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The Pitfalls of Using Location Quotients to Identify Clusters and Represent Industry Specialization in Small Regions

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Abstract

This paper examines the use of location quotients, a measure of regional business activity relative to the national benchmark, as an indicator of sectoral agglomeration in small cities and towns, and as a measure of industry specialization that might impact the number of new business startups in these places. Using establishment-level data on businesses located in Maine, our findings suggest that the addition of one "hypothetical" establishment in very small towns leads to a dramatic change in the magnitude of the region-industry location quotient. At population sizes of about 4,100 or more people, however, location quotients are reasonably stable. Regression results from an analysis of the relationship between new business activity and regional industry specialization show that the effect of location quotients on business startups switches from "inelastic" to "elastic" at a population size cutoff of about 2,600 residents. Overall, our findings suggest that researchers and practitioners should exercise caution when using location quotients to study small regions.

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  • Andrew Crawley & Todd M. Gabe & Mariya Pominova, 2021. "The Pitfalls of Using Location Quotients to Identify Clusters and Represent Industry Specialization in Small Regions," International Finance Discussion Papers 1329, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1329
    DOI: 10.17016/IFDP.2021.1329
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    2. Jianing Xu & Weidong Li, 2023. "High-Speed Rail and Industrial Agglomeration: Evidence from China’s Urban Agglomerations," Land, MDPI, vol. 12(8), pages 1-18, August.

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    More about this item

    Keywords

    Agglomeration; Industrial Cluster; Location Quotient; Regional Economics; Rural;
    All these keywords.

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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