Study: Firm Networks, Borders and Regional Economic Integration
The impact of the presence and persistence of provincial border effects on goods trade and long-term growth is well established. However, the factors that underlie them remain unclear. Identifying these factors is important because interprovincial trade flows are substantial. In 2015, interprovincial trade accounted for roughly 60% of the value of Canada's international exports and re-exports.
A new Statistics Canada study, "Firm Networks, Borders and Regional Economic Integration," presents new evidence on the negative impact of provincial borders on the establishment of cross-province firms networks that help facilitate trade. It is found that half of the estimated negative effect of provincial borders on goods trade is related to barriers to establishing these networks.
Firms may invest in production facilities across provincial borders to gain greater market access, reducing interprovincial trade in the process. On the other hand, multi-unit firms can also increase trade by lowering trade costs incurred across their network of operating locations. This occurs as the firm trades goods across units (vertically-integrated supply chains) or through investment in the development of shared upstream (supplier) and downstream (customer) supply chains. As firms expand across regions, their internal and external supply chains move with them, potentially fostering further inter-provincial integration through trade in the process.
This study measures the strength of firm network ties between two regions as the number of operating units that firms with operations in each region has in the other. After taking into account distance between regions and the capacity of regions to develop these links, firm network ties are found to be 19% weaker between regions that cross provincial borders than between regions within provincial borders.
The study also finds that, on balance, stronger firm network ties across regions are associated with higher levels of goods trade, but that this complementary effect becomes weaker as the distance between the regions grow.
The presence of border effects is measured by examining the relative weakness of inter-provincial goods trade compared with intra-provincial trade, after taking into account distance and the capacity of regions to generate and absorb trade. All else being equal, goods trade across provincial borders represents about 60% of intra-provincial trade. However, when taking into account the negative effect that provincial borders have on firm network ties, this proportion rises to about 80%. Roughly half of the estimated border effect on trade is related to the negative effect provincial borders have on firm networks and the trade that these networks facilitate.
Note to readers
A relatively long period of time is needed to estimate the underlying relationships between trade and networks. This paper relies on regional trade data from the Surface Transportation File and firm network ties derived from the Business Register spanning the years 2004 to 2012. The relationships examined are highly persistent with no evidence that they have significantly changed since. Nevertheless, the analysis will be reassessed once new comparable data become available.
The research paper "Firm Networks, Borders and Regional Economic Integration," part of the Analytical Studies Branch Research Paper Series (11F0019M), is now available.
For more information, contact us (toll-free 1-800-263-1136; 514-283-8300; STATCAN.infostats-infostats.STATCAN@canada.ca).
To enquire about the concepts, methods or data quality of this release, contact Mark Brown (613-951-7292; email@example.com), Economic Analysis Division.