Services that add value in the city: The rise of the modern economy in Brazil

Abstract

Recent technological advances have increased the importance of economic activities based on new production techniques with embedded, sophisticated services. In this sense, services offered as intermediate inputs for manufacturing firms that add value in this process constitute one of the main components of productivity gains and economic development. However, such service firms are not homogeneously distributed in space. This paper aims to investigate the spatial distribution of service firms that add value and compare it with the location of service firms that reduce cost. This is done by employing count data models (correcting for the excessive number of zeros whenever necessary) to identify the main factors associated with the location of existing and new firms in these sectors in Brazilian labor market areas. There is also an effort to control for the potential endogeneity of density measures. The main results show that despite the strong linkages with manufacturing, service firms do not necessarily pursue locations close to places that concentrate industrial employment, and they actually avoid to locate in neighboring areas of those who concentrate manufacturing activities. Higher population density, diversity and other measures of economic spatial concentration are much more relevant to determine the location of these firms.