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How Do Trade and Communication Costs Shape the Spatial Organization Of Firms?

Author

Listed:
  • Toshitaka Gokan

    (National Research University Higher School of Economics)

  • Sergey Kichko

    (National Research University Higher School of Economics)

  • Jacques-François Thisse

    (National Research University Higher School of Economics)

Abstract
We show how trade and communication costs interact to shape the way firms organize their activities across space. We consider the following three organizational types: (i) integrated firms in which all activities are conducted at the same location, (ii) horizontal firms, which operate several plants producing the same good at different locations, and (iii) vertical firms, which perform distinct activities at separated locations. We find necessary and sufficient conditions for the three types of organization to coexist within the same country, whereas firms located in the other country are all spatially integrated. We then study how trade and communication costs affect firms’ organizational choices. First, lower trade costs lead to fewer firms going multinational. By contrast, less expensive communication flows leads to more investment abroad. The reason for this difference in results is that the two types of spatial frictions differ in nature: in the proximity-concentration trade-off, lower trade costs weaken the need for proximity, while lower communication costs foster deconcentration.

Suggested Citation

  • Toshitaka Gokan & Sergey Kichko & Jacques-François Thisse, 2018. "How Do Trade and Communication Costs Shape the Spatial Organization Of Firms?," HSE Working papers WP BRP 191/EC/2018, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:191/ec/2018
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    More about this item

    Keywords

    trade costs; communication costs; spatial fragmentation of firms;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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