Growing in the Desert: A Comparative Analysis of Firms Located in Border Regions of the 2004 Enlargement
Co-authored with Nicolas Debarsy and Jan Fidrmuc
Abstract
Borders can act as barriers to regional development, limiting the market potential of firms located there. Drawing on location theory Lösch (1944), which likens border regions to deserts attracting only smaller firms, this paper investigates the impact of the borders on firms in regions affected by the 2004 EU enlargement. Using firm-level data, we analyze both internalized borders and the external borders of New Member States (NMS) and their EU15 neighbors. Our results suggest lower growth of profitability for firms located in border areas between a NMS country and a EU15 country. We further find heterogeneity across firms sizes and sectors.
Motivation
- Borders limit the market potential of firms, hence firms may prefer to avoid border regions and prefer to settle further inland (Lösch, 1944).
- Persistence of barriers between countries within the EU Single Market (Santamaría et al., 2023; Capello et al., 2018, Fantechi and Fratesi, 2023).
Research question
- How does productivity of firms in border areas compare to the ones located more in the hinterland?
- How do these effects differ across different company sizes and sectors?
Contributions
- Comparison of single unit firms from multiple sectors in various countries.
- Accounting for spatial heterogeneity.
Empirical strategy
- Comparison of firm productivity near borders (0–25 km) and farther away (50–100 km) across borders between EU15 and new member states (differentiating both sided of the border), borders between two new member states, and external borders of the EU over the period 1998-2021.
- Dependent variable: profit (EBITDA) per employee (level and growth).
- Covariates: firm level (age, sector group and size category) and location level (density and foreign market potential in 1995 and border elevation).
- Method: OLS.
Results
- Lower growth of productivity among firms located in new member states near EU15 borders.
- Stark productivity differences in new member states across agriculture and non-agriculture between the borders with EU15 and the EU’s external border.
- In new member states, irrespective of the border, level of productivity declines with firm size.
References
Capello, R., Caragliu, A., and Fratesi, U. (2018). Breaking down the border: Physical, institutional and cultural obstacles. Economic Geography, 94(5):485–513.
Fantechi, F. and Fratesi, U. (2023). Border effects on firm’s productivity: The role of peripherality and territorial capital. Papers in Regional Science, 102(3):483–507.
Lösch, A. (1944). Die räumliche ordnung der wirtschaft. G. Fischer.
Santamaría, M., Ventura, J., and Yeşilbayraktar, U. (2023). Exploring european regional trade. Journal of International Economics, 146:103747