Agglomeration Externalities Research Articles

Agglomeration externalities of fast-growth firms

ABSTRACT Small groups of fast-growth firms contribute disproportionately to job creation, yet little is known about their broader impact on the economy. This paper provides the first evidence of the agglomeration externalities of fast-growth firms, examining their economic impact on non-fast-growth firms operating within the same region (NUTS-2) and industry (SIC2), and through backward and forward linkages. Using comprehensive firm-level data on UK firms between 1997 and 2013, the analysis shows robust evidence of positive spillovers of fast-growth firms on the labour productivity of non-fast-growth firms in the same industry and region. However, the externalities in relation to the employment growth of non-fast-growth firms are negative, suggesting labour poaching and local competition effects.

The impact of institutional proximity, cognitive proximity and agglomeration economies on firm-level productivity

PurposeThis paper analyses the impact of institutional proximity, cognitive proximity and geographical proximity (in the form of agglomeration economies) on the firm-level productivity of foreign-owned firms in Ireland. The analysis of agglomeration economies, consisting of internal economies of scale, localization economies, related variety and urbanization economies, has a strong pedigree in regional economics literature. Increasingly, however, alternative explanations of firm-level productivity performance have been explored with institutional and cognitive proximity often identified as other important determinants of performance. This paper presents an analysis of the importance of agglomeration economies (based on geographical proximity) versus institutional and cognitive proximity (which may be a-spatial).Design/methodology/approachA series of measures capturing regional level agglomeration economies are generated as well as measures of institutional and cognitive proximity. The impact of these effects on foreign-owned firm-level productivity is analysed using data from the Irish Census of Industrial Local Units 2009. The estimation method employed is general method of moments (GMM) which allows for the potential endogeneity of variables within the system of analysis.FindingsThe results reveal that institutional proximity has a positive impact on productivity. A possible reason for this result is that local units of the same nationality are sharing knowledge in relation to successfully conducting business in Ireland. However, cognitive proximity is found to be statistically insignificant. Agglomeration economies are also important with urbanization economies and the availability of skilled labour having a positive effect on productivity.Originality/valueThe key contributions of this paper are as follows; firstly, the paper provides the first test of the institutional and cognitive proximity hypotheses on productivity while also controlling for a series of internal and external agglomeration economies. Secondly, the analysis considers, firm level, regional level and national level indicators as determinants of firm's productivity. In combining micro and macro level indicators, the paper attempts to answer the call of Van Oort et al. (2012) for such analyses. Thirdly, the paper provides the first detailed examination of the role of ‘proximity’ on foreign-owned manufacturing firms in the Irish context.

What Explains the Product Market Component of Corporate Investment?

This paper shows that the large common component of investment among firms in the same product market is partly due to peer effects. We estimate the influence of peers' investment using an instrumental variables approach based on the presence of local agglomeration externalities. On average, firms increase investment by 10% in response to a one standard deviation increase in the average investment of their product market peers. Moreover, the influence of peers is stronger in concentrated industries, industries with more heterogeneous firms, and for relatively smaller firms with less precise information. These findings are consistent with a strategic model in which the investments of peers provide relevant information about product market fundamentals. The positive influence of peers' investment could amplify variation in aggregate investment and thus affect aggregate productivity and output.

Can industrial agglomeration achieve the emission-reduction effect?

This paper adopted the Meta-constraints efficiency model to measure the environmental efficiency of the industry in China, and then used the spatial panel model to analyze the impact of industrial agglomeration externalities on environmental efficiency. The study found that industrial agglomeration exerted an apparent spatial spillover effect. Different agglomeration degrees and means may be matched with different environmental effects. With the evolution of agglomeration, the balanced effects among negative externality of scale (pollution effect). Marshallian and Jacobs positive externality (self-purification effect) lead to a U-curved tendency between industrial agglomeration and environmental efficiency. Therefore, with the increase of industrial agglomeration degree, the environmental efficiency first decreases and then increases. The effect of industrial agglomeration in the Midwest on the environment is mainly presented as a negative externality of scale, situated in the descending phase of the U curve. However, the effect of eastern industrial agglomeration on the environment mainly manifested as Marshallian and Jacobs positive externalities and was situated close to the ascending phase of the U curve. All regions should fully utilize the “self-purification” effect of the Marshallian externality and the Jacobs externality on emission-reduction according to the different phases of industrial development.

What drives the spatial wage premium in formal and informal labor markets? The case of Ecuador

AbstractThis article investigates the incidence of agglomeration externalities in Ecuador, a small‐sized, middle‐income developing country. In particular, we analyze the role of the informal sector within these relations, since informal employment accounts for a significant part of total employment in the developing countries. Using individual level data and instrumental variable techniques, we investigate the impact of spatial externalities, in terms of population density, local specialization and urban size, on the wages of workers in Ecuadorian cities. The results show that spatial externalities matter also for a small developing country. Moreover, analysis of the interaction between spatial externalities and informality shows that, on average, workers employed in the informal sector do not enjoy significant benefits from agglomeration externalities. Finally, by investigating the possible channels behind spatial agglomeration gains we show that the advantages from agglomeration for formal sector workers may well be accounted for by better job‐quality matches and, to a lesser extent, by learning externalities. For informal sector workers, our findings also suggest possible gains from job changes, which offset a penalty for remaining employed in the same occupation.

The Agglomeration of Manufacturing Industry, Innovation and Haze Pollution in China: Theory and Evidence.

Haze pollution in China is a serious environmental issue, which does harm both to people’s health and to economic development. Simultaneously, as an important industrial development law, agglomeration may result in the increased concentration of manufacturing firms and, consequently, an increase in haze pollution. However, the positive externalities of agglomeration can also improve the efficiency of regional innovation, which curbs haze pollution. In this paper, we construct both theoretical and empirical models to investigate the effects of industrial manufacturing agglomeration on haze pollution. The results reveal the following: (1) By incorporating the effect of agglomeration and haze pollution into a general endogenous growth model, we show an inverted-U relationship between agglomeration and haze pollution on the balance growth path. (2) Based on data concerning haze pollution (PM2.5) and data from 285 Chinese cities, the empirical results verify the findings of the theoretical model. Further, we calculated the values of agglomeration variables, with respect to the inflection points of the inverted-U, which the cities need to reach in order to gain the specific agglomeration values required to enjoy the inhibition effect of agglomeration on haze pollution. (3) A heterogeneity analysis shows that the inverted-U relationship is more obvious among the cities in the middle and northeastern areas of China, as well as medium-size cities. (4) Cities’ environmental regulation policies and high-quality institutional environments can restrain the positive effect of agglomeration on haze pollution. (5) Using three measures of innovation, it is also empirically found that innovation is the mechanism (mediator) between agglomeration and haze pollution.

Quantifying 3D-nanosized dispersion of SiO2 in elastomer nanocomposites by 3D-scanning transmission electron microscope (STEM)

Nanofiller/elastomer nanocomposites as strategically important materials have attracted intensive attentions due to high elasticity. However, due to the limitation of conventional two-dimensional characterization methods, the multi-scaled dispersion structure of nanofiller in elastomer nanocomposites hasn’t been comprehensively understood. Here, we established a highly-objective method to comprehensively quantify the three-dimensional (3D)-dispersion of nanoparticle in elastomer matrix. 3D-scanning transmission electron microscope (STEM) was applied to get the intrinsic 3D-dispersion structure of nano-silica (SiO2) in solution-polymerized styrene-butadiene rubber (SSBR). Equivalent sphere and fractal branch models were created to further quantify the poly-dispersity, inner connectivity and morphology of SiO2. A two-stage agglomeration evolution schematic was proposed to elucidate the development of nanosized dispersion structure of SiO2. With the increase of SiO2 volume fraction (Φsilica), the number, size and branching degree of SiO2 simultaneously increase (namely, self-agglomeration). Further increase Φsilica, adjacent SiO2 interconnect with each other, leading to sharp increases of connectivity and branching degree of SiO2 (namely, external agglomeration). This two-stage agglomeration mode interprets the well-known “Payne effect” well, which has not been quantified by 3D dispersion structure parameters before.

Determinants of innovation: the role of the agglomeration economies

Innovation is an important driver of productivity and economic growth. Then, how innovation emerges or how it can be reinforced is a relevant question to tackle, especially in developing economies. The main aim of this study is to identify the determinants of innovation with special emphasis on the agglomeration externalities. The employed data is obtained from the National Survey of Science, Technology and Innovation Activities (ACTI), corresponding to the periods 2009-2011 and 2012-2014. Using a pooled data of 8,025 firms, discrete choice models are estimated for different choices of firms: general innovation, product, process, organizational and marketing innovation. The results show that what matters for innovation is the presence of other innovative firms rather than the concentration of firms in general. The agglomeration externalities derived from diversity predominate over those derived from specialization. The most relevant individual factors that drive innovation are the investment in R&D and the qualified workers.

Agglomeration Economies and Firms’ Performance: Assessment on Ivorian Enterprises

Exposed for competing firms in the same industry or not, within the same area, has been shown to improve the efficiency of firms, on average. In this study, we assess whether agglomeration economies have a significant influence on firms' productivity in Cote d'Ivoire. Considering urbanization and localization economies variables, we use an estimation methodology relied on a two-step procedure. We find evidence of the existence of agglomeration externalities in Cote d'Ivoire by using the two-step procedure. After controlling for firm's age and legal status, we show that localization economies have a positive influence on firms' productivity in general. In contrast, urbanization variables have a mixed impact. When we consider differentiation among sectors, firms engaged in services seem to benefit more from agglomeration economies in Cote d'Ivoire.

How Do Cities Change When We Work from Home?

How would the shape of our cities change if there were a permanent increase in working from home? We study this question using a quantitative model of the Los Angeles metropolitan area featuring local agglomeration externalities and endogenous traffic congestion. We find three important effects: (1) Jobs move to the core of the city, while residents move to the periphery. (2) Traffic congestion eases and travel times drop. (3) Average real estate prices fall, with declines in core locations and increases in the periphery. Workers who are able to switch to telecommuting enjoy large welfare gains by saving commute time and moving to more affordable neighborhoods. Workers who continue to work on-site enjoy modest welfare gains due to lower commute times, improved access to jobs, and the fall in average real estate prices.

Public transport provision under agglomeration economies

The purpose of this paper is to investigate, using both theoretical and numerical analysis, the impact of agglomeration externalities on short-run policy decisions in public transport, i.e. socially optimal pricing, frequency setting, and subsidisation. We develop a simple two-mode model in which commuters can opt for car or public transport use; car use leads to congestion, and public transport is subject to crowding. Allowing for agglomeration externalities, we show the following results. First, if car use is correctly priced for congestion, agglomeration benefits imply substantially lower public transport fares and higher frequencies. They neutralise to some extent the pressure to increase fares to correct the crowding externality. Second, as a consequence, agglomeration benefits justify low cost recovery ratios in public transport. Assuming an agglomeration elasticity of 1.04, a value well within the range of reported elasticities, numerical implementation of the model finds that cost-recovery ratios are 35.8% lower than in the absence of the productivity externality. Third, interestingly, the effect of agglomeration benefits on fares and frequency is much smaller if road use is exogenously under-priced. In this case, any modal shift induced by lower public transport fares has opposing agglomeration effects on the two modes, since agglomeration benefits are not mode-specific.

Estimating the Skill Bias in Agglomeration Externalities and Social Returns to Education: Evidence from Dutch Matched Worker-Firm Micro-Data

This paper employs a unique set of micro-data covering almost one-third of the Dutch labor force, to estimate the heterogeneity of agglomeration externalities across education levels. This paper shows that there is substantial heterogeneity in the relationship between agglomeration and productivity of workers (proxied by their hourly wage) with different educational background. Apart from estimating the impact of the aggregate density of regional labor markets, we also estimate whether the composition of the local labor market in terms of education is related to the productivity of different types of workers. Using the presence of universities as an instrument, we estimate the effect of the supply of university graduates on wages, i.e. the social return to education. We find that agglomeration externalities are substantially higher for high- and medium skilled than for low-skilled employees. We find no positive effects from the presence of high-skilled on the productivity of low-skilled.

Endogenous Local Labour Markets, Regional Aggregation and Agllomeration Economies

This paper examines the role of regional aggregation in measuring agglomeration externalities. Using Dutch administrative data, we define local labour markets (LLMs) based on the worker's commuting outcomes, gender and educational attainment, and show that high-educated workers and male workers are characterised by a relatively large LLM. We find that the effect of employment density on workers' wages increases in the level of regional aggregation, explained by larger agglomeration externalities at a higher spatial scale. We quantify subgroup differentials and find that high-educated workers have agglomeration externalities twice as high as low-educated workers. We show that workers who lose their job in denser LLMs experience positive agglomeration externalities on job matching, with more modest losses in wages and again larger density effects at higher levels of regional aggregation.

Creative industries agglomeration and entrepreneurship in China: necessity or opportunity?

ABSTRACTThis paper seeks to address the question of how the type of agglomeration externalities impacts on the type of entrepreneurship at the regional level. Using China’s provincial panel data from 2003 to 2015, we employ the Generalised Moment Method to test the role of regional specialisation and geographic concentration in necessity-driven and/or opportunity-driven entrepreneurship. In general, the empirical results show that entrepreneurial activities motivated by opportunity, rather than by necessity, tend to be higher in a more specialised or more concentrated area in the context of creative industries. The results are basically consistent and robust by regressions within different groups of creative sectors. The paper is helpful in examining the channels by which entrepreneurial activities can be stimulated by industries clustering strategy.

Determinants of the spatial distribution of exporters in regions: the role of ownership

Spatial distribution of exporters only recently has attracted the attention of researchers, while the location of economic activity as such has been subject of profound analysis for a long time. Regions have become more open and thus vulnerable to external shocks. Nevertheless, the increase in the number of exporters in the population of firms is one of the top priorities of regions’ economic policy agenda, as it improves competitiveness and overall productivity. Literature overview shows an important gap, which is insufficient consideration of the role of ownership, as regards the determinants of the spatial distribution of exporters. The study identifies the differences between the determinants of spatial location of foreign-owned exporters (FOEs) and domestic-owned exporters (DOEs), in particular the role of metropolis, the proximity to infrastructure and the consequences of historical factors and thus the path dependency. The FOEs and DOEs differ in their location preferences. In particular, our results indicate that FOEs pay more attention to proximity to infrastructure and are more susceptible to the presence of agglomeration externalities in the vicinity of metropolitan areas. In addition, historical factors affect the spatial distribution of exporters, especially if the interaction of path dependency and infrastructure endowment is introduced.

Firm dispersion and total factor productivity: Are Norwegian salmon producers less efficient over time?

The Norwegian salmon farming sector has experienced an increase in industry concentration for the last 20 years attributed to agglomeration externalities and scale economies; big firms increase their size and market share while small firms remain operating at the minimum level. However, small firms have higher profitability ratios than their bigger counterparts, a fact that contradicts economic theory as less efficient firms (and less profitable) will not grow and eventually will disappear. This paper quantifies the role of idiosyncratic demand and distortions on observed productivity differences across Norwegian salmon producers from 2001 to 2016. By using a data set that measures directly firm-level quantities, prices and sales, it is possible to break down the sources of total factor productivity dispersion on technical inefficiency and firm fundamentals. The understanding of total factor productivity (TFP) dispersion is useful as micro-productivity changes can point out aggregate productivity movements that matter on industrial and macroeconomic policies.

Organizational sponsorship and the economics of place: How regional urbanization and localization shape incubator outcomes

Organizational sponsorship impacts new venture emergence and survival prospects by shaping the relationship between new ventures and their surrounding environment. While extant literature offers an explanation as to why heterogeneity in the effectiveness of sponsorship emerges based on the sponsor's characteristics, current theorizing largely overlooks how sponsorship interacts with local economic conditions. This study introduces insights from urban economics to extend organizational sponsorship theory by showing how different types of agglomeration economies affect the effectiveness of organizational sponsorship. We test our hypotheses with a comprehensive database that includes over 46,000 sponsored and non-sponsored firms in the years 1997–2007. Our results reveal organizational sponsorship delays new venture exit when urbanization levels are low, localization is low, and both urbanization and localization are high.Executive Summary.Organizational sponsorship (OS) is an institutional arrangement whereby private or public entities provide assistance to new firm ventures. Since young firms face low survival chances at birth, it is assumed that any assistance such firms receive is to their advantage. However, very little research supports this assumption (Clayton et al., 2018; Dutt et al., 2016). It is in this context that we examine the impact of OS in different regional environments. Specifically, we look at the interplay between business incubation, a ubiquitous form of OS, urbanization, the city-scale of the region in which the firm is founded, and localization, the presence of same-industry firms in the region, in determining new venture survival. By exploring this interaction, we identify how the efficacy of OS varies in differing environmental circumstances. Additionally, it provides a better understanding of the specific OS mechanisms that are most likely to promote new venture survival depending on regional characteristics.For the purposes of our study, we combine insights from OS and agglomeration literatures. Specifically, we look at the interplay between the bridging, buffering and curating functions of OS with the externalities that arise from urbanization and localization. We consider the regional characteristics that provide new ventures with positive agglomeration externalities of input sharing, quick and quality matching with resource providers, and knowledge spillovers. Similarly, we also consider regional characteristics that give rise to negative externalities of rising costs and congestion. Thus, we identify urbanization and localization scenarios in which new ventures are most in need of buffering from competition, in the form of financial aid and subsidies, and scenarios where new ventures need to be bridged or curated with non-monetary resources such as accountants, lawyers, or industry-specific suppliers and investors. That is, we identify founding environments in which OS functions are most valuable.We test our hypothesis on a population of US business incubators operating between 1997 and 2007. To study the impact of OS at different levels of urbanization and localization, we compare the probability of exit by incubated new ventures with that of a control group of non-incubated new ventures in the same county. We find that incubators are most effective in improving the survival of new ventures when both localization and urbanization in the founding environment are low or when both are high.By linking OS literature with agglomeration literature our study identifies the conditions under which OS is most effective and finds that it is most effective when mitigating the lows of resource-deprived environments or the highs of a hyper-competitive landscape. We also extend the theoretical link between these two streams of literature by identifying the critical role of the OS function of curating in a highly localized and urbanized environment.Our study sheds new light on why OS is often met with varying levels of success in promoting new venture survival. We see that specific regional characteristics determine the type of OS mechanisms that are most beneficial. Thus, for instance, simply mimicking successful incubators in one region may not lead to success for incubators in other regions. Furthermore, we see that OS is counterproductive in regions with low urbanization and high localization. Together, these findings suggest that policy-makers need to consider the specific constraints faced by entrepreneurs in different regions before they seek to promote entrepreneurship through OS. It also stresses the need for entrepreneurs to do due diligence prior to joining an incubator.

What Drives the Location Choice of New Manufacturing Plants in Germany?

About 30 years after German reunification a persistent gap in different firm performance measures exists between East and West Germany. In this paper I focus on the differences in new German manufacturing plants' location choices across the German district-free cities and districts and investigate its regional determinants. For that purpose, I construct a novel, rich regional- and firm-level dataset based on the Official Firm Statistics from the German Federal Statistical Office and the Offices of the Laender. The analysis provides first time evidence how in particular the location decision of firms in the German economy is influenced by regional road infrastructure as well as regional structural funding. The effects are economically important and significant. The results reveal that a 10 percent increase in firm agglomeration increases the odds of a new plant to locate in the region by 12 percent. A 10 percent decrease of travel time on roads increases the odds of a plant to locate by 4 percent in overall Germany, by 7.6 percent among East German regions and by 26.5 percent in particular for large plants in the East German regions. A 10 percent larger population increases the odds to locate by 8.7 percent. A 10 percent increase in regional structural funding for infrastructure purposes increases the odds to locate in a region in East Germany by 8.3 percent in particular for large plants. Policy implications emerge that address in particular the improvement of infrastructure and support to reap off benefits that arise from agglomeration externalities.

Heterogeneity in the effect of federal spending on local crime: Evidence from causal forests

Federal place-based policy could improve efficiency if it targets areas with large amenity or agglomeration externalities. We begin by showing that positive shocks to federal spending in a county and their associated economic stimulus substantially decrease crime, an important amenity. We then employ two machine learning algorithms—causal trees and causal forests—to conduct a data-driven search for heterogeneity in this effect. The effect is larger in below-median income counties, and the difference is economically and statistically significant. This heterogeneity likely improves the efficiency of the many place-based policies that target such areas.

Spatial Distribution on the search for economic externalities acquisition in rural industry clustering: A study of emerging batik industry clusters in lagging regions of Wonosobo Regency and Purworejo Regency, Indonesia

Compared to advanced countries, industrial clustering phenomena in developing countries have experienced multifaceted forms and different directions. When the former have featured robustness and predictability of cluster performance, the latter has been struggling with messy institutional support for business continuation. Cluster existence in developing countries lacks capabilities to establish economic externalities of industrial agglomeration due to poor inter-industry linkages and business cooperation. In Indonesia context, the emergence of rural industry clustering addresses intriguing explorations on its resilience in coping with the unconducive business environment. This paper is aimed at examining the experience of the emerging batik industry clusters in lagging regions in response to a variety of obstacles in physical, social, economic, and institutional aspects. By using a sequential explanatory mixed-methods design, the study focuses on the formation of inter-industry linkages and business cooperation in the local batik industry clusters. Spatial distribution was analyzed using GIS. The preliminary conclusion suggests that the practice of rural industry clustering has merely demonstrated a trial-and-error opportunistic behaviour rather than a well-organised business milieu. The local government intervention to cluster formation has served as a temporary solution for small-and-medium enterprises development by utilising local resources and empowering village communities. For the long-term, such action may jeopardise the management of rural economies into ineffective burdens instead of promoting cluster competitiveness better.