The scope of agglomeration economies: evidence from catalonia*

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The scope of agglomeration economies: Evidence from Catalonia*
Jordi Jofre-Monseny1

Universitat de Barcelona & Institut d’Economia de Barcelona, Dpt. D’Economia Política i Hisenda Pública, Avda. Diagonal 690, Torre 4, Planta 2a, 08034 Barcelona, Spain (e-mail:

Received: 14 January 2008 / Accepted: 28 October 2008

Abstract.This paper is an empirical study of the geographic and industrial scope of agglomeration economies. We also explore if small establishments make better neighbours than their larger counterparts. We address these issues by studying the effects of local industrial characteristics on the location decisions of new establishments using the random profit maximization framework. We carry out separateeconometric estimations for seven industries in Catalonia, a Spanish region, using data from 1995–2002. Agglomeration economies seem to work at a very local level. Evidence of localization, urbanization and diversity effects is found. There is no strong evidence that establishments prefer to be located near to small rather than large establishments. JEL classification: L25, R30 Key words: Agglomerationeconomies, firm location, conditional logit, Poisson regression

1 Introduction External effects exist when the economic scale of a firm’s geographical location enhances its productivity (Rosenthal and Strange 2004). There is a substantial body of literature on the question of why firms co-locate in space and how this co-localization results in productivity differences across firms in differentlocations.1 The existence of these external scale effects has important policy implications. A good understanding of these phenomena can help to design policies aimed at fostering the development of particular industries at the local and regional level and guiding more general policies for local and regional growth. The empirical literature on agglomeration economies is substantial.2 A great deal ofthis literature has focused on whether specialized economic environments (localization/MarshallArrow-Romer externalities) or large and diversified cities (urbanization/Jacobs diversity effects)
* The author acknowledges financial support from SEJ2007-65086 and 2005SGR00285 1 See Duranton and Puga (2004) for an extensive review. 2 See Rosenthal and Strange (2004) for an extensive review.
© 2009 theauthor(s). Journal compilation © 2009 RSAI. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden MA 02148, USA. Papers in Regional Science, Volume 88 Number 3 August 2009.


J. Jofre-Monseny

generate larger scale effects. Empirical studies have yielded diverse results. Hence, this question remains unsolved. Much less applied work hasanalysed the geographic scope of these external effects. Since data at a geographically detailed level were not available until recently, very few papers have focused on the geographic scope of agglomeration economies. Rosenthal and Strange (2003) is the first paper that uses US zip code data to analyse this question carefully. A third question that has not received much attention in the literatureis whether the local industrial organization matters, i.e., are external effects larger in an environment made up of small firms than in a site where there are a few large firms? This paper aims to shed some extra light on these three topics by looking at location decisions of new and relocating establishments across municipalities in Catalonia, a region in Spain. We first study the geographic scopeof agglomeration economies by comparing how new and relocating establishments value the industry characteristics of one municipality in comparison to the industry characteristics of the municipalities contained in two different concentric rings from this municipality. Data from Catalonia is very well suited to analyse this issue given the reduced size of its municipalities. The average size of...
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