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Strategic Interaction Across Countries and Multinational Agglomeration: An Application to the Cement Industry

Author

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  • Pankaj Ghemawat

    () (IESE Business School, 08034 Barcelona, Spain)

  • Catherine Thomas

    () (Columbia Business School, New York, New York 10027)

Abstract

Agglomeration in foreign direct investment (FDI) is typically attributed to location-specific characteristics such as natural resource advantages or production-related spillovers between multinational firms. The increasing collocation of the largest global firms in the cement industry since the 1980s is not easily attributed to either of these explanations. This paper draws on theories of multimarket contact to test whether strategic interaction across national markets has influenced the successive market entry decisions generating the observed agglomeration. We first establish that there is indeed nonrandom agglomeration of the six largest cement firms. We next show that preexisting cross-market interaction with current incumbents helps predict which firm will enter a given market and also the choice of market a given firm enters. The association does not appear to be caused by strategic convergence or mimicry of recent entry events and cannot be explained by production side effects, which depend only on local conditions. The findings are consistent with multimarket contact models where collocation allows firms to sustain higher prices in all markets. This latter inference is also supported by evidence of an association between global firm market share and local cement price. The paper suggests that pricing spillovers can serve as an alternative motivation for FDI agglomeration.

Suggested Citation

  • Pankaj Ghemawat & Catherine Thomas, 2008. "Strategic Interaction Across Countries and Multinational Agglomeration: An Application to the Cement Industry," Management Science, INFORMS, vol. 54(12), pages 1980-1996, December.
  • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:12:p:1980-1996
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0917
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    References listed on IDEAS

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    1. Head, Keith & Ries, John & Swenson, Deborah, 1995. "Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States," Journal of International Economics, Elsevier, vol. 38(3-4), pages 223-247, May.
    2. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
    3. Jans, Ivette & Rosenbaum, David I., 1997. "Multimarket contact and pricing: Evidence from the U.S. cement industry," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 391-412, May.
    4. Philip M. Parker & Lars-Hendrik Roller, 1997. "Collusive Conduct in Duopolies: Multimarket Contact and Cross-Ownership in the Mobile Telephone Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 304-322, Summer.
    5. Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-375, August.
    6. Spagnolo, Giancarlo, 1999. "On Interdependent Supergames: Multimarket Contact, Concavity, and Collusion," Journal of Economic Theory, Elsevier, vol. 89(1), pages 127-139, November.
    7. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
    8. Fernandez, Nerea & Marin, Pedro L, 1998. "Market Power and Multimarket Contact: Some Evidence from the Spanish Hotel Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(3), pages 301-315, September.
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    Citations

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    Cited by:

    1. repec:eee:iburev:v:26:y:2017:i:6:p:1196-1207 is not listed on IDEAS
    2. Elisabetta Allevi & Giorgia Oggioni & Rossana Riccardi & Marco Rocco, 2013. "A spatial competitive analysis: the carbon leakage effect on the cement industry under the European Emissions Trading Scheme," Temi di discussione (Economic working papers) 899, Bank of Italy, Economic Research and International Relations Area.
    3. Juan Alcácer & Cristian Dezső & Minyuan Zhao, 2015. "Location choices under strategic interactions," Strategic Management Journal, Wiley Blackwell, vol. 36(2), pages 197-215, February.
    4. Guy Meunier & Jean-Pierre Ponssard & Catherine Thomas, 2016. "Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 455-486, April.
    5. Naveen Kumar Jain & Tanvi Kothari & Vikas Kumar, 2016. "Location Choice Research: Proposing New Agenda," Management International Review, Springer, vol. 56(3), pages 303-324, June.
    6. repec:spr:annopr:v:255:y:2017:i:1:d:10.1007_s10479-016-2200-x is not listed on IDEAS
    7. Raventós, Pedro & Zolezzi, Sandro, 2016. "Cement in Central America: Global players in a local industry," Journal of Business Research, Elsevier, vol. 69(2), pages 395-399.

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    Keywords

    FDI; agglomeration; MNEs; multimarket contact;

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