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Geographical Boundaries of External and Internal Agglomeration Economies

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Abstract

This chapter analyses the role of traditional factors associated with Marshallian and Jacobsian economies (i.e. external agglomeration) and the role of factors associated to the intra-firm co-location of activities (i.e. internal agglomeration) in influencing location decisions of multinational enterprises (MNEs) within a foreign country. Our empirical analysis considers the location decision of 447 new greenfield investments in manufacturing activities by 384 foreign MNEs in Italy, throughout the period 1998–2012, at a sub-national NUTS-3 level. Findings from a conditional logit model confirm that (1) both external and internal agglomeration economies have a strong effect on MNEs’ location decisions and (2) once allowing for intra-firm co-location, the influence of external forces decreases. Additionally, results obtained through spatial econometrics techniques show a strong spatial decay effect both for the effects associated with intra-firm co-location in contiguous provinces and for the traditional Marshallian forces. Conversely, the benefits of diversity (Jacobsian economies) cross province geographical boundaries.

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Notes

  1. 1.

    However, the evidence about the significance and the role of the different sources of agglomeration economies are still controversial and conflicting results have often been often obtained (e.g. Rosenthal and Strange 2004; Beaudry and Schiffauerova 2009; De Groot et al. 2009; Melo et al. 2009).

  2. 2.

    There are two approaches for computing a spatial weight matrix, namely (1) weights based on distance and (2) weights based on boundaries (contiguity). In the former, the weights (w ij) are based on the distance between two geographical units i and j (between their centroids), using the inverse of squared distance, k-nearest neighbours, negative exponential or threshold distance techniques. In the latter, the contiguity relationship between two spatial units can be obtained following two main criteria: the rook contiguity, whether two units share a common border; and the queen technique whether two units share a common border or a point-length border (vertex). The rook is a more stringent definition of contiguity, and the choice depends on the purpose of the analysis and the phenomenon under investigation, as well as the irregularity in the spatial unit polygons.

  3. 3.

    As the same parent company may have several new investments during the considered period, in order to consider this multi-presence we cluster the standard errors by MNE. The coefficients are calculated as odds ratio to facilitate interpretations and comparisons.

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Authors and Affiliations

  1. Warwick Business School, University of Warwick, Coventry, UK

    Katiuscia Lavoratori

  2. Henley Business School, University of Reading, Reading, UK

    Lucia Piscitello

  3. DIG-Politecnico di Milano, Milan, Italy

    Lucia Piscitello

Authors
  1. Katiuscia Lavoratori
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  2. Lucia Piscitello
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Correspondence to Katiuscia Lavoratori .

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Editors and Affiliations

  1. Dept of Economics & Finance, Università Cattolica del Sacro Cuore, Milano, Italy

    Stefano Colombo

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Lavoratori, K., Piscitello, L. (2021). Geographical Boundaries of External and Internal Agglomeration Economies. In: Colombo, S. (eds) Spatial Economics Volume II. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40094-1_8

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