Research Highlights

What Happens to Productivity When Large Companies Move to an Area?

simone lenzu and holger mueller
Overview: In “Propagation and Amplification of Local Productivity Spillovers,” NYU Stern Professors Simone Lenzu and Holger Mueller, along with NYU Stern PhD student Quinn Maingi and co-author Xavier Giroud (Columbia University) research the effect that large manufacturing plant openings have on productivity of local and distant plants.

Why study this now: Local governments spend billions of dollars in subsidies every year for companies to locate within their areas. A common rationale for such place-based policies is that they raise the productivity of local workers and businesses. It is widely believed that these productivity gains are geographically localized - but is that all?

What the researchers found: Using confidential Census plant-level data, the study revealed that:
  • Large manufacturing plant openings raise the productivity of local plants as well as distant plants hundreds of miles away.
  • This “global” productivity spillover does not decrease with geographical distance, and is stronger in knowledge-based industries: industries where there are mutual research & development and patent citation flows between companies.
  • While knowledge sharing through these networks amplifies the effects of local productivity shocks (a million-dollar plant opening in an area, for example), it widens economic disparities between individual workers and regions in the economy: those with high GDP become richer, while those with low GDP become poorer.
Key insight: Productivity gains from large plant openings in an area don’t only affect the local economy - the effects can be felt in distant regions as well.

What does this change: It is widely believed that productivity gains from large companies relocating to a particular area are solely geographically localized. The research findings challenge this view; in fact, the study shows that the productivity spillovers from local place-based policies propagate throughout the economy of multiple faraway regions.

Final takeaways: According to the researchers, their “results are consistent with knowledge sharing among plants of the same firm: once the knowledge spills over to the firm's local plant, it can be freely shared with other plants of the same firm, even ones that are located far away. Accordingly, the benefits of local place-based policies may extend far beyond the geographical regions where the policies are implemented.”