Arbitraging Labor Markets

We develop a new rationale for firms to operate in multiple locations within the same country. We show that business group firms relocate operations and grow less if firms of the same group in other local labor markets offer a better labor supply, an improved fit between the requirements of the firm and the local labor force, and lower labor costs. The first two aspects are more important than costs; hence, business groups primarily address their access to human capital. Relocation is concentrated in industries with lower asset tangibility, in high-skilled jobs, and in business groups with decentralized managerial functions. Local labor conditions are of similar importance to and distinct from agglomeration economies. Variation in employment growth rates is associated with changes in hiring and separations, whereas internal transfers of employees account for only a small portion of the variation, as business groups predominantly move jobs, but not employees, between their locations. As such, they arbitrage local labor markets.