Location and survival of MNEs' subsidiaries: Agglomeration and heterogeneity of firms

• Author: Sergio Mariotti,Rocco Mosconi,Lucia Piscitello
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3081

RESEARCH ARTICLE

Location and survival of MNEs' subsidiaries:

Agglomeration and heterogeneity of firms

Sergio Mariotti

1

| Rocco Mosconi

1

| Lucia Piscitello

1,2

1

Politecnico di Milano - Department of

Management, Economics and Industrial

Engineering, Milan, Italy

2

Henley Business School–University of

Reading, Reading, UK

Correspondence

Lucia Piscitello, Henley Business School–

University of Reading, Whiteknights,

Reading RG6 6UD, UK.

Email: lucia.piscitello@henley.ac.uk

Abstract

Research summary: Our study provides a quasi–

replication of Shaver and Flyer (2000), which was among

the first studies that challenged the positive role of

agglomeration in determining companies' location choice

and performances, thus changing the way management

scholars view companies' attitude towards agglomeration

forces. We employ the same research design, specification

and tests, and a different population, to discuss the gener-

alizability of the original study. Building on the frame-

work of Shaver and Flyer (2000), our findings offer

intriguing new empirical evidence highlighting the impor-

tance of the differential between entering foreign firms

and host country firms as a crucial condition in under-

standing agglomeration forces and adverse selection

mechanisms.

Managerial summary: Our exercise confirms that

agglomeration forces act differently on stronger versus

weaker multinational enterprises (MNEs). However, we

find that stronger MNEs tend to avoid location in highly

specialized areas when they are afraid of knowledge leak-

ages towards host country–based rivals that have enough

absorptive capacity to benefit and improve their competi-

tive advantages. Managerial implications are quite rele-

vant. Indeed, when MNEs avoid co–location in highly

specialized areas, they also limit their own access to local

knowledge and other agglomeration economies, such as

supply networks and qualified workforce. Thus, MNEs

managers need to design and implement devices that, on

the one hand prevent local leakages of their knowledge

Received: 26 January 2017 Revised: 20 June 2019 Accepted: 17 July 2019 Published on: 4 September 2019

DOI: 10.1002/smj.3081

2242 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2019;40:2242–2270.wileyonlinelibrary.com/journal/smj

and, on the other, do not hinder their access to local

unique knowledge and resources.

KEYWORDS

agglomeration, foreign subsidiaries, heterogeneity, location, survival

1|INTRODUCTION

The role of agglomeration forces, that is, the relationship between the characteristics of the local con-

text and the behavior of firms is a critical issue, not only in strategic management. From Marshall

(1890) onwards, economists and geographers have assessed—both theoretically and empirically—

the importance of agglomeration in explaining the geographical distribution of activities and firms

(see the reviews by Combes & Gobillon, 2015; and Rosenthal & Strange, 2004). Agglomeration

economies concern the formation of a specialized local labor market, the vertical relationships along

the value chain, and the emergence of industry-specific spillovers. Thus, agglomeration effects refer

to the mechanisms that make it more productive to cluster with other actors in the same area: reduced

transportation and associated operational costs, and reduced costs of moving people across space,

thus allowing labor market pooling and efficient allocation of labor (Puga, 2010), as well as face–to–

face contacts, flows of ideas, and knowledge spillovers (for a collection on agglomeration econom-

ics, see Glaeser, 2010).

Along this line, business analysts and management scholars have been studying companies' loca-

tion strategies correlating them with concentration of activities. In other words, firms locate their

activities in agglomerated clusters, as long as they can exploit agglomeration externalities and reduce

their costs (Hennart & Park, 1994; Mariotti & Piscitello, 1995).

This was the dominant credo about firms' location behavior until the publication of Shaver and

Flyer (2000), henceforth SF, which provided a critical discussion challenging the attraction role of

local agglomeration economies. On the one hand co–locating with other actors provide firms with

agglomeration benefits; on the other hand, it might also generate costs, previously understated by the

literature, and the net balance is not always obvious. SF argued that externalities stemming from geo-

graphic clustering are not automatically positive and that in certain circumstances firms gain more

from avoiding agglomeration. Specifically, “firms vary in the net benefit they receive from agglomer-

ation economies. For example, firms with the best technologies, human capital, training programs,

suppliers or distributors will minimally benefit from access to competitors' technologies, human capi-

tal, training programs, suppliers or distributors”(SF, 2000: 1175), while the opposite will be true for

weaker firms.

In other words, firms' heterogeneity matters: “good technology firms”mayprefertoremainisolated,

as they fear to dissipate their competitive advantages through the generation of externalities that benefit

local competitors, thus seeing agglomeration economies as a centrifugal rather than a centripetal force.

Conversely, “weak technology firms”would be more inclined to agglomerate as they bet on a favorable

balance between positive and negative externalities they can access through agglomeration, thus inducing

an adverse selection effect, according to which only weak firms will be keen on agglomerating.

Reflecting its overall impact, the SF study is well cited, with more than 960 Google Scholar cita-

tions as in June 2019, with an average number of citations equal to 67.6 per year in the last decade

(2009–2018), and 380 Web of Science citations (with an increasing trend in the recent years). Since

MARIOTTI ET AL.2243