Geography Reference
In-Depth Information
nature, with some activities being closely related to the need for face-to-
face contact, whereas others are largely independent of such a need (Arora
and Forman 2007). Moreover, the activities for which face-to-face contact
and ICTs are complements appear to be those located in urban areas
with extensive transportation infrastructure (Haynes et al. 2006). Further
evidence which is suggestive of this comes from the fact that frequency of
airline business travel between major cities has increased more or less in
line with the growth in telecommunications usage between them (Gaspar
and Glaeser 1998). The fact that cities are increasingly being dominated by
high human capital individuals (Berry and Glaeser 2005) implies that the
importance of engaging in face-to-face relationships is positively associ-
ated with knowledge levels.
The second set of empirical evidence which suggests that spatial transac-
tions costs have increased comes from trade modelling and studies on logis-
tic costs. Empirical research on distance costs finds that distance effects are
not only persistent (Disdier and Head 2008), but also that such a persist-
ence cannot be explained simply by observing the behaviour of shipping
costs. Using a meta-analysis, Disdier and Head (2008) find that bilateral
trade exhibits an average elasticity of 0.9 with respect to distance, which
implies that on average bilateral trade is nearly inversely proportionate to
distance. Given that a 1 per cent rise in the share of GDP accounted for by
exports is associated with a per capita income increase of up to 1 per cent
(Frankel and Romer 1999), this average elasticity of trade with respect to
distance suggests that there are very large proximity-productivity effects.
Moreover, Disdier and Head (2008) find that although distance effects
declined slightly between 1870 and 1950, analyses employing recent data
suggest that after 1950 they began to rise again.
The most likely explanation for these persistent distance effects is
associated with the issue of time. Hummels (2001) and Deardorff (2003)
suggest that the influence of time on trade is increasing. Time in transit is
costly, being up to as much as 0.5% of the value of the goods shipped per
day (Hummels 2001). The high cost of time in transit comes partly from
the costs of carrying stock and also from the likelihood that long transit
times reduce the reliability and predictability of deliveries (McCann 1998;
Harrigan and Venables 2006; Venables 2006). It also makes firms slower
to respond to changing demand conditions or costs levels (Venables
2006). Since the early 1980s, the opportunity costs of time appear to have
increased for both household and industrial consumers (Piore and Sabel
1984; Best 1990). Consumer demand requirements are becoming ever
more sophisticated and exhibit an increasing preference for retail services
characterized by reliability, timeliness and quality. Modern household
and industrial consumers now require a level of service customization and
