How do trade and communication costs shape the spatial organization of firms?

Discussion Papers

No.706

by Toshitaka Gokan, Sergey Kichiko, Jacques-François Thisse

March 2018

ABSTRACT

We show how trade and communication costs interact to shape the way firms organize their act ivities 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 se veral 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 ot her country are all spatially integrated. We then study how trade and communication costs aff ect firms’ organizational choices. First, lower trade costs lead fewer firms to go 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 pro ximity-concentration trade-off, lower trade costs weaken the need for proximity, while lower communication costs foster deconcentration.

Keywords: trade costs, communication costs, spatial fragmentation of firms

JEL classification: F12, F21, R12

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