Geography Reference
In-Depth Information
on broad categorizations of national geographies. The distinction between
HFDI and VFDI in studying MNE operations, which as we have seen is
central to different theoretical views, implies some significant implications
for the spatial configuration of MNE activities. In particular, the two
types of firm integration, as stylized as they may be, follow rather distinct
locational patterns. In the case of HFDI, this type of integration is more
prone to urban (or metropolitan) concentration; in the case of VFDI,
one more oriented towards sub-urban or industrial regions. Such critical
insights, derived by combining different forms of firm integration with
market and industry structure, have been uncovered by the scholars of the
New Economic Geography (see, for examples, Markusen and Venables,
1996; Venables, 2006).
2.5.2
New Economic Geography: Dispersion Versus Concentration
New economic geography (NEG) models first raised the possibility that
the locational determinants of MNE activities may be understood in terms
of various tensions. These are captured in terms of forces of dispersion
versus concentration on the basis of firm and industry-specific trade-offs
between scale economies and market access (HFDI), and between scale of
integration and factor costs differentials (VFDI), all of which turn out to
be critical for understanding the geographical patterns of MNE activity.
HFDI largely explains foreign investment among advanced economies,
while VFDI largely accounts for flows of FDI from developed to devel-
oping countries. Among the determinants of FDI,
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both supra-national
regional economic integration and sub-national agglomeration economies
have been incorporated in KCM-type models to determine the locational
choices of MNEs (Barba et al. 2004).
The arguments so far tend to be based on two country models. However,
when we start to take account of geography in a more explicit manner, then
the issue becomes more complex again. With regards to the geography of
international production, a central issue discussed by NEG approaches is
that of the geographical
dispersion
versus
concentration
of multinational
activity. The new economic geography develops from the seminal work of
Paul Krugman (1991a, b), which shares the same broad theoretical back-
ground of the KCM. NEG builds on the earlier developments in new trade
theory, which focussed on the reasons why most international trade and
FDI were actually observed to be between advanced countries, primarily
taking the form of horizontal rather than vertical integration. In particu-
lar, mergers and acquisitions dominate many aspects of foreign produc-
tion. The key insight of these theories is that such trade and FDI patterns
are driven by economies of scale at the level of a firm, an industry, and
