Firm Productivity and Agglomeration Economies: Evidence from Egyptian Data

This paper attempts to shed light on the nexus between firm productivity and economies of agglomeration in Egypt. Using a large dataset of 62,108 firms in 342 four-digit activities in 27 regions governorates, we introduce three measures of agglomeration, which are urbanization or firm diversification, measured by the number of firms in the governorate, localization and specialization, measured by the average productivity in the governorate and sector (generating externalities and knowledge spillovers), and finally competition, measured by the number of firm operating in the same governorate and the same sector. We find strong evidence for the existence of agglomeration economies in Egypt after controlling for firm age, location, economic activity and legal status. In the Egyptian context, productivity spillovers gained from agglomeration economies outweighed the negative effects of congestion implied by our competition measure. The latter is chiefly due to the lack of good infrastructure. When regressions are run by firm size and activity, our main findings show, first, that micro and small firms are more likely to benefit from localization and diversification compared to medium and large firms. Finally, service firms benefit more from a high level of diversification, while manufacturing firms gain more from knowledge spillovers and specialization. Our results support promoting entrepreneurship through the creation of industrial clusters located outside Cairo to lessen disparities between regions and acquire the full advantages of agglomeration.