How important are agglomeration effects for plant performance? Empirical evidence for Germany

The question whether agglomeration effects are of importance for regional development has a long tradition in regional science. This paper asks if regional characteristics and specifically agglomeration effects influence the performance of plants in Germany and, if so, in which direction. Hence, we aim at contributing to the still sparse empirical studies in this field of research by adding three aspects to the existing evidence. First, we provide the first plant-level evidence on regional agglomeration effects for Germany. Second, while earlier papers looked only at few sectors of the economy or only at manufacturing, we extend our analysis to the services sector. Finally, we are among the first who identify agglomeration effects while controlling for the internal structure of the establishments using a rich set of plant characteristics that are likely to influence productivity. To this end we estimate plant-level production functions augmented by regional characteristics and controlling in detail for plant-specific features. The analysis is conducted both within a static and a dynamic panel framework. We use the IAB Establishment Panel, a large-scale German establishment survey covering around 16,000 establishments each year. In the static framework we find support for the positive impact of localization economies and market size, while urbanization seems to have a negative influence. Results for the dynamic models are rather inconclusive.