A meta‐analysis of agglomeration and venture performance: Firm‐level evidence

Abstract

AbstractResearch summaryAgglomeration theory has long explored and asserted that similar firms locate in close geographic proximity for performance‐related benefits. However, no study has systematically assessed the literature to determine whether the relationship between agglomeration and firm performance holds. Through a meta‐analysis of 42 studies and nearly 200,000 firm‐level observations, our study estimates the relationship between agglomeration and performance, showing the importance of knowledge spillovers in this relationship. Specifically, we find although agglomeration confers innovation benefits, it does not consistently offer financial performance benefits. We also highlight several important conditions, including firm age, industry technology intensity, and economic development level that impact the agglomeration–performance relationship. Together, our work advances agglomeration theory by suggesting when, and to what extent, agglomeration holds the most promise for organizations.Managerial summaryAll firms must address a fundamental question before launching their firms—where to locate? Existing thought largely suggests that locating near similar firms offers certain advantages, such as reducing search costs for skilled employees or gaining access to knowledge spillovers. By examining the body of literature on this topic, our study analyzes the collective evidence of the performance benefits of co‐location. We find that co‐location generally enhances firm innovation, but we discover it fails to increase firm financial performance, on average. And, in some cases, co‐location is detrimental to financial performance. Ultimately, we offer a variety of contingencies that help explain when co‐locating might be advantageous or disadvantageous to firms, thereby providing firm leaders and entrepreneurs with clear guidance on when (and when not) to co‐locate.