Sequential Investment, Firm Motives, and Agglomeration of Japanese Electronics Firms in the United States

• Author: Wilbur Chung,Jaeyong Song
• Published date: 01 September 2004
• Date: 01 September 2004
• DOI: http://doi.org/10.1111/j.1430-9134.2004.00022.x

Sequential Investment, Firm Motives, and

Agglomeration of Japanese Electronics

Firms in the United States

WILBUR CHUNG

The Wharton School

University of Pennsylvania

wcchung@wharton.upenn.edu

JAEYONG SONG

College of Business Administration

Seoul National University

jsong@snu.ac.kr

Recent research finds that firms investing abroad tend to agglomerate with

other foreign entrants. Yet firms often invest multiple times within the same

host country, which raises the question of whether firms agglomerate with

their competitors’ or their own prior investments. Collocation’s attractiveness

also may vary as a firm’s entry motives evolve. The activities of prior and

present investments often differ—initial investment may be for distribution

while later ones might be for manufacturing. For Japanese investment into the

United States in the electronics sector from 1980 to 1998, we find that firms

tend to collocate only with their own prior investments. The exception is firms

with little of their own experience, who tend to collocate with competitors.

These results demonstrate the importance of firm heterogeneity in determining

agglomeration behavior.

1. Introduction

A key strategic choice for firms is where to locate. While firms choose lo-

cations to maximize profit, classic studies also have focused on interfirm

dynamics. For example, Knickerbocker (1973) argued that oligopolists

tend to respond to each other by investing abroad at similar times and

into similar locations. This “follow-the-leader” behavior explains why

Weacknowledge the helpful comments of Heather Berry, Mauro Guillen, Witold Henisz,

Arturs Kalnins, and Louis Thomas; two anonymous referees and the coeditor; and the

copyediting assistance of John Rutter on prior drafts. This research was funded partially

fromthe Yonsei Center for Global Studies, YonseiUniversity (research grant # 2003-1-0236)

and the Institute of Management Research at Seoul National University.

c

2004 Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road,

Oxford OX4 2DQ, UK.

Journal of Economics & Management Strategy,Volume 13, Number 3, Fall 2004, 539–560

540 Journal of Economics & Management Strategy

competitors enter the same countries. At a finer grained level of analysis

a related question is where the competitors locate within a specific host

country—do they spatially separate or agglomerate?

Recent research in the new economic geography identifies forces

promoting agglomeration. Krugman (1991) argues that firms might

agglomerate due to increasing returns—the presence of more firms ex-

pands the worker population, which increases market demand, thereby

decreasing firms’costs, which raises workers’real wage that in turn

attracts more workers. Extending the Krugman (1991) model, Venables

(1996) introduced vertically related industries—an upstream industry

feeds a downstream industry that then sells to end consumers. The

upstream firms would like to locate close to their customers, which

are the downstream firms. In turn, the downstream firms would like

to locate where there are more upstream firms, since this reduces

the downstream firms’input costs. Adding a Marshallian perspec-

tive, a geographic concentration of similar activity results in technical

externalities—development of specialized suppliers, workers investing

in industry specific skills, and knowledge spilling between firms—

all of which could reduce firms’costs, could improve their product

quality, or both. Formalizing such ideas, Fujita and Thisse (2002, pg.

283) show that when transportation costs are low, firms collocate to

benefit from a production cost reduction without losing much business

in other locations. Empirical examinations are consistent with these

expectations. Head, Ries, and Swenson (1995) showed that Japanese

firms entering the United States tend to replicate the location choice

of prior Japanese subsidiaries; even after accounting for incumbents’

locations and other factors, Japanese firms locate their manufacturing

facilities in the same regions of the United States.

These agglomeration forces are opposed by forces promoting

separation: increased competition and transportation costs. While firms

may be attracted initially to those locations with high demand or to those

rich with critical factor inputs, such locations may become crowded.

Market share and/or price will fall with more firms. And as more firms

draw on these factor sources, factor prices will be bid up. Thus, in

situations of such crowding, firms may separate to avoid such increased

competition. Separation also may result when transportation costs are

low. With low costs, a firm could serve proximate and distant markets

from a single central location without substantial disadvantage. But

as transportation costs climb, the profitability of such a configuration

diminishes; if transportation costs are high enough, the firm would

prefer to have facilities distributed geographically.

While prior studies highlight several forces both for and against

agglomeration, our interest is in how firms’traits affect their propensity

to agglomerate. Related work in international strategy has begun to