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

49 Pages Posted: 8 May 2018

See all articles by Toshitaka Gokan

Toshitaka Gokan

Institute of Developing Economies (IDE-JETRO)

Sergey Kichko

National Research University Higher School of Economics

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: April 27, 2018

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.

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

JEL Classification: F12; F21; R12

Suggested Citation

Gokan, Toshitaka and Kichko, Sergey and Thisse, Jacques-François, How Do Trade and Communication Costs Shape the Spatial Organization Of Firms? (April 27, 2018). Higher School of Economics Research Paper No. WP BRP 191/EC/2018. Available at SSRN: https://ssrn.com/abstract=3169901 or http://dx.doi.org/10.2139/ssrn.3169901

Toshitaka Gokan

Institute of Developing Economies (IDE-JETRO) ( email )

3-2-2 Wakaba, Mihama-ku
Chiba, 261-8545
Japan

Sergey Kichko (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Jacques-François Thisse

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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