Agglomeration Economies and the Firm TFP: Different Effects Across Industries

41 Pages Posted: 22 Feb 2019

See all articles by Martin Gornig

Martin Gornig

German Institute for Economic Research (DIW Berlin)

Alexander Schiersch

German Institute for Economic Research (DIW Berlin)

Date Written: February 2019

Abstract

This paper analyzes the effect of agglomeration economies on firms’ total factor productivity. We propose the use of a control function approach to overcome the econometric issue inherent to the two-stage approach commonly used in the literature. Estimations are conducted separately for four industry groups, defined by technological intensity, to allow for non-uniform effects of agglomeration economies on firms given their technological level. In addition, R&D is included to account for the firms’ own efforts to foster productivity through creating and absorbing knowledge. Finally, radii as well as administrative boundaries are used for defining regions. The results confirm differences in the strength and even in the direction of agglomeration economies: While urban economies have the largest effect on TFP for firms in high-tech industries, they have no effect on TFP in low-tech industries. For firms in the latter industries, however, the variety of the local economic structure has an impact, while this is irrelevant for the TFP of firms in high-tech industries. Only localization economies have a positive and significant effect on TFP throughout, but the effect increases with technological intensity of industries. Throughout, R&D is also found to have a positive effect that increases with technological intensity.

Keywords: total factor productivity, manufacturing firms, agglomeration economies, spatial concentration, structural estimation

JEL Classification: R11, R12, R15, D24

Suggested Citation

Gornig, Martin and Schiersch, Alexander, Agglomeration Economies and the Firm TFP: Different Effects Across Industries (February 2019). DIW Berlin Discussion Paper No. 1788, 2019, Available at SSRN: https://ssrn.com/abstract=3339204 or http://dx.doi.org/10.2139/ssrn.3339204

Martin Gornig

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Alexander Schiersch (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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