Too close for comfort? Microgeography of agglomeration economies in the United Kingdom

The issue of whether firm productivity is affected by agglomeration externalities is a longstanding area of research. However, the appropriate geographical level to better detect the effects of agglomeration economies and at which level these externalities work is still unclear. Using detailed firm‐level longitudinal data on 4927 manufacturing firms in the United Kingdom over the period 2008–2016, we investigate the relation between the microgeography of external agglomeration economies and firm productivity. We compare different geographical levels: city‐wide and narrowly defined neighborhoods around a firm. Results from a multilevel (mixed‐effect) model show that urbanization externalities play a role at a higher level of geographical aggregation, such as the city, whereas localization externalities operate at a finer level, within the city and in a closer neighborhood to the firm. Failing to control for more granular levels of geography results in confounding the two types of externalities. We also provide novel evidence that these externalities vary across firm (such as age, size, and productivity) and location (such as population density) characteristics.