The Spatial Configuration of the Firm and the Management of Sunk Costs

Abstract

In this paper we explain why the modern corporation may persist with decentralised system plants differentiated by the vintage of capital and the style of management. Here, our goal is to show how and why firms are, at once, structured by the inherited configuration of capital, and reproduce differentiation within and without the corporation. To do so, we use concepts and principles drawn from modern financial theory to show that a spatially differentiated configuration of production may have advantages for the firm in terms of the risk-adjusted flow of revenue, strategic options in relation to actual and potential competitors, and the management of sunk costs. Our argument is focused upon the modern corporation, characterised by a separation between ownership and control as well as a dependence upon internal stakeholders for the realisation of planned revenue and output targets. We argue that our framework can help theorists account for the persistence of inter-firm and intra-industry differences in capital profiles, despite a common presumption in favour of convergence around a simple, most efficient industry standard. While the paper is an exercise in theory, it is based upon our previously published studies of corporate restructuring in manufacturing and retail industries in the United States and the United Kingdom.