Tracing the Sources of Local External Economies

In a cross-sectional establishment-level analysis using confidential secondary data, I evaluate the influence of commonly postulated sources of localized external economies–supplier access, labor pools, and knowledge spillovers–on the productivity of two U.S. manufacturing sectors (farm and garden machinery and measuring and controlling devices). Measures incorporating different distance decay specifications provide evidence of the spatial extent of the various externality sources. Chinitz’s (1961) hypothesis of the link between local industrial organization and agglomeration economies is also investigated. The results show evidence of labor pooling economies and university-linked knowledge spillovers in the case of the higher technology measuring and controlling devices sector, while access to input supplies and location near centers of applied innovation positively influence efficiency in the farm and garden machinery industry. Both sectors benefit from proximity to producer services, though primarily at a regional rather than highly localized scale.