Multinational Firms’ Location and the New Economic Geography

Multinational Firms’ Location and the New Economic Geography

New Horizons in International Business series

Edited by Jean-Louis Mucchielli and Thierry Mayer

This book analyses how foreign direct investors choose their locations, whilst exploring the forces which shape international economic geography. Although these two issues are, to some extent, inter-related, researchers have only recently acknowledged the similarity of economic geography and international business approaches to the empirical assessment of likely causes of the degree of spatial concentration observed in many modern industries.

Chapter 6: Market size and agglomeration

Keith Head, Thierry Mayer and John Ries

Subjects: business and management, international business, economics and finance, regional economics, geography, economic geography, urban and regional studies, regional economics

Extract

Keith Head, Thierry Mayer and John Ries INTRODUCTION Positive spillovers between firms and factor cost advantages may explain the observed geographic concentration of industry. Recent research on the influence of demand on production introduces a third reason for concentration. Specifically, the so-called ‘home market effect’ implies that locations with high demand will host a disproportionate share of industry. Thus, positive spillovers, low factor costs and the home market effect serve as forces that can result in the agglomeration of industry. Proximity has its costs, however. If locations are equally attractive, imperfect competition causes firms producing in the same location to earn lower profits than they would earn if they were to differentiate geographically. Thus, the competition effect serves as a force leading to the geographic dispersion of industry. This chapter measures geographic concentration of Japanese investment in the USA and Europe and tests for the source of observed concentration. We begin by employing Ellison and Glaeser’s (1997) measure of concentration to see if the concentration of Japanese FDI is greater or less than that predicted by our formulation of their random model of investment. Next, we use conditional logit estimation to explore whether, after controlling for market size, the presence of rivals in a foreign location is associated with a higher or lower likelihood of investment in that location. A negative coefficient supports home market effects models whereas a positive coefficient is consistent with positive spillovers between firms. Finally, we...

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