West German Firms After Mr. Gorbachev Tore Down the Wall: Examining the Effect of Distance on Corporate Financial Performance in Post-Reunification Germany

Abstract

The reunification of East and West Germany in 1989 had many economic consequences: a West German economic boom, mass migration from the East to West, and a huge inflow of investment into East Germany, among many other events. This paper examined the effect of German reunification on West German firm performance, an area which has yet to be explored by existing literature. By studying this unique natural experiment, this paper contributes to the discussion about factors affecting intra-national trade, the well-established relationship between distance and trade, as well as the evaluation of German policies after reunification. This paper used data from West German companies that were publicly listed before and after reunification to examine how a firm’s distance from the former East-West border affected its post-reunification financial performance. This paper showed that reunification had a more positive effect on firms that were located farther from the former border. In fact, after reunification, a firm located one kilometer farther from the former border had an annual net income that was 225,000 USD higher and revenue that was 7.8 million USD higher than a firm located one kilometer closer to the former border. Possible explanations for this relationship include a muted effect of distance on trade within German national borders, as well as more East German competition for West German firms closer to the border. These factors may have resulted in the poorer performances of West German border firms after reunification, compared to non-border firms.