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The Hardships of Long Distance Relationships: Time Zone Proximity and Knowledge Transmission within Multinational Firms

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  • Bahar, Dany

    () (Brookings Institution)

Abstract

Using a unique dataset on worldwide multinational corporations with precise location of headquarters and affiliates, I present evidence of a trade-off between distance to the headquarters and the knowledge intensity of the foreign subsidiary's economic activity, emerging from dynamics related to the proximity-concentration hypothesis. This trade-off is strongly diminished the higher the overlap in working hours between the headquarters and its foreign subsidiary. In order to rule out biases arising from confounding factors, I implement a regression discontinuity framework to show that the economic activity of a foreign subsidiary located just across the time zone line that increases the overlap in working hours with its headquarters is, on average, about one percent higher in the knowledge intensity scale. I find no evidence of the knowledge intensity and distance trade-off weakening when a non-stop flight exists between the headquarters and the foreign subsidiary. The findings suggest that lower barriers to real-time communication within the multinational corporation play an important role in the location strategies of multinational corporations.

Suggested Citation

  • Bahar, Dany, 2018. "The Hardships of Long Distance Relationships: Time Zone Proximity and Knowledge Transmission within Multinational Firms," IZA Discussion Papers 11697, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11697
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    References listed on IDEAS

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    1. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741 Elsevier.
    2. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    3. Arturs Kalnins & Francine Lafontaine, 2013. "Too Far Away? The Effect of Distance to Headquarters on Business Establishment Performance," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 157-179, August.
    4. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.
    5. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
    6. Ramondo, Natalia, 2014. "A quantitative approach to multinational production," Journal of International Economics, Elsevier, vol. 93(1), pages 108-122.
    7. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
    8. Campante, Filipe R. & Yanagizawa-Drott, David, 2016. "Long-Range Growth: Economic Development in the Global Network of Air Links," Working Paper Series 16-034, Harvard University, John F. Kennedy School of Government.
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    More about this item

    Keywords

    multinational firms; multinational corporations; knowledge; location; proximity concentration hypothesis; FDI;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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