Too close for comfort? Microgeography of agglomeration economies in the United Kingdom

Davide Castellani,Katiuscia Lavoratori

doi:10.1111/jors.12531

Davide Castellani, Katiuscia Lavoratori

Open Access

https://doi.org/10.1111/jors.12531

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Abstract

AbstractThe issue of whether firm productivity is affected by agglomeration externalities is a longstanding area of research. However, the appropriate geographical level to better detect the effects of agglomeration economies and at which level these externalities work is still unclear. Using detailed firm‐level longitudinal data on 4927 manufacturing firms in the United Kingdom over the period 2008–2016, we investigate the relation between the microgeography of external agglomeration economies and firm productivity. We compare different geographical levels: city‐wide and narrowly defined neighborhoods around a firm. Results from a multilevel (mixed‐effect) model show that urbanization externalities play a role at a higher level of geographical aggregation, such as the city, whereas localization externalities operate at a finer level, within the city and in a closer neighborhood to the firm. Failing to control for more granular levels of geography results in confounding the two types of externalities. We also provide novel evidence that these externalities vary across firm (such as age, size, and productivity) and location (such as population density) characteristics.

Highlights

External agglomeration economies, generated by the geographical concentration of economic activities, may increase the competitiveness of a specific area and contribute to the productivity of firms located there (Barca et al, 2012; Martin & Ottaviano, 2001; McCann & Van Oort, 2009; Menghinello et al, 2010; Rodríguez‐Pose, 2011)
Including the variables at 1 × 1 km level, we find that the role of localization externalities arises only in a closer neighborhood of the firm within the city, 11This conclusion is supported by the value of the Likelihood Ratio test, which compares the multilevel model with an OLS regression, where the acceptance of the null hypothesis underlines that there is not significant difference between the two models, the location effect is negligible
This study investigates whether firm productivity is associated with external agglomeration economies

Summary

Introduction

External agglomeration economies, generated by the geographical concentration of economic activities, may increase the competitiveness of a specific area and contribute to the productivity of firms located there (Barca et al, 2012; Martin & Ottaviano, 2001; McCann & Van Oort, 2009; Menghinello et al, 2010; Rodríguez‐Pose, 2011).

Results

Conclusion