Geography Reference
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the domestic market. The importance of the size of the domestic market
for the multinational firms is known as the 'home market effect'. New
economic geography approaches then translate these arguments into the
case of cities and sub-national agglomerations, and demonstrate that the
location behaviour of MNEs depends on the balance of the input supply
and scale economy advantages of geographical concentration versus the
trade cost and market access advantages of geographical dispersion. In
the NEG terminology such advantages are referred to as centripetal forces
and centrifugal forces, respectively. Dispersion forces are strengthened
to the extent that wages and land prices fall with distance, although this
benefit may not be applicable to technology-intensive activities (Barba et
al. 2004). 18
Combining these various insights with issues of firm integration, it
becomes clear that the distinction between HFDI and VFDI has impor-
tant implications for the spatial configuration of multinational activi-
ties. Research in urban economics (Glaeser et al. 1992; Henderson et
al. 1995) demonstrates that the growth and productivity advantages for
firms in particular locations depend on the degree of industrial diversity
or specialization of the local economic environments in which the firms
operate. Certain types of firms appear to benefit from being located
in a region which exhibits industrial diversity, while others appear to
benefit more from being located in a region which exhibits industrial
specialization.
Adopting the lines of enquiry developed by NTT and NEG, most
notably characterized by the work of Markusen and Venables (1996),
Fujita et al. (1999), and Venables (2006), it is possible to argue that the
attractiveness - or L advantages - of particular locations for MNE invest-
ment will depend on both the variety and the nature of the local linkages
which the firm wishes to access. The location choice of MNEs which are
primarily focussed on HFDI will tend to be oriented towards areas of
agglomeration which are characterized by industrial diversity, whereas
the location behaviour of firms focussed on VFDI will tend to be more
oriented towards specialized locations. In general, in situations where final
producers and also intermediate suppliers both exhibit economies of scale,
they will tend to locate in the same region (Venables 1996). Where econo-
mies of scale operate in the same sector (i.e. localization economies are at
work), then VFDI will dominate and the region will be highly specialized.
In contrast, where the economies of scale operate in different sectors (i.e.
urbanization economies are at work), then HFDI will dominate and the
region will be highly diversified. 19 Even more complex patterns are pos-
sible, in that differences in the size of the market and local skills endow-
ments can also play a role. As such, these two different types of firm
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