The complementarity and connectivity of locations: digitalization, sustainability, and disruptions

2.1 Complementarity of locations

Complementarity refers to the added value generated when two assets are combined (Teece 2018). The degree of complementarity can range from weak to strong. Weak complementarity arises when assets generate independent value but yield more when integrated (Jacobides et al. 2018). Under strict complementarity, individual assets have little to no value unless used together (Hart and Moore 1990). In a spatial context, locational complementarity occurs when assets in two locations produce greater value together than separately. This definition assumes that locations differ in their profiles along dimensions such as economic development, knowledge specialization, social systems, and institutional structures. Hence, it is the heterogeneity of locational assets that creates the potential for complementarity.

Locational complementarity manifests in various forms. For instance, one location’s production capacity can complement another location’s market demand, as seen in trade relations between countries or between a city and its surrounding catchment area. The complementarity of locations also results from the spatial division of labor, in which regions become specialized in different but complementary activities in global value chains. In the knowledge economy, locational complementarity becomes more critical since regional innovation ecosystems increasingly specialize in niche knowledge domains while new product development requires creative combination and integration of diverse but related knowledge across multiple locations (Frenken et al. 2007; Li and Bathelt 2021).

2.2 Connectivity of locations

While complementarity explains why locations are connected, connectivity focuses on how complementary assets embedded in different locations are linked to create value (Belderbos et al. 2024b; Cano-Kollmann et al. 2016). This process is largely facilitated by MNEs, which, through their organizational networks, possess the capacity to mobilize and integrate these locational assets effectively (Zaheer and Nachum 2011).^[1] Although certain locational assets, such as the market, can be accessed via trade, integrating specific and complex locational assets often requires tight governance. MNEs, with their capability to coordinate activities across geographic and institutional boundaries, are particularly well-suited to perform this function (Rugman and Verbeke 2001).

The modes of locational connectivity differs depending on the agents involved, and on the linkage duration, direction, and scope. First, in terms of agents, connectivity can be constructed by organizations (Bathelt et al. 2004; Lorenzen and Mudambi 2013) or individuals, such as transnational entrepreneurs and mobile professionals (Saxenian 2006). The two types of agents overlap as expatriate assignments and international travel within MNEs reflect both organizational and individual connectivity among locations. Organizational connectivity of locations can be further classified into intra-organizational connectivity, in which one MNE establishes operations in multiple locations, and inter-organizational connectivity, in which firms from different locations form strategic alliances, merge or acquire, or become buyers and suppliers (Turkina et al. 2016).

Second, the connectivity of locations varies in duration, direction, and scope. Locational linkages can be either durable or temporary (Li 2014). Durable or permanent connections include the establishment of subsidiaries or joint ventures in new locations, while temporary connections arise through professional interactions, such as those occurring at industry conferences or trade fairs. In terms of linkage direction, connectivity of locations can be either inbound, where a location attracts foreign direct investment (FDI), thereby bringing in external resources, technologies, and expertise, or outbound, where firms from a location invest externally, allowing the transfer of local capabilities and expertise to other regions (Bathelt and Buchholz 2019; Berman et al. 2020).

Further, the connectivity of locations can have different scope reflecting its depth and breadth (Cantwell and Zaman 2024). Deep connectivity involves repeated, enduring linkages with specific locations, fostering intense interdependence and mutual reliance. In contrast, wide connectivity spans a broad range of locations, enabling diversification and access to a wide variety of complementary assets.

Together, these dimensions highlight the multifaceted nature of the connectivity of locations. As primary agents of location connectivity, MNEs play a crucial role in linking complementary assets across geographically dispersed locations. In leveraging their location-connecting networks, MNEs cannot only create value for their shareholders but also, purposely or unintentionally, shape the socio-economic development, political tensions, and environmental goals of the communities they connect.

3.1 Digitalization

A particularly important aspect of the 21st-century global economy that affects both connectivity and complementarity is digitalization. Digitalization manifests in two distinct but interconnected forms, each with unique implications for global business organizations. In its first form, as information and communications technologies (ICT) that transmit data seamlessly at minimal costs, digitalization enhances connectivity between geographically separated locations. In its second form, in situ digital technologies, such as smart factories using artificial intelligence and robotics to redesign production processes and empower human productivity, it transforms activities within specific locations. Together, these technological developments create opposing forces that reshape the global footprint of multinational enterprises (Autio et al. 2021).

Information and communications technologies have dramatically improved the efficiency and effectiveness of connectivity between distant locations. Through advancements in telecommunication infrastructure, cloud computing, collaborative software, and digital platforms, ICT has fundamentally altered how information, knowledge, and instructions flow across geographic space. This enhanced connectivity significantly reduces the spatial transaction costs, i.e., the costs associated with conducting business across geographic spaces like borders and continents.

As these spatial transaction costs decrease, MNEs find it increasingly viable to disperse their activities across a broader geographic range. The ability to coordinate complex operations remotely enables firms to distribute different functions to optimal locations without sacrificing operational cohesion. For example, research and development may be located in innovation hubs, while customer service operations might be situated in regions with appropriate language skills and time zone advantages.

Consequently, ICT advancements generally increase the centrifugal forces acting on MNEs, promoting greater geographic dispersion of their activities. More locations become viable operational sites, and the volume of activities undertaken at a distance from headquarters expands. This dispersion allows MNEs to leverage location-specific advantages across a broader geographic canvas. In short, it increases the extent of locational complementarity.

The second form of digitalization involves in situ digital technologies that transform activities within specific locations (Autio et al. 2021; Choi et al. 2023; Yoon et al. 2023). Technologies such as robotization, 3D printing, artificial intelligence, and the broader Industry 5.0 paradigm focus on enhancing productivity and effectiveness at the point of operation. These technologies fundamentally alter the production function of various business activities, changing the input requirements and comparative advantages of different locations.

A critical consequence of in situ digital technologies is their tendency to reduce locational complementarity. As advanced economies increasingly adopt automation and robotization, the traditional comparative advantage of low-cost, low-skill labor locations diminishes. When robots can perform tasks previously delegated to human workers in lower-wage economies, the economic rationale for offshoring weakens. The production function transforms from labor-intensive to capital- and technology-intensive, reducing the need for geographic dispersion based on labor cost differentials.

As a result, in situ digital technologies generally strengthen centripetal forces, promoting the concentration rather than dispersion of MNE activities. As the value of low-cost labor diminishes relative to technological capabilities, production may “reshore” or “near-shore” to locations closer to end markets or innovation centers.

The overall impact of digitalization on the geographic dispersion of MNE activities depends on the balance between ICT-driven centrifugal forces and in situ digital centripetal forces. This balance is not uniform across industries, functions, or time periods. Rather, it evolves with technological developments, business model innovations, and changes in the global economic landscape.

For activities where knowledge transfer, coordination, and communication are paramount (such as business services or software development), the centrifugal forces of ICT may dominate, leading to greater geographic dispersion. Conversely, in manufacturing activities where automation and robotization can substantially replace labor inputs, the centripetal forces of in situ digital technologies may dominate, leading to greater geographic concentration. Moreover, the balance may shift over time as technologies mature and diffuse globally. What begins as a concentrating force may eventually enable new forms of dispersion as technologies become more accessible across diverse locations.

Digitalization represents a transformative force in the 21st-century global economy, fundamentally altering both connectivity and complementarity of locations. Through ICT, digitalization enhances the ability of MNEs to coordinate activities across geographic space, promoting greater dispersion. Through in situ digital technologies, digitalization transforms the production function within locations, possibly reducing the complementarity that previously drove geographic dispersion.

The net effect on the geographic dispersion of MNE activities depends on the relative strength of these opposing forces. As digitalization continues to evolve, MNEs must continuously reassess their global footprint, balancing the enhancing connectivity offered by ICT against the changing locational complementarities resulting from in situ digital technologies. Understanding this dynamic interplay is essential for both business strategy and public policy in an increasingly digital global economy.

3.2 From complementarity to connectivity

After explaining the concepts of connectivity and complementarity of locations and their dynamics shaped by digitalization, we now turn to their relationships, aiming to understand the MNE-location interaction systematically in the current new context. Placing regions as the contextual backdrop and MNEs as the central actors, this section examines how regional characteristics (economic, socio-political, or environmental), reflecting locational complementarity, influence the location decisions of MNEs, or the decisions of generating or discontinuing connectivity.

While MNEs’ rationale for location choices can be broadly characterized as market seeking and asset acquisition (Dicken 2014), the interplay between regional attributes and MNEs’ location strategies is complex (Crescenzi et al. 2014). For instance, Alcácer and Chung (2014) measure the three elements of agglomeration economies (labor market pooling, knowledge spillovers, and supplier sharing) and find the first two exert much greater effects on foreign direct investment (FDI) attraction. Similarly, Asmussen and others (2020) measure various urban features, showing infrastructure and cosmopolitan culture in globally connected cities draw knowledge-intensive FDIs.

In addition to economic features, social structures, geopolitical tensions, and environmental concerns are increasingly pronounced in local settings, factoring into MNEs’ decisions in making connectivity. For example, Ascani and others (2023) find that Chinese FDI in manufacturing activities may favor locations with fragile environmental conditions. On geopolitical tensions, Li and others (2023) suggest that, when the relation between the host country and their home country deteriorates, MNEs tend to choose locations in the host country where firms from their home country have already agglomerated to mitigate political risk. Further, with a case study of a peripheral region in East Germany, Henn and Hannemann (2024) demonstrate how local political resentment can translate into hostile business practices against foreign firms, exacerbating liabilities of foreignness. This aligns with the well-known case of Amazon’s second headquarters in North America. Initially, Amazon chose New York City but then decided to withdraw due to urban politics and protests from local groups (Durkin 2018). These studies illustrate how MNEs’ decisions of establishing or discontinuing locational connectivity are increasingly shaped by location-specific social and political dynamics. Understanding how these dynamics play out will be invaluable to extend our understanding of the MNE-location interaction.

3.3 From connectivity to complementarity

Shifting the focus from MNEs to regions, we can explore how the trans-local linkages created by MNEs (connectivity) influence regional socio-economic features and sustainability goals (complementarity). While it is widely acknowledged that global pipelines complement local buzz (Bathelt et al. 2004) and that “connectivity is an essential dimension of regional economic development” (Crescenzi and Iammarino 2017, p.110), the effects of different types of connectivity on local social and economic development, including the mechanisms associated, remain unclear.

For instance, policymakers tend to presume that inward investment can stimulate employment and economic growth, while outward investment seems to imply the loss of local wealth and development opportunities (Castellani and Pieri 2016). However, empirical studies challenge this assumption (Crescenzi and Ganau 2025). Bathelt and Buchholz (2019) find positive relations between outward investment and home region’s economic development, channeled through mechanisms including knowledge transfer, job creation and income growth in the home region. Equally, the positive impact of inward investment in the host region may also be exacerbated. Lorenzen and others (2020) indicate that while MNEs connect with major urban centers, they may inadvertently disconnect them from these and other urban centers’ surrounding areas, exacerbating inequalities between urban cores and their catchment areas. Further in this direction, Cantwell and Zaman (2024) show that international knowledge connectivity leads to increasing innovation concentration in global cities. These findings suggest that MNEs’ choices and actions may play a role in creating the current social-economic landscape characterized by interregional inequality and social fragmentation (Storper 2018; Bathelt et al. 2024). As argued by Wiessner and others (2024), the impacts of MNEs on regions need to be examined from a broader perspective that integrates economic, social, and ethical considerations.

Beyond MNEs’ direct impacts in their host regions, MNEs also shape regional socio-economic development indirectly through the global patterns of their linkages (connectivity), as manifested in global networks of clusters and city regions. These global patterns emerge from organizational and individual linkages. At the organizational level, Li and Bathelt (2018, 2021) identify a pattern of investment linkages across clusters, which may channel more growth potential to these locations, leaving unconnected regions marginalized. Focusing on the aerospace industry, Turkina and others (2016) find buyer-supplier relationships tend also to be formed across clusters. Further, Berman and others (2020) show that Italian industrial districts exhibit greater inbound investments from foreign firms than outbound investments by local players, suggesting the direction of connectivity can be important to understand innovation of interconnected clusters. At the individual level, Saxenian (2006) highlights the role of transnational entrepreneurs in fostering high-tech cluster connectivity, while Park and others (2019), using LinkedIn data, depict cluster networks formed through labor mobility. In light of rising geopolitical tensions, restrictive immigration policies, and regulatory barriers for cross-border investments, it is interesting to examine the dynamics of these global networks of clusters and city regions and their influences on regional socio-economic development, such as inequality and segregation.

In sum, the two previous sections examine the two-way relationships between connectivity and complementarity of locations. It is important to note that their interplay and dynamic is deeply interwoven, like two sides of the same coin. International connectivity often channels innovation and economic activity into specific locations, exacerbating inter-regional differences, but also inequalities and intensifying social and political segregation. These pressures, in turn, can generate backlash from marginalized places (Rodríguez-Pose 2018) to disrupt global connectivity established by MNEs. To understand the reciprocal interaction between MNEs and locations in the current context requires collective efforts from international business and economic geography.