The Hardships of Long Distance Relationships: Knowledge Transmission and the Ease of Communication within Multinational Firms

CID Research Fellow & Graduate Student Working Paper No. 85

Dany Bahar
August 2017


Using a unique dataset on worldwide multinational corporations with precise location of headquarters and affiliates, I present evidence suggesting that when firms expand internationally, they tend to locate foreign subsidiaries geographically closer to the headquarters the more knowledge intensive the affiliates’ economic activities are. This tradeoff,however, weakens when controlling for the ease of communication between the headquarters and its foreign subsidiary, such as being in the same time zone. All the evidence points that the intra-firm transmission of knowledge plays an important role in the mechanisms of the proximity-concentration hypothesis.

Keywords: multinational firms, multinational corporations, knowledge, location, proximity concentration hypothesis, FDI

JEL codes: F23, L22, L25

Affiliated Program: Growth Lab