Location Strategies for Agglomeration Economies

39 Pages Posted: 20 Feb 2010 Last revised: 30 Jan 2011

See all articles by Juan Alcacer

Juan Alcacer

Harvard University - Strategy Unit

Wilbur Chung

University of Maryland - Robert H. Smith School of Business

Date Written: February 18, 2010


Geographically concentrated industry activity creates pools of skilled labor and specialized suppliers, and increases opportunities for knowledge spillovers. The strategic value of these agglomeration economies may vary by firm, depending upon the relative value of each economy, and upon firm and agglomeration economy traits. To better determine when a firm will be attracted to agglomeration economies, we develop a three-layer framework. The first layer assesses the relative importance of skilled labor, suppliers, and knowledge spillovers. The second layer considers whether firms can benefit from geographic concentration without co-locating. The final layer examines why some firms are more inclined to co-locate than others based upon firm and agglomeration economy traits. We test our framework on the U.S. location choices of new manufacturing entrants between 1985 and 1994 and find that firms are far more attracted to skilled labor and specialized suppliers than they are to potential knowledge spillovers, even in R&D intensive industries. We also find that leading firms will be more attracted to pools of labor, suppliers, and potential knowledge spillovers when their own contributions are less fungible, and cannot be easily leveraged for strategic advantage by proximate competitors.

Keywords: agglomeration economies, location choice, firm strategy

JEL Classification: R30, R12, L21

Suggested Citation

Alcacer, Juan and Chung, Wilbur C., Location Strategies for Agglomeration Economies (February 18, 2010). Harvard Business School Strategy Unit Working Paper No. 10-071, Robert H. Smith School Research Paper No. RHS 06-144, Available at SSRN: https://ssrn.com/abstract=1555111 or http://dx.doi.org/10.2139/ssrn.1555111

Juan Alcacer (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-6338 (Phone)
617 495-0355 (Fax)

Wilbur C. Chung

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

HOME PAGE: http://www.rhsmith.umd.edu/faculty/wchung/

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