Does Agglomeration Affect Multinational Companies Differently? Evidence From Firm-level Data

This paper shows how ownership structure plays an important role in determining firms’ location decisions. We show that foreign firms are likely to benefit more from agglomeration economies than domestic ones. We derive a point estimate of 0.448 for the elasticity of output value-added with respect to agglomeration, using a standard approach. However, this approach fails to account for the impact of firms outside the immediate locality. Therefore, we develop an alternative approach based on a gravity index, reflecting either demand or input cost effects (‘multilateral resistance’). Thus, considering barriers to trade that a firm in a particular municipality faces with respect to other locations the point estimate increases to 0.672. Indeed, failing to account for multilateral resistance may lead to inaccurate estimates of the impact of trade barriers on bilateral trade flow. In terms of location decisions we show that MNCs are relatively footloose, that is, they chose their location based on the proximity to other foreign firms. Then we consider the possibility of language and border barriers the results show a significant effect that varies with ownership structure. Furthermore, we show how firms are more likely to benefit from other firms of the same economic activities in their neighborhood.