Location theory: Policy Applications
Location theory: Standard Assumptions
Location theory: Location of FDI
Location theory: Host-Country Policies
Location theory: Economic Environment
Location theory: Technology and Agglomeration Economies
Location theory: Firm Strategy
Location theory: Empirical Research on FDI Location
Location theory: New Location Theory: Random Chance and Time
In a policy context, researchers have studied the following question: What can policymakers to do to enhance the attractiveness of their locations and thus increase the likelihood multinational firms will decide to choose the particular location? Much of the work in this area evolved from two important areas of research.
First, New Trade Theory (see Krugman 1994) introduced economies of scale into theories of international trade. In the extreme, some industries such as airplane manufacture and semiconductor fabrication are so costly to set up that theworldmight support only a very small number of firms. In such a case, a country could ‘‘win’’ a two-country game in which both countries decide whether to subsidize its own firm so that firmis able to lower its cost and take the entire world market for producing a particular good (see Brander and Spencer 1985). This type of policy is often referred to as ‘‘strategic trade policy.’’ Despite there being no empirical evidence for the existence of industries with such extreme production structures that support only a single global firm (suitable subsidy targets),many billions of dollars are wasted every year by countries and states in subsidy games designed to ‘‘win’’ a larger share of global production.Knowing countries and states are willing to offer payments to lure and keep production gives firms an incentive to threatentomove. Inmany cases, these threats lead to bidding wars that reduce firms’ costs at the expense of countries and states.
Second, Porter’sCompetitive Advantage ofNations (1998) directly considered a positive role for governments in making locations more attractive. Unlike proponents of strategic trade policy, Porter advocated broader types of policy actions to enhance the attractiveness of a location. These actions include increased spending on education and R&D, government spending on infrastructure, institutional development, and the like. This goal of these policies would be to create Silicon Valley like clusters by improving the quality of domestic factors of production such as labor and capital. Since high-quality factors of production can be deployed across many different sectors, there is much less waste involved in policies that improve factor quality than in policies that merely seek to redistribute the location of existing economic activity.
Location theory addresses the important questions of who produces what goods or services in which locations, andwhy. Ideas fromlocation theory have been widely used in international economics, in particular, to predict which countries will specialize in the production of certain goods for export, and which countries MNCs will choose as production locations. In early location models, factors of production were given rather than created, and technologies for producing particular goods were unalterable. Clearly, modern applications of location theory to trade, FDI, and international economic policy have considerably expanded the scope of these location models. However, fundamental insights from the earliest theories of location such as the importance of factors of production, trade, and transportation costs remain powerful explanations for the location of global production today.