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

Purpose - This 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/approach - A 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. Findings - The 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/value - The 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 Oortet 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.