EVOLUTION OF INVESTMENT FLOWS IN U.S. MANUFACTURING: A SPATIAL PANEL APPROACH

The paper starts with a discussion of a conceptual model of location factors in U.S. manufacturing investment at the state level. The purpose of the paper is to test the relative importance of growth factors influencing investment and whether or not they have changed in importance over time. These factors include agglomeration, market structure, labor, infrastructure, and fiscal policy. A better understanding of investment flows in the manufacturing sector will help determine how growth factors have changed over time and which economic development policies may be most appropriate at targeting the sector. The analysis covers the time period 1994 to 2006 for the 48 contiguous states, with data taken from the Annual Survey of Manufactures, the Bureau of Economic Analysis, and the Bureau of Labor Statistics. Panel methods are used to test for fixed effects due to heterogeneity across states. Spatial panel methods with time effects are used for determination and specification of spatial and temporal effects. Empirical results are consistent across the empirical models put forth. Results suggest that market demand remains one of the most important location factors of manufacturing investment. Investment also goes to states with more productive labor and localized agglomeration of manufacturing activity