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

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 fewer firms to go multinational.By contrast, less expensive communication flows leads to more investment abroad. The reasonfor this difference in results is that the two types of spatial frictions differ in nature: in theproximity-concentration trade-off, lower trade costs weaken the need for proximity, whilelower communication costs foster deconcentration.