Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/2626 
Year of Publication: 
2001
Series/Report no.: 
CEPR Discussion Paper Series No. 2907
Publisher: 
Centre for Economic Policy Research (CEPR), London
Abstract: 
Many previous studies have shown that the localization of firms can be an important factor in attracting new foreign direct investment into a host country. What has been missing in this literature thus far, however, is an investigation into the reasons why industry clusters attract firms. We distinguish between ‘efficiency agglomerations’ – firms locating close to each other because they can increase their efficiency by doing so, and ‘demonstration effects’, whereby existing firms send signals to new investors as to the reliability of the host country and newly entering firms follow previous firms. In this Paper we try to disentangle these two effects, by examining the location of US and UK firms in Ireland. We calculate proxies for ‘efficiency agglomerations’ and ‘demonstration effects’ and include these proxies in an empirical model of the location decision of firms. For US firms, we find that both efficiency agglomeration and demonstration effects are important determinants of entry. For UK firms, however, the evidence is not as clear cut.
JEL: 
F23
Document Type: 
Working Paper

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