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      Location Fundamentals, Agglomeration Economies, and the Geography of Multinational Firms
      29 Aug 2016Working Paper Summaries

      Location Fundamentals, Agglomeration Economies, and the Geography of Multinational Firms

      by Laura Alfaro and Maggie Xiaoyang Chen
      Understanding the location interdependence of multinational firms and how they agglomerate with one another is critical to designing and improving economic policies. These authors’ analysis, using a worldwide plant-level dataset and a novel index of agglomeration, yields a number of insights into the economic geography of multinational production. In addition to market access and comparative advantage motives, multinationals' location choices are significantly affected by agglomeration economies including not only vertical production linkages but also technology diffusion and capital-market externalities.
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      Author Abstract

      Multinationals exhibit distinct agglomeration patterns, which have transformed the global landscape of industrial production (Alfaro and Chen, 2014). Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of pairwise-industry agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. In particular, we run a horserace between two distinct economic forces: location fundamentals and agglomeration economies. We find that location fundamentals including market access and comparative advantage and agglomeration economies including capital-good market externality and technology diffusion play a particularly important role in multinationals' economic geography. These findings remain robust when we use alternative measures of trade costs, address potential reverse causality, and explore regional patterns.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: August 2016
      • HBS Working Paper Number: HBS Working Paper #17-014
      • Faculty Unit(s): Business, Government and International Economy
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      Laura Alfaro
      Laura Alfaro
      Warren Alpert Professor of Business Administration
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