Urban size and KIBS vertical disintegration: the case of Milan

The literature shows that market size favours firms’ vertical disintegration because it reduces transaction and knowledge coordination costs. The existing evidence is based primarily on cross-sectional data and on the manufacturing sector, with little or no attention is given to longitudinal data and services. This paper estimates the effect of urban size on the purchase of service inputs by knowledge-intensive business service firms located in the metropolitan region of Milan. Relying on a rich panel dataset, and adopting different econometric techniques to overcome endogeneity, we find a positive and statistically significant effect of increased urban population on the degree of KIBS vertical disintegration only when urban size is measured at the province level. We also find that this effect holds particularly in the case of traditional professional- rather than technology-related activities.