Spatial agglomeration and vertical disintegration of knowledge intensive business services in Lombardy

A recent strand of the economic literature has emphasised the role of services, and in particular knowledge-intensive business services (KIBS), as a primary source of knowledge creation and diffusion. Since this transferring process often occurs through strong face-to-face interactions, the role of spatial proximity becomes crucial. Theoretical and empirical literature show that the geographic concentration of industry induces firms to vertically disintegrate their production, due to the lowering of transport and governance costs as well as to the reduction of opportunism in managing transactions. However, the evidence is primarily based on manufacturing firms, whereas little or no attention is given to service firms. In this paper we try to fill this gap by estimating the effects of the spatial agglomeration on service firms’ vertical disintegration in a dynamic context, with reference to the Lombardy region in Italy. Data used in this work are drawn from AIDA, a commercial database collected by Bureau Van Dijck gathering information on balance sheets data as well as the geographical position of Italian joint stock companies. Relying on this rich firm-level dataset, we build a sample of almost 15.000 KIBS firms located in Lombardy over the period 2004-2009, and we estimate a one-step system GMM dynamic panel data model in which, as dependent variable, we use the share of purchased business services, while, as explanatory variables, we include firm size, age, and urban density at the local labour system level. In so doing, we can estimate the impact that the short-run variations of spatial agglomeration variables have on the short-run variations in the degree of vertical disintegration of KIBS firms, while controlling for potential endogeneity biases. Our results complement previous cross-sectional evidence on KIBS firms agglomeration and point to a positive, and statistically significant, effect of urban density on vertical disintegration, even once controlling for persistence effects over time. This effects, however, tend to vanish as congestions effects arise, thus identifying a non-linear relationship between the geographical concentration of industry and vertical disintegration.