Spatial Agglomeration of MNEs: The Role of Information Externalities and Knowledge Spillovers

Abstract

This study suggests a model for the agglomerative behaviour of MNEs with local competitors. Relying on foreign MNEs’ spatial distribution across 686 Italian Local Labor Systems, we find that MNEs’ locational behaviour is influenced by (i) informational externalities, giving rise to locational cascades and imitation of other foreign MNEs, and (ii) potential knowledge spillovers, which might act both as a centrifugal and a centripetal force, depending on the nature of local counterparts. Specifically, foreign MNEs tend not to agglomerate with local domestic companies as they perceive potential knowledge inflows to be lower than potential leakages, unless local companies enjoy some comparative advantages. Conversely, foreign MNEs’ are willing to agglomerate with other foreign MNEs, as they bet on a positive balance between knowledge inflows and outflows.

Keywords: MNEs’ location choice, agglomeration, information externalities, knowledge spillovers

JEL Classification: F23, L11, R12, R30