Location Choices Across the Value Chain: How Activity and Capability Influence Agglomeration and Competition Effects

Abstract

There has been a recent revival of interest in the geographic component of firm strategy. Recent research suggests that two opposing forces - competition costs and agglomeration benefits - impact a firm's geographic strategy, along with location traits. Unexplored is (1) how the tradeoff between these opposite forces changes according to the activity a firm performs in a given location - R&D, production or sales - and (2) how firm capabilities increase or decrease competition costs and agglomeration benefits. I explore these questions using the worldwide location decisions of firms in the cellular handset industry. I find that, compared to a random distribution of activities across locations, production and sales subsidiaries are more geographically dispersed and R&D subsidiaries are more concentrated. When distinguishing firms by their capabilities, I find that more-capable firms co-locate less than less-capable firms, regardless of the activity performed.

Keywords: FDI, location choice, firm heterogeneity

JEL Classification: F23, L13, D43, M10