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Agglomeration economies and firm TFP: different effects across industries

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  • Gornig, Martin
  • Schiersch, Alexander

Abstract

This paper analyzes the effect of agglomeration economies on firms’ total factor productivity. We propose the use of a control function approach to overcome the econometric issue inherent to the two-stage approach commonly used in the literature. Estimations are conducted separately for four industry groups, defined by technological intensity, to allow for non-uniform effects of agglomeration economies on firms given their technological level. In addition, R&D is included to account for the firms’ own efforts to foster productivity through creating and absorbing knowledge. Finally, radii as well as administrative boundaries are used for defining regions. The results confirm differences in the strength and even in the direction of agglomeration economies: While urban economies have the largest effect on TFP for firms in high-tech industries, they have no effect on TFP in low-tech industries. For firms in the latter industries, however, the variety of the local economic structure has an impact, while this is irrelevant for the TFP of firms in high-tech industries. Only localization economies have a positive and significant effect on TFP throughout, but the effect increases with technological intensity of industries. Throughout, R&D is also found to have a positive effect that increases with technological intensity.
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  • Gornig, Martin & Schiersch, Alexander, 2019. "Agglomeration economies and firm TFP: different effects across industries," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203597, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc19:203597
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    JEL classification:

    • 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)
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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