Firm networks, borders, and regional economic integration

Borders reduce interprovincial trade relative to intraprovincial trade. Using trade and firm ownership microdata over a 9-year period (2004-2012), we show firm ownership networks, like trade flows, diminish with distance and borders and that the estimated effect of provincial borders on trade may fall by almost 75% after accounting for firm networks. This suggests the weaker presence of firm networks across borders has a significant, although statistically imprecise, effect on interprovincial trade. These findings reinforce the view that understanding border effects require not only the identification of barriers to trade but also barriers to investment across borders.