Spatial Organization of Firms: Internal and External Agglomeration Economies and Location Choices Through the Value Chain

by Juan Alcácer & Mercedes Delgado

Overview — How do firms decide location strategy for distinct activities in the value chain, such as manufacturing, research and development, or sales? Does strategy depend on geographically bounded spillovers between firms, or within firms? This paper uses data for organic expansions in the US by firms in pharmaceuticals in 1993-2005 to consider two types of expansions. The first is internal: an increase in employment in existing establishments. The second is external: opening new establishments. Alcacer (HBS) and Delgado (Fox School of Business) argue that decisions about geographical location are a tradeoff between external drivers pulling firms to geographically disperse activities and internal drivers pushing within-firm collocation, either across activities (such as manufacturing and R&D) or within activities (such as multiple R&D labs). Key concepts include:

In biopharmaceutical activity, both internal and external agglomeration economies have separate, positive impacts on location, with relevant differences by activity.
Internal economies of agglomeration arise within an activity (such as among plants) and across activities (such as between manufacturing and sales).
The effects of across-activity and within-activity internal economies vary by activity and type of organic expansion.
Across-activity internal economies are asymmetric: For example, organic expansions of bio-sales activity seem to collocate with existing manufacturing establishments, but organic manufacturing expansions do not collocate with sales.

Author Abstract

We explore the impact of geographically bounded intra-firm spillovers (internal agglomeration economies) and geographically bounded inter-firm spillovers (external agglomeration economies) on firms' location strategies. Using data from the Census Bureau's Longitudinal Business Database and the U.S. Cluster Mapping Project, we analyze organic expansions of biopharmaceutical firms (by both new establishments and employment increase in existing establishments) in the U.S. in 1993-2005. We consider all activities in the value chain and allow location choices to vary by R&D, manufacturing, and sales. Our findings suggest that (1) internal and external agglomeration economies have separate, positive impacts on location, with relevant differences by activity; (2) internal economies of agglomeration arise within an activity (e.g., among plants) and across activities (e.g., between manufacturing and sales); (3) the effects of internal economies across and within activities vary by activity and type of organic expansion; and (4) across-activity internal economies are asymmetric.