Agglomeration economies and firm productivity: evidence from French individual data

Geographical concentration of some industries over time is hard to explain without assuming the existence of agglomeration economies. The increasing availability of accurate individual firm data has renewed interest in the quantitative evaluation of the extent of these economies. Using three administrative files on French firms' accountancy and employment, we assess the impact on firm TFP of both urbanization economies, resulting from the size of the local market, its industrial diversity and its market potential, and of localization economies, resulting from the concentration of the same or similar activities. We find strong evidence for the former: higher density of economic activities or greater market potential in a given area increase significantly the productivity of the firms located in that area. However we do not find that industrial diversity does as well. We also find evidence of localization economies, as we observe that the more concentrated in a given area an economic activity is, the more productive the firms of this industry are. Finally we show that the more qualified the local labor force is, the more productive are the firms located in that area, suggesting that skilled workers are more prone to generate and benefit from agglomeration economies.