Functional fragmentation and the location of multinational firms in the enlarged Europe

Abstract

Despite the recent advances in the theory of location, the analysis of the role of services surrounding production activity has been largely neglected. This paper analyzes the colocation of a multinational firm's value chain in the enlarged European Union. Depending on its particular characteristics, each function (or activity) would favor different country characteristics. Opposing this dispersion force, vertical linkages between stages can encourage firms to co-locate different activities in the same country. We use recently collected individual firm data on almost 11.000 location choices for a 5 year period and 23 countries. We analyze the determinants of location choice for each activity, including sectoral and functional agglomeration variables. We also illuminate the co-location of functions at the firm level, specifically that of R&D and production.JEL classification: F23, L22, R3 Keywords: Functional fragmentation ; vertical linkages ; location choice. Fragmentation fonctionnelle et localisation des firmes multinationales dans l'Europe élargie.Malgré les développements récents de la théorie de la localisation, le rôle des activités de service liées à la production reste peu étudié. Ce papier analyse la localisation des différents éléments de la chaîne de valeur des firmes multinationales au sein de l'Union Européenne. Certaines forces telles que les avantages comparatifs conduisent à la dispersion des fonctions (où activités) entre les différents pays. A l'opposé, les liens verticaux entres les différentes étapes du processus de production au sein des firmes peuvent conduire les entreprises à co-localiser différentes fonctions dans le même pays. Nous utilisons une base de données de firmes individuelles récemment développée qui fournit plus de 11000 choix de localisation dans 23 pays. Nous analysons les déterminants de la localisation, notamment avec des variables d'agglomération sectorielle et fonctionnelle. Enfin, nous montrons que les liens verticaux conduisent les firmes à localiser leur production et leur R&D au sein des mêmes pays.Classification JEL classification: F23, L22, R3 Mots-clés: Fragmentation fonctionnelle ; liens verticaux ; choix de localisation. * A study of the quality of the database and its management have been carried out at the Invest in France Agency (AFII) under the supervision of Fabrice Hatem and Edouard Mathieu. We thank them for their help with this task. We are also grateful to the consulting group Ernst & Young, and more specifically to Barry Bright and Mark Hughes. I wish to thank the guest editors and the three anonymous referees whose suggestions improved the paper greatly. I am also grateful to

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“…One way to relax this assumption is to introduce individual random effects and estimate a mixed logit model (Brownstone and Train 1999). Using the same data set, Defever (2006) provides estimation implementing a mixed logit. Introducing country variables instead of country fixed effects produces the same result.…”

“…Although it is not the main purpose of this chapter, policy variables such as taxes could be interesting to study. Using the same setup as Defever (2006), I included a tax variable. I have been able to collect corporation tax data for all twenty-three countries of the enlarged Europe.…”

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