External Benefits of Geographical Concentration of Firms with Trade Networks

When making a location decision, a firm considers only its own trading costs and ignores trading costs paid by trading partner firms. The exclusion of the latter is the source of locational externalities. We examine this locational externality in the Tokyo metropolitan area, using the actual trade networks. Results show (1) we classify what trade patterns involve locational externalities, (2) the ratio of trades involving locational externalities is about 8%, and (3) the transfer of a randomly-chosen 5% of firms to the center of Tokyo can generate external benefits of 0.13-0.21% in the total industry in terms of value added.