The economic effect of proximity on plant level performance and investment : evidence from the opening of new airline routes in Norway
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- Master Thesis 
This paper empirically analyses the effect of direct airline routes on plant-level investment and productivity in Norway. I look at the effects of changes in proximity due to the opening of new direct flight routes between the locations of headquarters and plants. Improvement in proximity leads to lower monitoring costs for the headquarter, and may lower potential agency costs. This is a thoroughly studied topic on arms-length transactions, but little is known on intra-firm proximity. Looking at Norwegian flight information from 2004 to 2014, and financial information on Norwegian headquarters and plants from 2002 to 2012, I find ten new flights opening between ten areas in Norway. This constitutes ten treated destinations with 375 firms having headquarter and plant located at either end of a route. As a control group, I find 667 companies with headquarter and plant located in different parts of Norway, that does not yet have a direct route connecting them. My main analysis is on the difference in plants’ return on assets, but I also look at the EBITDA-margin, operating margin, absolute investment from headquarters to plants, and the profitability deriving from that investment. I find through several regional and year-specific analyses that there is strong evidence of increased profitability from proximity. I find that investment from headquarter decreases with proximity, leading to less but better investment overall.