Strategic Interaction Across Countries and Multinational Agglomeration: An Application to the Cement Industry

Management Science

Posted: 26 Dec 2010

See all articles by Pankaj Ghemawat

Pankaj Ghemawat

University of Navarra, IESE Business School; New York University (NYU) - Leonard N. Stern School of Business

Catherine Thomas

Columbia Business School - Finance and Economics

Date Written: December 1, 2008

Abstract

Agglomeration in FDI is typically attributed to location-specific characteristics such as natural resource advantages or production related spillovers between multinational firms. The increasing collocation of the largest global firms in the cement industry since the 1980s is not easily attributed to either of these explanations. This paper draws on theories of multimarket contact to test whether strategic interaction across national markets has influenced the successive market entry decisions generating the observed agglomeration. We first establish that there is indeed non-random agglomeration of the six largest cement firms. We next show that pre-existing cross-market interaction with current incumbents in a market helps predict the identity of the next firm to enter, at all levels of multimarket contact. The association does not appear to be due to strategic convergence or mimicry of recent entry events and cannot be explained by production-side effects, which depend only on local conditions. The findings are consistent with multimarket contact models where collocation allows firms to sustain higher prices in all markets. This latter inference is also supported by evidence of an association between global firm market share and local cement price. The paper suggests that pricing spillovers can serve as an alternative motivation for FDI agglomeration.

Keywords: FDI, Agglomeration, MNEs, Multimarket Contact.

Suggested Citation

Ghemawat, Pankaj and Thomas, Catherine, Strategic Interaction Across Countries and Multinational Agglomeration: An Application to the Cement Industry (December 1, 2008). Management Science. Available at SSRN: https://ssrn.com/abstract=1731308

Pankaj Ghemawat

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

New York University (NYU) - Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

Catherine Thomas (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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