Information and Communication Technology and Firm Geographic Expansion

This paper studies how information and communication technology (ICT) affects the firm geographic organization and its implications on aggregate efficiency. ICT can widen firms’ geographic span of control by reducing their internal communication costs. Empirical evidence from confidential US Census data shows that firms with more advanced technology have both higher within-firm communication and larger geographic coverage. I then develop a quantitative spatial equilibrium model in which firms endogenously adopt ICT, choose multiple production locations, and trade domestically. I estimate the model by exploiting natural experimental variation from the Internet privatization of the early 1990s. The model quantifies that privatization led to an overall efficiency gain of 1.3%, two-fifths of which came from firm geographic expansion. The distribution of these gains across locations is shaped by multi-unit firms’ location choices. Policy simulations show that, in reducing the digital gap, a coordinated national policy leads to larger efficiency gains than local policies.