Is high-Quality Production Location-Specific? Evidence from the Automobile Industry

Abstract

A large literature has documented substantial heterogeneity in the performance of similar firms within industries, but what are the sources of that heterogeneity? In this paper we investigate one potential source of differential performance, the role of location-specific factors, including the quality and attitudes of the local workforce, the type of supplier networks, the education system, the institutional infrastructure, and local “culture.” We focus on the automobile industry and in particular the role that location-specific factors play in determining the quality of automobile production. We exploit the natural experiment provided by the establishment of assembly plants in the U.S. by Japanese auto manufacturers. A number of the most popular Japanese car models are assembled both in Japanese plants and U.S. plants. We use a unique data set of over 400,000 used-car transactions at wholesale auctions to test whether the long-run quality of otherwise identical cars depends on the country of assembly. Japanese-assembled cars sell for a modest $50 more on average and other measures of quality also show small or no differences. The finding that American plants can produce high quality (Japanese) cars suggests that there is not an inherent limitation to the U.S. manufacturing environment and that the sources of heterogeneity in quality automobile production are likely dominated by firm-specific rather than location-specific factors.

Keywords: Performance differences, Location of production, Multinationals, Automobile industry

JEL Classification: L23, L25, L62