Urban density and vertical disintegration: the case of service firms in Milan

A recent strand of the economic literature has emphasized the role of services, and in particular knowledge-intensive business services (KIBS), as a primary source of knowledge creation and diffusion, as they are typically transferred among firms through strong supplier-user interactions. This feature is of particular importance for the regional and urban economics literature since the face-to-face contacts needed for knowledge exchange make spatial proximity to become crucial. Existing theoretical and empirical literature show that the geographic concentration of industry induces firms to vertically disintegrate their production due to lower transport and managerial costs as well as lower possibility to adopt opportunistic behaviours. However, this evidence is primarily based on manufacturing firms, whereas little or no attention is given to service firms. The aim of this paper is to fill this gap, by assessing the effects of different measures of spatial concentration on service firms’ vertical disintegration within a large city such as Milan. Data used in this work are drawn from AIDA, a commercial database collected by Bureau Van Dijck and gathering information on balance sheets data as well as geographic location of Italian joint stock companies. Relying on this rich firm-level dataset, we build a sample of more than 83,000 service firms located in the metropolitan area (MA) of Milan in year 2008. Our dependent variable is given by the value of business services purchased by service firms over total production costs. As regressors, we include measures of firms size, age and urbanization economies, as defined as population density for each municipality of the LLS of Milan. In this way, we are able to estimate the elasticity of the degree of vertical disintegration with respect to a unit increase in urban density, which, for service firms, may represent an increase in market potential and/or a decrease in transport costs and/or a way for decreasing the adoption of opportunistic behaviours. Preliminary results seem to confirm that service firms tend to disintegrate production more if they are located within a dense urban area, this being particularly true for KIBS located in the core municipality of Milan.