Author Description

While the presence of provincial border effects - the relative weakness of inter-provincial trade compared to intra-provincial trade - is well established, it remains unclear what underlies them. Parsing out the sources of the border effect is important, because it provides policy makers with much more information on where to direct their efforts. This paper takes a step in this direction by asking whether part of the border effect can be attributed to how multi-unit firms organize their production within and across provincial borders. Networks of operating units controlled by the same enterprise lower the cost of trade by shipping goods between units as value is added through the production chain or via the use of common upstream and downstream supply chains. Higher costs of operating these networks in multiple provinces may act as a barrier to firm networks. By combining measures of regional trade and firm networks over a nine-year period (2004 to 2012), the study tests these propositions. It finds that, while many firms operate networks across multiple provinces, firm networks dissipate with provincial borders, and that this has important implications for trade. Using a gravity model, the study finds that provincial border effects fall by about half after accounting for firm networks. This results both from provincial borders acting as a barrier to firm networks and from networks that cross provincial borders acting less as a complement to, than a substitute for, trade.