Intra-industry agglomeration and the external economies of scale model: empirical evidence from Colombia

Abstract

ABSTRACT This paper provides an economic model of localization economies under intra-industry agglomeration. When firms in an industry experience diseconomies of scale and homogeneous goods agglomerate, external economies of scale emerge, creating incentives for competitive firms to agglomerate. This study tests this model on the Colombian basic-plastics industry, using a dynamic panel regression for the period 1995–2015. Data analyses of 195 firms using an agglomerate index revealed the total cost declines by 0.031% as the agglomeration index increases marginally by 1.0%. These findings are beneficial to economic policymakers working to achieve agglomerations in other economic sectors through, for example, free-trade zones.