Does geographic proximity affect firms’ cross-regional development? Evidence from high-speed rail construction in China

Abstract

Firms' cross-regional development is essential for their growth, with communication costs arising from geographic distance becoming a widely discussed factor. However, the causal relationship between geographic proximity and firms' cross-regional development remains inadequately underexplored. By leveraging firm registration data from 2003 to 2014, and exploiting the staggered construction of China's high-speed rail (HSR) as a quasi-natural experiment, this paper studies the effects of falling communication costs on firms' cross-regional development. HSR construction leads to an 8.6% increase in the number of firms' affiliates and a 68.6% rise in the weighted average distance between new affiliates and their headquarters. The effects are more pronounced for firms with higher performance heterogeneity and in cities with limited Internet infrastructure, suggesting that HSR construction can mitigate information asymmetry and improve monitoring. This study provides new micro-evidence for how geographic proximity promotes firms' cross-regional expansion through communication cost channels, offering implications for multiregional firms and policymakers.