Competitive Advantage, Industry Clusters and the Magnetic Attraction of Investment in New Plant and Equipment From Outside the Region

Abstract

While the literature on agglomeration externalities has emphasized the competitive and productivity benefits associated with the concentration and co-location of related industries – i.e., industry clusters – the research is sparse on whether regions with specialized industry clusters magnetically attract investment from firms outside the region. Agglomeration externalities create benefits for related industries to co-locate, but to what degree do these externalities attract similar or complementary industries? In this paper, we address whether, and to what degree, agglomeration externalities magnetically attract new operations and employment into a region. Using greenfield foreign direct investment data at the U.S. county level, we conclude that firms are more likely to invest in new or expanded facilities in regions that have a high absolute concentration of employment in their specific industry. Whether this magnetic attraction occurs for complementary industries within an industry cluster, the data suggest that there is a difference between high-tech and not high-tech industries. We also find that that several regional characteristics that are considered important by site selectors – those informing the FDI location decisions – are more salient than other regional characteristics and attributes, for example, the availability of labor. We also find that certain state-level characteristics are also positively associated with greenfield FDI flows, such as lower electricity costs and good state governance. These results are largely similar and robust across statistical methods – OLS, logit, negative binomial and pseudo-panel – as well as dependent variables.