Foreign Investment and Trade: Agglomeration and Persistence Effects


International transactions—foreign investment and trade—are an important conduit for knowledge and learning. What determines the volume of investment and trade? In turn, how do international investment and trade stimulate growth?

A common theme in the research has been the identification and quantification of persistence effects. For example, the most important influence on new foreign investment appears to be the extent of past foreign investment—foreign investors go where foreign investors go. Why is that so? With different co-authors, I explored different possible explanations. One possibility is agglomeration effects, i.e., firms locate along with others because they benefit from more reliable and sophisticated input supply or because colocation induces the development of supporting infrastructure. Another possibility is that firms "observe" each other and investment location decisions of pioneer firms create a cascading effect. In the growth of manufactured exports, persistence may reflect the existence of long-term buyer-supplier relationships which act as conduits of knowledge helping firms to continuously upgrade and maintain their market positions. Finally, exporters may have access to better technology through imports of specialized equipment, which further enhances export competitiveness.

Based on field research in the Southern provinces of China and the maquiladora regions of Mexico, we further explored the nature of agglomerations that may promote growth. Do regions with a high degree of specialization promote knowledge creation or are more diverse regions more conducive to the further development of knowledge? How important are informal relationships between business associations in transferring knowledge and what is the nature of knowledge transferred through these relationships?

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