The hardships of long distance relationships: time zone proximity and the location of MNC's knowledge-intensive activities

Using a unique global dataset on multinational corporations (MNCs) with precise location of headquarters and affiliates, I present evidence of a trade-off between distance to the headquarters and knowledge intensity of the affiliates' economic activity. This trade-off is strongly diminished the higher the overlap in working hours between the headquarters and the affiliate. In order to rule out biases arising from confounding factors, I implement a regression discontinuity framework to show that the economic activity of a subsidiary located just across the time zone line which increases the overlap in working hours with its headquarters is, on average, roughly 1% higher on the knowledge intensity scale. The results are present only for foreign horizontal subsidiaries. Overall, the findings suggest that barriers to real-time communication within MNCs play an important role in the location decisions of their subsidiaries.