Communication Costs and the Internal Organization of Multi-Plant Businesses: Evidence from the Impact of the French High-Speed Rail

Abstract

We document the impact of travel time between headquarters and affiliates of geographically dispersed corporate groups on the management of such business organizations. Theory suggests that the easier circulation of managers might facilitate the transmission of information between production plants and headquarters, thus fostering growth and functional specialization (on production activities) at remote affiliates and decreasing operational costs at the group level. We test these predictions on the population of French corporate groups, using the expansion of the High Speed Rail network as a shock on internal travel times. We estimate that HSR induced the creation of one production job for the average affiliate in the service industries (against 0.2 job in retail, trade or manufacturing industries), and the shift of around one managerial job from affiliate to HQ. At the group level, descriptive regressions suggest that the impact on the operational profit margin is around 0.5 percentage points in most industries. 4

How do trade and communication costs shape the spatial organization of firms?

“…Therefore, communication costs are related to travel time between locations. One of the possible strategies, proposed by Giroud (2013) and Charnoz et al (2018), is to link communication costs to the opening new direct airline or high-speed railway routes.…”

“…For multi-plant US …rms Giroud (2013) shows that the opening of new airline links that reduce the travel time between headquarters and plants generated an increase of 7% in plant productivity. Charnoz et al (2018) use the development of the high-speed railway network in France to show how the decrease in passenger travel time between headquarters and a¢ liates allowed a higher concentration of management functions in the headquarters.…”

Escaping social pressure: Fixed-term contracts in multi-establishment firms

“…There is indeed abundant evidence that monitoring problems and asymmetric information induce a positive relationship between the probability of downsizing and the distance to the headquarters (see e.g. Landier et al, 2009, Giroud, 2013, Kalnins and Lafontaine, 2013, and Charnoz, Lelarge and Trevien, 2018. As a consequence, we assume that job risk increases with the distance between the establishment and the firm's headquarters 7 -i.e.…”

Communication Costs and the Internal Organisation of Multi-Plant Businesses: Evidence From the Impact of the French High-Speed Rail

“… We actually show in the extended version of this article (Charnoz et al ., ) that changes in communication costs are a significant, but small driver of affiliates’ entries and exits. …”

“… The long version of our article (Charnoz et al ., ) provides complementary results about affiliates’ entry and exit. They show that the decision to close or sell an affiliate is significantly and negatively correlated with greater travel time reductions, but positively correlated with decreases in travel times at other affiliates, with the same order of magnitude.…”