In Denmark approximately 7% of all firms have more than one establishment. These firms account for approximately 47% of the private sector total employment and around 54% of the total output. Given the importance of multi-establishment firms for the aggregate economy, it is crucial to know and understand the facts regarding their spatial organization.
In this article, we use highly detailed register data covering the universe of firms between 1981 and 2016 to lay out four stylized facts regarding the spatial internal organization of firms.
Some of these facts are, to the best of our knowledge, new in the literature. First, we show that the average number of establishments has increased by 36% during the last 36 years. Second, we show that the average distance between the establishments and workers to their headquarters also increased by more than 200% during the same period. This increase holds for the four aggregate sectors in our sample: manufacturing, finance, insurance and real estate, business services and transportation. This fact suggests that firms are placing workers further away from their HQ.
Third, we show that the increase in the average distance of workers to their HQ is driven mainly by increases in the average distance of production and business service workers. The changes in the average distance of managers to their HQ is small and contributes 6% of the total change. Finally, we show that the ratio of managers to production and clerical workers within firms has been increasing, going from, approximately, one manager for every 9-10, to one manager every four production and clerical workers. This increase has been particularly large in establishments located in the metropolitan area of Copenhagen and the most popu-lated municipalities in general. Finally, we show that these within-firm changes in the ratio of manager to production workers could partially explain the increase in the aggregate functional specialization, as suggested by Duranton and Puga (2005).
What could be the factors causing this spatial distribution of firms, establishments and workers, and their evolution over time? Based on the literature, the potential most important causes are: i) fragmentation costs, ii) location specific comparative advantages, iii) land and labor costs, iv) agglomeration economies, v) market access, and vi) skilled-biased technical change.16 Also, these causes are probably interconnected and there could be complementarities between some of them. We study some of the mechanisms in a companion paper.
First, the presence of fragmentation costs are an important factor since the movement of knowledge, people and/or goods can be very important for different operations within or across
16We refrain from discussing other important factors like differential tax rates across regions. Even though this could be a very important mechanism for firm location decisions in countries like the United States (Su´arez Serrato and Zidar, 2016), we do not think that this is an important factor in the fragmenting decision of firms inside Denmark.
firms. On one hand, in the presence of high communication costs, a firm might choose to operate in only one establishment. However, if communication costs decrease, it can decide to open new establishments and change its organizational structure for one that is more profitable (Duranton and Puga, 2005). For instance, if communicating across establishments is relatively easier, it could become more affordable for the firm to send some occupations further from the HQ. Furthermore, it could choose to leave only those workers at the HQ that benefit more from Face-to-Face communication (Storper and Venables, 2004). Communication costs have also been emphasized in the organizational economic literature as an important determinant of organizational structures (Garicano, 2000; Brynjolfsson and Hitt, 2000; Bloom et al., 2014).
On the other hand, internal transportation costs are also important, especially for firms in the manufacturing sector where intermediate inputs have to be shipped between establishments.
Improvements in the transportation infrastructure, such as the Great Belt Bridge that opened in 1998 connecting Zealand and Funen, can have a similar effect on firm fragmentation and organizational structure, as shown in Charnoz et al. (2018) for the expansion of the French High-Speed Rail.
Second, some municipalities might have comparative advantages in the production of certain goods and services. For instance, larger municipalities, who are usually more skill intensive, could specialize in skill intensive tasks (Davis and Dingel, 2014). Therefore, once a firm reaches a certain scale it might want to locate part of it in a more advantageous location. This is also connected with the existence of fixed costs of opening (and potentially closing) an establishment.
These costs could cause a firm to not open as many establishments as it would like, due to its small scale, low productivity, among others.
Third, higher labor and land costs in certain locations might cause a firm to fragment in order to lower their marginal costs. This has been the case with business service workers in the U.S. (Liao, 2012). These higher input costs could be driven by higher population growth, as in (Rossi-Hansberg et al., 2009), and/or by other factors such as an inelastic supply for office or residential space. When facing higher costs, firms could decide to leave in that particular establishment, only those occupations that benefit the most from the municipality’s urbanization economies (e.g. higher income workers have a higher preference for consumption amenities, as shown by Couture and Handbury (2017)). A firm could choose not to reallocate those tasks that benefit the most from input-output sharing, labor pooling or other types of agglomeration economies (Faggio et al., 2017). For example, a firm might want to locate their R&D facilities in the capital region due to the relatively high concentration of academic institutions.
Fifth, a firm could also choose to open a new establishment in a municipality if it believes there is enough local demand for its product. Even though we exclude retail and wholesale firms from our analysis, we still believe that market access can be an important mechanism for the firms in our sample. For instance, a business service firm might want to open an establishment near to manufacturing or service firms in order to be close to its (potential) clients. On the other hand, a firm might want to locate in Copenhagen, in another port city, or near the German border, in order to be more exposed to international markets.
Finally, these changes could also be affected by skill-biased technical change. It has been shown extensively in the literature that technology (including communication and information technology) complements highly educated workers engaged in abstract tasks and substitutes workers performing cognitive and manual tasks (Autor et al. (2003)). Consequently, the in-creases in the ratio of managers to production and clerical workers could be driven by skill-biased technical change. The fact that this ratio seems to be increasing more in the largest municipal-ities, could be explained in part by increases in the skill bias of agglomeration economies, as in Baum-Snow and Pavan (2013).
Two important caveats of our results are worth mentioning. First, we are not able to observe the establishments of a Danish firm outside Denmark, nor its labor force. It is clear that recent trends in globalization have seen an increase in offshoring and foreign outsourcing, especially for manufacturing firms, but also for firms in the business service sector.17 This is consistent with recent reports by Statistics Denmark showing increases in foreign employment held by Danish firms abroad.18 Therefore, our results should probably be interpreted as a lower bound of the actual decentralization patterns within firms. Second, there has also been an increase in outsourcing within national boundaries (Goldschmidt and Schmieder, 2017). We cannot observe this either in our data. In consequence, there could be more occupational specialization and spatial decentralization than the one dictated by the boundaries of the firms.
The results of this paper intend to shed light and motivate future research studying different geographic and economic consequences of changes in firms’ location decisions, for example, changes in the sorting of different types of workers, local productivity, and urban and rural development. Perhaps more importantly, the changes in the spatial organization within firms could be a very important cause explaining the recent diverging trends in urban wage inequality and residential income segregation across and within municipalities and regions.
17For example, through anecdotal evidence we know that a firm from the medical manufacturing industry has a plant in Hungary and is considering expanding its size, while closing the one in Denmark.
18For example, https://www.dst.dk/da/Statistik/nyt/NytHtml?cid=26775
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