Proximity and Investment: Evidence from Plant-Level Data

Abstract

Proximity to plants makes it easier for headquarters to monitor and acquire information about plants. In this paper, I estimate the effects of headquarters’ proximity to plants on plant investment and productivity. Using the introduction of new airline routes as a source of exogenous variation in proximity, I find that new airline routes that reduce the travel time between headquarters and plants lead to an increase in plant investment of 8% to 9% and to an increase in plants’ total factor productivity of 1.3% to 1.4%. The results are robust to controlling for local and firm-level shocks that could potentially cause the introduction of new airlines routes, they are robust when I consider only new airline routes that are the outcome of a merger between two airlines or the opening of a new hub, and they are robust when I consider only indirect flights where either the last leg of the flight (involving the plant’s home base airport) or the first leg of the flight (involving headquarters’ home base airport) remains unchanged.