Agglomeration and relocation: Manufacturing plant relocation in Korea

Abstract

This study investigates the magnitude of localization economies by analysing the relocation pattern of Korean establishments in the manufacturing sector. Relocation of establishments is identified by their move across the border of wards, counties, or cities and distinguished between beyond and within their workers' commuting distance. It seems that relocation beyond commuting distance costs more than that within commuting distance since the former includes additional costs related with searching for, hiring, and training new workers. Key findings of this paper show that external benefits from agglomeration are large enough to be recognized by manufacturers through relocation beyond the border of their workers' commuting area. When the own industry's share of employment in all manufacturing industries becomes doubled through relocation, the probability for establishments to relocate over a long distance across the boundary of their workers' commuting area rises by 17 per cent. The results for sub-samples divided by the age of establishments show that older establishments are more likely to relocate over a long distance to an area with disproportionate presence of establishments in the same industry. These results seem to fit product life cycle theory by Duranton and Puga. As the production process of the product becomes standardized, the firms producing that product tend to relocate to the specialized area where they can reduce the production costs by increasing dependence on the existing intermediate input suppliers, who are more likely to appear in a more specialized area.JEL classification: R30, R12, D21

Regional business climate and interstate manufacturing relocation decisions

“…The coefficient is negative suggesting migration is higher from states with a low share of employment in manufacturing to states with a relatively large share of employment in manufacturing. This result is consistent with the product life cycle model and the prior findings within manufacturing context (Duranton & Puga, 2001;Hong, 2014;Mack & Schaeffer, 1993;Wojan & Pulver, 1995). It appears that more innovative firms, as evidenced by spending on research and development, benefit more from the Jacobian externalities associated with agglomeration economies.…”

“…Treating manufacturing as one industry in any study of relocation determinants may lead to aggregation bias. We know from a theoretical perspective that, for example, within the product life cycle framework (Duranton & Puga, 2001;Hong, 2014;Mack & Schaeffer, 1993;Rink & Swan, 1979;Wojan & Pulver, 1995), firms at different levels of "maturity" view business climate through very different lenses. More mature industries look for lower cost alternatives while newer industries may place higher value on other factors.…”

“…Finally, the factors that are considered in relocation decisions may differ across manufacturing firms. The product life cycle model (see Rink & Swan, 1979) implies that as manufacturing becomes more mature and less focused on innovation it seeks out lower cost alternatives (Duranton & Puga, 2001;Hong, 2014;Mack & Schaeffer, 1993;Wojan & Pulver, 1995). On the other hand, manufacturing companies in newer industries tend to be more focused on innovation and to benefit from Jacobian externalities associated with agglomeration economies.…”

“…If manufacturing firms are perceptive to business climate, it is important to understand which components of the business climate different types of firms prioritize. Within the product life cycle theoretical framework (Duranton & Puga, 2001;Hong, 2014;Mack & Schaeffer, 1993;Rink & Swan, 1979;Wojan & Pulver, 1995), industrial "maturity" determines companies' preferences. Businesses in more mature industries, or industries less likely to invest in innovation, are likely to seek out lower cost alternatives while newer and more innovation-focused industries may place higher value on other factors.…”

“…It is important to separate the study of factors that help understand relocation decisions from the study of the more general location decisions. As noted by Holl (2004), Hong (2014), Kronenberg (2013) and Manjón-Antolín & Arauzo-Carod (2011), many previous studies treat relocation, new firm formation, and new branch location decisions equally in broad investigations of location choices, thus leading to potentially incorrect policy infrerences. In this study we focus on the factors behind interstate relocation decisions in the U.S. manufacturing between 2000 and 2011.…”