Agglomeration and New Establishment Survival: A Mixed Hierarchical and Cross-Classified Model

Innovative economic developments take place in urban areas and industrial clusters. Urban and regional planners, geographers and economists are interested in the forces that create, shape and maintain these concentrations of economic activities (Van Oort 2004). Since the early 1990s, a growing empirical literature has emerged in the field of regional science and urban economics. It examines whether spatial circumstances give rise to agglomeration economies – external economies from which firms can benefit through co-location – that endogenously induce localized economic growth (Glaeser et al. 1992; Henderson et al. 1995; Combes 2000; Rosenthal and Strange 2003; Brülhart and Mathys 2008). As this literature tends to combine the traditional urban economics and regional science literature with new growth theory (Romer 1986; Lucas 1988), Glaeser (2000) has dubbed this line of research the “New Economics of Urban and Regional Growth.” Many of the empirical studies under this heading show that agglomeration economies may be one source of the uneven distribution of economic activities and growth across cities and regions. In their survey of empirical literature on the benefits of agglomeration, Rosenthal and Strange (2004) point out that the elasticity of productivity to city and industry size typically ranges between 3 and 8%. However, the effects of agglomeration economies on localized economic growth generally differ across sectors, space, and time (Rosenthal and Strange 2004; Van Oort 2007; De Groot et al. 2009; Melo et al. 2009; Neffke 2009; Burger et al. 2010).