Agglomeration Externalities and Growth in Urban Industries - empirical evidence from Sweden, 1896-1910

Abstract: What are the effects of regional specialization, industrial diversity, and local competition on industrial growth? Utilizing a novel dataset on the Swedish manufacturing industry, 1896-1910, an OLS model is estimated that captures the relationship between dynamic agglomeration externalities, i.e. knowledge spillovers, and employment growth in industries located in cities. The main results are that on a high level of industrial aggregation, specialization is associated with lower successive employment growth in urban industries, while diversity and competition encourages employment growth. On a lower level of aggregation, specialization and diversity decreases employment growth in urban industries, while the effects of competition remain positive. A plausible interpretation is that while inter-industrial externalities were important between broadly defined industries, disaggregated industries benefited from proximity to other dissimilar dominant industries. Thus, there is little support for the notion of Marshall (1890), Arrow (1962), and Romer (1986), that intra-industrial externalities are an important determinant of growth, while there is support, although somewhat inconclusive, for the notion of Jacobs (1969) that diversity and competition encourages industrial growth.