According to my latest research,* companies invest more in plants located closer to headquarters and those plants tend to be more productive. Combining plant-level data with airline data in the U.S. from 1977-2005, I analyzed how the launch of new airline routes affected plant investment and productivity. I found that a new direct route from headquarters city to the city where the plant is located led to an increase in plant investment of 8% to 9%. Also, plants’ total factor productivity rose by 1.3% to 1.4%. In both cases, the effect was only seen when the new route reduced travel time by at least two hours round trip; the larger the reduction in travel time, the stronger the effect.
These are empirical findings, but there are a lot of possible explanations for why this is so. If managers are very close – or can easily travel to a plant site – the more likely they are to have better information about that plant. They are also more likely to spot investment opportunities, and are better able to make decisions about where to spend money. They’re also able to monitor and guide where that money is going, making sure it’s not being wasted.
The same might be said for the increase in productivity. The plant workers may feel that they’re being monitored more closely so they work harder. (It’s a human reaction: wouldn’t you work harder if your boss worked in the office at the end of the corridor, as opposed to across the country?) The plant may also get more guidance from headquarters because management simply knows the plant better and understands how to motivate employees and find efficiencies.
My research found that the effect was more visible in the earlier years of the sample period when other means of exchanging information such as the Internet, corporate intranets and videoconferencing were either not invented yet, or less prevalent. The effect was weaker as new technologies came on the scene, but it was still apparent. I think that speaks to the fact that even though we have all this high-tech equipment and these new communication tools, there is still value in being there in person. With face-to-face visits, managers get to see up close how the plant operates and get to know the workers – things that are simply not as easy to do on Skype.
For companies, the biggest lesson from my research is: location matters. My research focused on headquarters and plants that were already in fixed locations, but there are potential implications for companies who are thinking about setting up new plants. There are a lot of factors to consider – the cost of labor in a given area, the price of land, to name just a couple. And there may be good reasons why a company would want to set up a plant in China rather than, say, suburban New Jersey. But clearly my research shows that proximity does matter. All else being equal, it increases the likelihood of investment and is good for productivity.
Read more at Site Selection Magazine
Xavier Giroud is an Assistant Professor of Finance at MIT Sloan School of Management
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