23 Dec 2009Working Paper Summaries

The Global Agglomeration of Multinational Firms

by Laura Alfaro and Maggie Chen

(Paper formerly titled "The Global Networks of Multinational Firms.") When and why do multinationals group together overseas? Do they agglomerate in the same fashion abroad as they do at home? An answer to these questions is central to the long-standing debate over the consequences of foreign direct investment (FDI). It is critical to understand interdependencies of multinational networks and how multinationals influence one another in their activities at home and overseas. HBS professor Laura Alfaro and George Washington University professor Maggie Chen examine the global network of multinationals and study the significance and causes of multinational agglomeration. Their results provide further evidence of the increasing separation of headquarters services and production activities within multinational firms. The differential specialization of headquarters and subsidiaries leads to distinct patterns of agglomeration. Key concepts include:

Recent decades have witnessed an explosion in the activities of multinational corporations, but little is understood about global patterns of multinational agglomeration.
Examples of this trend include firms that agglomerated in Silicon Valley and in Detroit now having subsidiaries clustered in Bangalore (termed "the Silicon Valley of India") and in Slovakia ("the Detroit of the East").
A new data set provides detailed location, ownership, and activity information for establishments in more than 100 countries.
Multinational subsidiaries with knowledge spillovers, among other factors, tend to agglomerate to one another. The importance of these agglomeration economies is, however, different across headquarters, subsidiary, and employment networks.
Many factors play a role in the location decisions of firms, so it may not be possible for a country to duplicate the circumstances that led to agglomeration in other nations.
Policymakers need to consider the interdependence of multinational firms when making decisions about FDI.

Author Abstract

In this paper we characterize the topology of global multinational networks and examine the macro and micro patterns of multinational activity. We construct indices of network density at both pairwise industry and establishment level and measure agglomeration in a global and continuous metric space. These indices exhibit distinct advantages compared to traditional measures of agglomeration including the independence on the level of geographic aggregation. Estimating the indices using a new worldwide establishment dataset, we investigate both the significance and causes of multinational firm co-agglomeration. In contrast to the conventional emphasis of the literature on the role of input-output linkages, we assess the effect of various agglomeration economies. We find that, relative to counterfactuals, multinationals with greater factor-market externalities, knowledge spillovers, and vertical linkages exhibit significant co-agglomeration. The importance of these factors differs across headquarters, subsidiary, and employment networks, but knowledge spillovers and capital-market externalities, two traditionally under-emphasized forces, exert consistently strong effects. Within each macro network, there is a large heterogeneity across subsidiaries. Subsidiaries with greater size and higher productivity attract significantly more agglomeration than their counterfactuals and become the hubs of the network. 59 pages.