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

Laura  Alfaro; Maggie Xiaoyang Chen

Chapter | The Oxford Handbook of Structural Transformation | 2019

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

by Laura Alfaro and Maggie Xiaoyang Chen

Abstract

Multinationals exhibit distinct agglomeration patterns, which have transformed the global landscape of industrial production (Alfaro and Chen, 2014). Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of pairwise-industry agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. In particular, we run a horserace between two distinct economic forces: location fundamentals and agglomeration economies. We find that location fundamentals, including market access and comparative advantage, and agglomeration economies, including capital-good market externality and technology diffusion, play a particularly important role in multinationals' economic geography. These findings remain robust when we use alternative measures of trade costs, address potential reverse causality, and explore regional patterns.

Keywords: multinational firm; economic geography; agglomeration; location fundamentals; agglomeration economies; Multinational Firms and Management; Geographic Location; Industry Clusters; Economics;

Format: Print

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Alfaro, Laura, and Maggie Xiaoyang Chen. "Location Fundamentals, Agglomeration Economies, and the Geography of Multinational Firms." Chap. 10 in The Oxford Handbook of Structural Transformation, edited by Célestin Monga and Justin Yifu Lin. Oxford University Press, 2019.

For decades, Chile enjoyed the stability of being the world’s largest producer of copper. Keynes would have advised that this period of growth would have been the time for the government to save, that “the boom, not the slump, is the right time for austerity at the Treasury.” If this wisdom has proven true on multiple occasions since Keynes’s statement in 1937, why do countries continue to conduct procyclical fiscal and monetary policies? Economists have documented this phenomenon across countries and found that particularly for emerging markets, capital inflows tend to coincide with expansionary macroeconomic policies while periods of capital outflows correspond with contractionary policies. Why is it so difficult for governments of emerging market countries to save during economic booms? By analyzing economic and social factors that contributed to unrest in Chile, students will wrestle with economic and ethical questions about balancing the needs of current and future generations.

Case | HBS Case Collection | June 2018 (Revised January 2020)

Renegotiating NAFTA

Laura Alfaro, Haviland Sheldahl-Thomason and Sarah Jeong

January 1, 2019 marked the 25th anniversary of the North American Free Trade Agreement (NAFTA). Twenty-five years after the landmark trade pact was signed by the United States, Canada, and Mexico, considerable debate surrounded it. Trade and trade agreements were a focal point of the 2016 U.S. presidential election. NAFTA came into effect on January 1, 1994, after being backed by the Republican administration of U.S. President George H. W. Bush and the Democratic administration of U.S. President Bill Clinton during its implementation. It created the largest free trade area in the world at the time. Since implementation, total trade between NAFTA countries grew 280%; in comparison while trade to non-NAFTA partners grew by 195%. Critics of NAFTA claimed that it had contributed to a loss of manufacturing jobs to Mexico, increased inequality in all countries, and undercut environmental laws. Those who supported NAFTA, however, noted that in addition to trade, output, and overall employment, investment among the three nations increased, and productivity also grew. Furthermore, the agreement led to lower prices. By 2018, all countries experienced low unemployment rates. With changes in NAFTA looming, many questioned whether the accord had brought more benefits than costs to its signatories. Could the costs be minimized under a new agreement without reducing the benefits? Did buying local goods help create the most jobs in a country? What was the role of business? Everyone wondered about the potential ramifications of the new NAFTA.

Keywords: Trade; Negotiation; Agreements and Arrangements; Cost vs Benefits; Auto Industry; United States; Mexico; Canada;

Citation:

Alfaro, Laura, Haviland Sheldahl-Thomason, and Sarah Jeong. "Renegotiating NAFTA." Harvard Business School Case 318-143, June 2018. (Revised January 2020.) View Details

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On January 16, 2020, the Senate passed a landmark trade deal that would replace the 26-year-old North American Free Trade Agreement (NAFTA). Until the United States-Mexico-Canada Agreement (USMCA) was signed, considerable debate had surrounded it. The new agreement made significant changes to the auto and dairy industries, instigating the nickname of “the cows and cars deal”. With changes to NAFTA looming, many questioned whether the accord had brought more benefits than costs to its signatories. Why had the countries signed the original agreement? Could the costs be minimized under a new agreement without reducing the benefits? Did buying local goods help create the most jobs in a country? What was the role of business? Everyone wondered about the potential ramifications of the new NAFTA. [Teaching Note for "Renegotiating NAFTA" HBS No. 318-143]

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

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