The Global Agglomeration of Multinational Firms

TheGlobalAgglomerationofMultinationalFirmsLauraAlfaroyHarvardBusinessSchoolandNBERMaggieXiaoyangChenzGeorgeWashingtonUniversityJune2010AbstractTheproliferationofmultinationalactivitieshasledtotheemergenceofnewindus-trialclustersaroundtheworld.Inthispaper,weexaminehow…rstnaturelocationfundamentalsandsecondnatureagglomerationeconomiesjointlydeterminethegloballandscapeofmultinational…rms.Usingauniqueworldwideplantdatasetthatreportsdetailedlocation,ownership,andoperationinformationforplantsinmorethan100countries,weconstructaspatiallycontinuousindexofglobalagglomerationandinvestigatethepatternsanddeterminantsofclusteringbetweenmultinational…rms.Ouranalysisindicatesthatmultinationals’agglomerationgoesaboveandbe-yond…rst-naturedrivengeographicconcentration.Second-natureforcesincludingknowledgespillovers,capital-marketexternalities,andverticalproductionlinkagesplayasigni…cantrole.Incomparisontodomesticplants,knowledgespilloversandcapitalmarketexternalitiesexertastrongere¤ectontheclusteringofmultinational…rmswhilelabormarketpoolinghasaweakerimpact.These…ndingsremainrobustwhenweexamineentrydecisionsandexploretheprocessofagglomeration.JELcodes:F2,D2,R1,R3Keywords:multinational…rm,agglomeration,…rstnature,secondnature,input-outputlinkage,knowledgespillover,factormarketexternalityWethankJimAnderson,BruceBlonigen,JamesHarrigan,KeithHead,BeataJavorcik,TarunKhanna,JimMarkusen,KeithMaskus,MikeMoore,HenryOverman,DiegoPuga,JohnRies,RobertoSamaniego,StephenYeaple,TonyYezer,andseminarandconferenceparticipantsatHarvardBusinessSchool,UniversityofVirginia,theAmericanEconomicAssociationmeeting,theEuropeanTradeStudyGroupplenarysession,theEmpiricalInvestigationofInternationalTrademeeting,theLACEATrade,IntegrationandGrowthMeeting,andtheCEPREuropeanResearchWorkshopinInternationalTradeforhelpfulcommentsandsuggestions.WealsothankWilliamKerrforkindlyprovidingusthepatentconcordancedata,BillSimpsonforexcellentadviceincalculatingtheagglomerationindexes,andFranciscoPinoforhelpwiththeGISsoftware.WearegratefultoDun&BradstreetandDennisJacquesforhelpinguswiththeD&BdatasetandHBSandGWfor…nancialsupport.yEmail:[e-mail];Phone:[phone].zEmail:[e-mail];Phone:[phone]IntroductionTheexplosionofmultinationalcorporation(MNC)activitiesinrecentdecadeshasprecipitatedtheemergenceofnewindustrialclustersaroundtheworld.Firmsthatagglomeratedin,forexample,SiliconValleyandDetroitnowhavesubsidiaryplantsclusteringinBangaloreandSlovakia(termed,respectively,theSiliconValleyofIndiaandDetroitoftheEast).Butaretheseclusterstheruleortheexception?Domultinationals,knownfortheirglobalresourceandmarketseekingactivities,agglomerateand,ifso,whatmotivatestheiragglomeration?Theextensiveempiricalliteratureonforeigndirectinvestment(FDI)ledby,forexample,Brainard(1997),Carr,Markusen,andMaskus(2001),Yeaple(2003a),andHeadandMayer(2004a),stressestheimportanceofmarketaccessandcomparativeadvantagetomultinationals’foreignlocationdecisions.Theirevidencesuggeststhatmultinationals’foreignactivitiesaremotivatedby…rstnatureincentivestoaccessmarketsandreduceproductioncosts.Aseparatestrandofliteratureineconomicgeography,focusedondomesticindustriallandscapeincountriessuchastheU.S.andtheU.K.,…ndsthatagglomerationeconomies,alsoreferredtoassecondnatureincludingproximitytocustomersandsuppliers,labormarketpooling,andknowledgespillovers,playasigni…cantroleindomestic…rms’locationchoiceswithinagivencountry(see,e.g.,EllisonandGlaeser,1999;RosenthalandStrange,2001;DurantonandOverman,2005,Ellison,GlaeserandKerr,2009).1Buthowthe…rstnaturefundamentalsinFDIandsecondnatureagglomerationforcesindomesticeconomicgeographyjointlyexplaintheworldwidelocationdecisionsofmultinational…rmsremainsunknown.Inthispaperweexaminethesigni…canceanddeterminantsoftheglobalagglomerationofmultinational…rms.Weinvestigate:…rst,domultinationalsagglomeratewithoneanotheraroundtheworld?Second,iftheydoagglomerate,istheagglomerationdrivenbyshared,…rst-natureincentivessuchasmarketaccessandcomparativeadvantagesordosecond-natureforcesplayaroleaswell?Finally,aremultinationals’overseasclustersasimpleprojectionoftheirheadquartersclustersathome,andarethee¤ectsofagglomerationeconomiessimilarbetweenmultinationalanddomesticmanufacturing…rms?Answerstothesequestionsarecentraltoacademicandpolicydebatescenteredonforeigndirectinvestment(FDI).Growingevidencesuggeststhatmultinationalsplayasigni…cantroleintheperformanceoflocaleconomies.Comparedtodomestic…rmsinthesamecountryandindus-try,multinationalstendtohavegreatersales,employmentandcapitalandhigherproductivity(see,Helpman,MelitzandYeaple,2004).Giventhesecharacteristics,theyarefoundtoraise1Anumberof…rm-levelstudiesininternationaltradeincluding,forexample,Head,RiesandSwenson(1995),HeadandMayer(2004a),Crozet,MayerandMucchielli(2004),Blonigen,EllisandFausten(2005),BobonisandShatz(2007),AmitiandJavorcik(2008),Debaere,LeeandPark(2010),haveexaminedtheroleofverticalproductionlinkagesinMNCs’agglomerationdecisionsinhostcountries.Thesestudieso¤erimportanceevidenceontheincentivesofverticallylinkedM