Firm relocation and age-dependent reliance on agglomeration externalities

Abstract

This paper explores the age-dependent reliance on agglomeration externalities from a dynamic perspective by investigating the determinants of manufacturing establishments’ relocation decisions at the stages of the initial and the post-initial relocations. The relocation decisions are conceptually split into those on whether to relocate and where to relocate, specified by a nested-logistic model structure. The results indicate that manufacturing establishments’ preference to intra-industry agglomeration changes non-monotonically during their lifetime. While they prefer to stay in or move into municipalities characterized by the own-industry agglomeration in their initial relocation decision, they shun the intra-industry agglomeration in the stages of post-initial relocation. These findings suggest that to achieve the goal of industrial decentralization, policies to induce incumbent firms to relocate into rural areas could be more effective than those to attract start-up firms in peripheral area because they have lower dependence on agglomeration externalities.