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Identifying Externalities in UK Manufacturing Using Direct Estimation of an Average Cost Function

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Author Info

  • Ciaran Driver

    (Tanaka Business School, Imperial College, London)

  • Paul Temple

    (University of Surrey)

  • Giovanni Urga

    (Cass Business School, London)

Abstract

We test for the presence of externalities in UK manufacturing industry, seeking to identify the channels through which they operate. Using survey data on average variable cost available by industry, we estimate a translog cost function, storing the coefficients on time dummies for a second stage regression in which measures of external activity are entered to capture omitted spillover effects. We carry out the analysis for total manufacturing and for a panel of ten sub-sectors. We find weak evidence that fixed investment represents one significant channel; there is stronger evidence for an effect stemming from high utilisation in the mechanical engineering sector. This appears to be a combination of both thick market effects and knowledge based externalities.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1005.

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Length: 19 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:sur:surrec:1005

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Postal: Guildford, Surrey GU2 5XH
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Web page: http://www.surrey.ac.uk/economics/
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Keywords: Costs; Productivity; Externalities; Investment; Manufacturing;

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References

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  1. Susanto Basu & John G. Fernald, 1999. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc.
  2. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  3. Susanto Basu, 1999. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  4. Argia M. Sbordone, 1994. "Interpreting the procyclical productivity of manufacturing sectors: external effects or labor hoarding?," Working Paper Series, Macroeconomic Issues 94-9, Federal Reserve Bank of Chicago.
  5. Caballero, Ricardo J. & Lyons, Richard K., 1990. "Internal versus external economies in European industry," European Economic Review, Elsevier, vol. 34(4), pages 805-826, June.
  6. Bartelsman, Eric J & Caballero, Ricardo J & Lyons, Richard K, 1994. "Customer- and Supplier-Driven Externalities," American Economic Review, American Economic Association, vol. 84(4), pages 1075-84, September.
  7. Donald S. Siegel & Catherine J. Morrison Paul, 1999. "Scale Economies and Industry Agglomeration Externalities: A Dynamic Cost Function Approach," American Economic Review, American Economic Association, vol. 89(1), pages 272-290, March.
  8. Caballero, Ricardo J. & Lyons, Richard K., 1992. "External effects in U.S. procyclical productivity," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 209-225, April.
  9. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  10. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
  11. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
  12. Oulton, Nicholas, 1996. "Increasing Returns and Externalities in UK Manufacturing: Myth or Reality?," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 99-113, March.
  13. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1988. "Appropriating the Returns from Industrial R&D," Cowles Foundation Discussion Papers 862, Cowles Foundation for Research in Economics, Yale University.
  14. Ciaran Driver & Giovanni Urga, 2004. "Transforming Qualitative Survey Data: Performance Comparisons for the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 71-89, 02.
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Cited by:
  1. Gianluca Benigno & Luca Fornaro, 2013. "The Financial Resource Curse," CEP Discussion Papers dp1217, Centre for Economic Performance, LSE.

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