Evolutionary agglomeration theory: increasing returns, diminishing returns, and the industry life cycle

Abstract

According to Marshall?s agglomeration theory, Krugman?s New Economic Geography models, and Porter?s cluster policies, firms should receive increasing returns from a trinity of agglomeration economies: a local pool of skilled labour, local supplier linkages, and local knowledge spillovers. Recent evolutionary theories suggest that whether agglomeration economies generate increasing returns or diminishing returns depends on time, and especially the evolution of the industry life cycle. At the start of the 21st century, we re-examine Marshall?s trinity of agglomeration economies in the city-region where he discovered them. The econometric results from our multivariate regression models are the polar opposite of Marshall?s. During the later stages of the industry life cycle, Marshall?s agglomeration economies decrease the economic performance of firms and create widespread diminishing returns for the economic development of the city-region, which has evolved to become one of the poorest city-regions in Europe.