We examine the effect of proximity between a subsidiary and its parent on the subsidiary’s productivity. We argue that closer proximity increases the parent’s ability to monitor and transfer knowledge to the subsidiary, thereby increasing the subsidiary’s productivity. Additionally, the structural linkages and interdependencies between the subsidiary and its parent moderate the effect of travel-time reduction on subsidiary productivity. Productivity increases resulting from closer proximity are more pronounced when subsidiaries are hierarchically closer or more related to their parent but less pronounced for subsidiaries connected to their parent through multiple ownership paths. We find support for these hypotheses in a sample of subsidiaries of French manufacturing firms before and after the opening of a high-speed train line, the LGV Méditerranée, in France in 2001.
