Abstract

This chapter examines the patterns and determinants underlying the global economic geography of multinational corporations (MNCs), focusing in particular on location fundamentals and agglomeration economies. The discussion builds on three broad strands of literature: the first, in the area of international trade, explores the role of location fundamentals in MNCs’ decisions to invest abroad; the second, in the field of regional and urban economics, studies the importance of Marshallian agglomeration forces in domestic economic geography; and the third assesses the advantage of proximity between customers and suppliers. A spatially continuous index of pairwise-industry agglomeration is developed using a unique worldwide establishment data set, WorldBase, that shows detailed location, ownership, and operation information for plants in more than 100 countries. The results suggest that location fundamentals, including market access and comparative advantage, and agglomeration economies such as capital-good market externality and technology diffusion, play an important role in MNCs’ economic geography.

Highlights

  • A key driver of this phenomenon is cross-border production, investment, and innovation led by multinational corporations (MNCs)

  • We find that agglomeration economies including technology diffusion and capital-good market externality play a more important role in the offshore agglomeration of multinationals than the agglomeration of domestic firms

  • Our results show that location fundamentals matter and that capital-good externality and technology diffusion, factors that have not been emphasized in this literature, exert an important effect on the agglomeration of MNCs

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Summary

Introduction

An exponential increase in flows of goods, capital, and ideas is one of the most prominent economic trends in recent decades. Identifying the causal effects of location fundamentals and agglomeration economies is a key challenge in empirical analyses of economic geography Both types of factors can endogenously reflect the patterns of MNC agglomeration. After computing the actual agglomeration index of MNCs, we construct an expected index of MNC agglomeration to capture the effect of location fundamentals This index reflects the geographic distribution of MNC plants predicted exclusively by the location fundamentals of multinational production including, among others, foreign market size, trade costs, and comparative advantage. Fourth, controlling for the agglomeration predicted by location fundamentals and all industry specific factors, we examine the degree to which proxies of agglomeration forces, including between-industry input-output linkages, labor demand similarity, technology spillover, and a new measure of capital-good market externality, explain the variations in the agglomeration index of multinational firms.

Related Literature
Methodology
Measuring Location Fundamentals and Agglomeration Economies
MP Location Fundamentals
Agglomeration Economies
Data: The WorldBase Database
Assessing the Roles of Location Fundamentals and Agglomeration Economies
MNC Offshore Agglomeration
MNC Headquarters Agglomeration
Comparing the Agglomeration of MNC Offshore and Domestic Plants
Additional Econometric Analysis
Findings
Conclusion
Full Text
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