- New Horizons in International Business series
Edited by Jean-Louis Mucchielli and Thierry Mayer
6. 6.1 Market size and agglomeration 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...
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