Abstract
This paper identifies the factors that affect the location of firms in Tanzania. Using a binomialeconometric strategy to address data gaps in firm location at the ward level, the paper groups factors into firm characteristics, market features, and two types of agglomeration economies that capture economies of scale external to the firm. The benefits of agglomeration may stem from specialization within and among firms (referred to in the literature as localization economies) or from diversification across firms (referred to as urbanization economies). The distinction between these two lies at the heart of the discussion on firm location. Regression results indicate that, of the various factors tested, the most important determinant driving firm location is the jobs diversification aspect of urban economies. Other contributing factors are localization economies (jobs specialization), competitive markets, and market access. Based on these findings, policymakers seeking to foster agglomeration could orient policies toward promoting firm entry within cities, complementary investments in urban infrastructure and the urban pool of labor, regulations that support competition, and improvements in market access for large cities. But localization economies are also significant in Tanzania, and could be encouraged through investment in smaller population centers and increasing competition and market access beyond the primary urban centers of Dar-es-Salaam and Arusha.
Highlights
The location of production in space has long been an underlying feature of trade and economic growth theory
We present a model to test whether agglomeration economies are a significant determinant of firm location in Tanzania, and which type of agglomeration is at work: localization and specialization, or urbanization and diversification
When we control for specialization in services, the coefficient for competition halves in value
Summary
The location of production in space has long been an underlying feature of trade and economic growth theory. For Adam Smith, the main condition for growth was the division of labor induced by trade (Evans, 1989). The places where production is located implicitly underpin our understanding of trade and growth. After a long interval during which spatial considerations were largely ignored in the literature, new technical insights brought space explicitly into economic models. Beginning in the 1990s, the New Economic Geography (NEG) emerged as a framework for rigorously addressing the role of space. The “core-periphery” model incorporates Dixit-Stiglitz monopolistic competition approaches that view concentration and dispersion of economic activity as the result of two countervailing forces: centripetal and centrifugal (Krugman, 1991 and 1992; Krugman and Venables, 1995; Fujita, Krugman and Venables, 1999)
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