1 The Role of Market Potential in Location Choice: Evidence from Japanese Investment

Abstract: The purpose of this paper is to examine the validity of market potential as a proxy for demand linkages, from the viewpoint of “who are consumers of goods”. Our claim is that an appropriate proxy for demand linkages crucially depends on the underlying theoretical models. Particularly in location choice of intermediate goods plants, we demonstrate that the widely-used Harris market potential is not an appropriate proxy for demand linkages. Thus, using consistent estimators obtained by restricting our sample only to finished goods plants, we strictly quantify the effect of the market potential on their location choice