Spatial concentration and firm-level productivity in France
The analysis of agglomeration economies focuses around two separate important questions: how large the gains from agglomeration are and how much firms internalize these gains when deciding where to locate. In order to provide answers, the authors of CEPR DP6858 focus on agglomeration externalities and distinguish between urbanization economies, which refer to the cross fertilization of different industries on a given territory and localization economies, which group the concepts of externalities on inputs market, on the labour market and knowledge.
The paper explores empirically the effect of spatial agglomeration of activities on the productivity of firms using French individual firm data from 1996 to 2004. The authors find that while gains from clustering do exist (a 10% increase of employment in neighbouring firms of the same industry increases a firm productivity by around 0.4 – 0.5%), they are modest and geographically very limited. For example, a firm that would move from a location with no other workers to a location with 650 employees from its own sector (the peak of the observed distribution in France) would gain 25% TFP, but going to an “over-crowded” area (with more than 9000 employees) would eliminate these TFP gains.
Geography matters a lot for French firms and they are aware of this, as they seem to take into account the TFP gains in their location choice. When the authors compare the geography that would maximise productivity gains and the observed geography, they find very little difference between the two.
Summarised by CEPR staff
Topics: Productivity and Innovation