The Spatial Configuration of the Firm and the Management of Sunk Costs

* This paper was first presented at the Institute of British Geographers’ Annual Conference, January 1995. It has also been presented in seminars at the University of Toronto, University of California, Los Angeles, Oxford, and the International Conference on Interfirm Linkages, Industrial Restructuring and Regional Development sponsored by the Labour Research Institute of Pusan National University (Korea). Thanks to those who participated in these meetings and seminars for their comments. The paper also benefited from the comments of Dean Hanink and Elizabeth Warren as well as the detailed advice of the referees. All remaining errors are the responsibility of the authors.

Abstract

In this paper we explain why the modern corporation may persist with a decentralized system of plants differentiated by the vintage of capital and the style of management. Our goal is to show how and why firms are, at once, structured by the inherited configuration of capital and also reproduce differentiation within and outside the corporation. To do so, we use concepts and principles drawn from modern financial theory to show that a spatially differentiated configuration of production may have advantages for the firm in terms of the risk-adjusted flow of revenue, strategic options in relation to actual and potential competitors, and the management of sunk costs. Our argument focuses on the modern corporation, characterized by a separation between ownership and control as well as a dependence upon internal stakeholders for the realization of planned revenue and output targets. We argue that our framework can help theorists account for the persistence of interfirm and interindustry differences in capital profiles, despite a common presumption in favor of convergence around a simple, efficient industry standard. While the paper is an exercise in theory, it is based upon our previously published studies of corporate restructuring in manufacturing and retail industries in the United States and the United Kingdom.

Key Words:

• corporations
• spatial configuration
• functional value of capital

Notes

* This paper was first presented at the Institute of British Geographers’ Annual Conference, January 1995. It has also been presented in seminars at the University of Toronto, University of California, Los Angeles, Oxford, and the International Conference on Interfirm Linkages, Industrial Restructuring and Regional Development sponsored by the Labour Research Institute of Pusan National University (Korea). Thanks to those who participated in these meetings and seminars for their comments. The paper also benefited from the comments of Dean Hanink and Elizabeth Warren as well as the detailed advice of the referees. All remaining errors are the responsibility of the authors.