This paper incorporates heterogeneous demand elasticities and the quality/skill complementarity of production in a footloose capital model in order to explain the spatial selection of firms with differentiated quality. We find that when trade becomes freer, high‐quality firms agglomerate in the region that accommodates more high‐skilled labor, whereas low‐quality firms move to the region that hosts more low‐skilled labor. If trade freeness is high, the spatial separation of high‐ and low‐quality firms occurs. This paper also points out the positive effect of integration on welfare owing to the specialization of product quality.