Location Fundamentals, Agglomeration Economies, and The Geography of Multinational Firms

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.