Agglomeration Premium and Trading Activity of Firms

Firms may benefit from proximity to each other due to the existence of several externalities. The productivity premia of firms located in agglomerated regions can be attributed to savings and gains from external economies. However, the capacity to absorb information may depend on activities of the firm, such as involvement in international trade. Importers, exporters and two-way traders are likely to employ a different bundle of resources and be organised differently so that they would appreciate inputs and information from other firms in a different fashion and intensity. Getting a better understanding of such external economies by looking at various types of firms is the focus of present paper. Using Hungarian manufacturing data from 1992-2003, we confirm that firms perform better in agglomerated areas and show that traders gain more in terms of productivity than non-traders when agglomeration rises. Firms that are stable participants of international trade gain 16 % in terms of total factor productivity growth as agglomeration doubles while non-traders may not benefit from agglomeration at all. Results also suggest that traders' productivity premium is most apparent in urbanised economies.