Location strategies for agglomeration economies

• DOI: http://doi.org/10.1002/smj.2186
• Author: Juan Alcácer,Wilbur Chung
• Published date: 01 December 2014
• Date: 01 December 2014

Strategic Management Journal

Strat. Mgmt. J.,35: 1749– 1761 (2014)

Published online EarlyView 11 November 2013 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2186

Received 14 November 2009;Final revision received 7 November 2012

LOCATION STRATEGIES FOR AGGLOMERATION

ECONOMIES

JUAN ALC ´

ACER1and WILBUR CHUNG2*

1

Harvard Business School, Harvard University, Boston, Massachusetts, U.S.A.

2

R.H. Smith School of Business, University of Maryland, College Park Maryland,

U.S.A.

Because agglomeration economies may create competitive advantage and each location has a

unique array of agglomeration economies, where should firms locate? We combine fundamental

economic and strategy concepts to: (1) determine when firms must locate proximately to access

factor pools; (2) show that factor pools controlled by fewer firms are less useful to new entrants;

and (3) demonstrate that certain firms risk aiding competitors when contributing to efficient

factor pools. We find support for our predictions with a test on new U.S. manufacturing entrants

from 1985 to 1994, using an empirical specification that separates agglomeration levels from

agglomeration economies. Copyright ©2013 John Wiley & Sons, Ltd.

INTRODUCTION

Agglomeration economies— positive externali-

ties that stem from the geographic co-location

of firms— are a potential source of compet-

itive advantage (e.g., Porter, 1998). Thus it

is not surprising the interest in agglomeration

economies has increased recently in both the

economics and strategy literatures. Economics

has focused on the supply side of agglomeration

economies —studying how different types of

agglomeration economies impact the geographic

distribution of economic activity. For example,

Glaeser and Kerr (2009) examine where manu-

facturing start-ups are born, showing that pools

of skilled labor have greater positive effects than

pools of specialized suppliers. Strategy has focused

on the demand side of agglomeration economies,

studying what types of firms co-locate. For

Keywords: agglomeration economies; location choice;

firm heterogeneity; agglomeration; factor pools

*Correspondence to: Wilbur Chung, R.H. Smith School of

Business, University of Maryland, College Park, MD 20742,

U.S.A. E-mail: wchung@rhsmith.umd.edu

Copyright ©2013 John Wiley & Sons, Ltd.

example, Shaver and Flyer (2000) show that larger

firms co-locate less frequently than smaller firms,

due to concerns over aiding competitors. Note that

each literature’s inherent focus leads it to ignore

the other— considering supply side heterogeneity

without acknowledging demand side heterogeneity

and vice versa. As a result, our understanding of

the relationship between location strategies and

agglomeration economies is incomplete.

We examine both supply and demand sides

of agglomeration economies to address the

question: where should firms locate to increase

appropriation from agglomeration economies?

Combining the two perspectives results in

several conceptual gaps that we address using

three basic concepts— localization, concentra-

tion, and market efficiency. We apply the first

concept— localization— to the supply side. This

leads to the new question of whether firms can

appropriate the different types of agglomeration

economies from afar, without co-locating. We

apply the second concept— concentration— to

the supply side. This leads to the new question

of whether factor pools controlled by fewer

firms reduce newcomer firms’ appropriation and,