Abstract

Where should firms locate? As communication technologies spread across city, region,and country boundaries, and communication channels multiply, many firms can potentially relocate some of their activities to regions with lower costs. While manufacturing has long been globalizing, IT is enabling a new wave focused on services. Spatial relocation is attractive to companies faced with the incessant pressure to control costs and information technologies can help firms transcend location boundaries. But these same technologies may also confer renewed importance to local assets that are hard to replicate in remote locations. This paper develops a framework to analyze these effects by estimating the regional demand for customer service representatives of a homogenous set of Fortune 1000 manufacturing firms. The model is estimated using firm-level data and the estimated demand structure is used to assess the effects of technology on customer volume, location choices and cost savings. A 10 percent increase in the use of Internet applications is found to lead to a 2.5 percent decrease in the firm’s employment of agents nationally. Moreover, the same increase reduces the willingness of firms to pay for regional benefits (technology “levels” the field between regions). However, the cost savings from the associated relocation are surprisingly small, averaging 1.3 percent of unit costs. Finally, the research shows that regional preferences vary widely among firms, suggesting that sensitivity to cost is highly firm-specific and that the importance of local assets does not vanish. Overall, these results show a positive relationship between technology and firms’ price sensitivity, but not on the scale of a massive spatial reorganization. Firm-specific regional preferences still matter.

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