Agglomeration Economies, Globalization and Productivity: Firm level evidence for Slovenia

This paper analyzes the impact of agglomeration economies on firm level performance measured by total factor productivity for Slovenia. To estimate total factor productivity, we use a control function approach to capture endogenous input choices and self selection. In contrast to most of the literature, we introduce agglomeration economies that are linked to globalization. In particular, we distinguish between knowledge spillovers related to domestic and foreign sources of agglomeration effects and analyze the impact of regional export market exposure, which we call international market access. We find positive effects of regional knowledge spillovers and international market access on firm level total factor productivity. These effects are stronger for micro and small firms and for firms operating in service sectors. We also show that knowledge spillovers are amplified when there are more foreign multinationals in a region.