Location decisions of large firms: analyzing the procurement of infrastructure services

Abstract

How do large companies buy infrastructure (e.g. electricity, gas or rail)? Mainstream economics literature proposes that in the absence of an intermediating government, the bargaining power of large customers in procuring infrastructure will be weak. Drawing on a spatial, temporal and relational framework, this article critiques this proposition through a case study of a large manufacturing firm, ThyssenKrupp (TK) AG, which recently invested €7 billion in steel processing facilities in Brazil and USA. I find that prior to making durable and immobile investments large firms—like TK—can exert symmetric bargaining power against sellers of infrastructure, provided the firm has competitive alternatives available in making a location decision. TK exerted strong bargaining power by doing extensive analysis; keeping its commitment to any given location alternative low; inducing a ‘relational auction’ among alternatives it found desirable and by demanding tailored infrastructure services, rather than off-the-shelf commodities. Public sector infrastructure megaprojects, built without active co-development with lead users, are likely to be wasteful investments.