Research Summary
Research Summary
When Distance Shrinks: The Effects of Competitor Proximity on Firm Survival
Description
What are the performance implications of locating close to firms in one's industry? The existing empirical evidence is mixed. In this paper I argue that proximity between firms affects their performance differently depending on whether they compete locally or in broader national markets. I capture changes in agglomeration using a new approach, where road infrastructure investments provide exogenous variation in the proximity between firms. Combining detailed data on the location of all manufacturing firms with changes in minimum travel times between them in the context of Brazil, I find that in locally traded industries greater proximity breeds competition. It leads to exit of the smallest firms and improved survival prospects of the largest. As proximity increases, firms react strategically, by switching their product and relocating to lower exposure to competitors. The effects differ in nationally traded industries. Here proximity increases the survival rate and results in fewer relocations, consistent with increased agglomeration spillovers. The results shed light on contradictory findings in the literature and show how changes in the actual costs of mobility intensify both competition and agglomeration forces.