Industry agglomeration and the location of foreign affiliates

This paper investigates why Japanese investors in the United States tend to locate foreign affiliates near concentrations of U.S. and Japanese establishments in their own industry. We hypothesize that the tendency to agglomerate varies according to attributes of industries, and our empirical analysis relates various industry characteristics to the probability that a Japanese investor will locate a plant in proximity to similar firms. Our results provide evidence that agglomerative forces are stronger in natural resources industries and industries that use their own sector's output intensively. We also find that Japanese manufacturers with high transport costs displayed greater tendencies to cluster, perhaps around geographically concentrated downstream purchasers of their products.