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

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.