Industry Networks and the Geography of Firm Behavior

Abstract

Using a network approach that circumvents well-known challenges in estimating peer effects, we show that interactions with a firm’s geographic neighbors play a significant causal role in corporate investment behavior, and a modest role in financial policies and firm performance. Moreover, these geography network effects are almost entirely driven by propagation effects through product market and supply chain networks. We corroborate our findings in a quasi-experimental framework that allows for spillovers in treatment effects. Our findings help rationalize industrial clusters (e.g., Silicon Valley), as they illustrate that agglomeration economies are substantial and operate predominantly within industry boundaries.

Keywords: Networks, Peer Effects, Agglomeration Economies, Corporate Investment, Capital Structure, Firm Performance, Geography, Spatial Econometrics

JEL Classification: G31, G32, L20, L23, L25, R11, R12, R15