Agglomeration effects of inter-firm backward and forward linkages: Evidence from Japanese manufacturing investment in China

•Firm-level agglomeration effects of multinational firms are examined.•Estimates reveal the strong agglomeration effects exerted by first-tier suppliers and customers.•Agglomeration by third-tier suppliers actually lowers the probability that subsequent investors choose the same locations.

This paper examines the agglomeration effects of multinational firms on the location decisions of first-time Japanese manufacturing investors in China for the period 1995–2007. This is accomplished by exploiting newly constructed measures of inter-firm backward and forward linkages formed in a home country. The conditional and mixed logit estimates reveal that agglomeration by first-tier suppliers and customers draws subsequent investment into a location. However, such agglomeration effects are not pervasive and do not extend to the second and third tiers. Instead, we find that agglomeration by third-tier suppliers generates a countervailing force, making a location relatively unattractive.