Externalities, Location, and Regional Development: Evidence from German District Data

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Büttner, Thiess Working Paper Externalities, location, and regional development: Evidence from German district data Diskussionspapier, No. 43 Provided in Cooperation with: Department of Economics, University of Konstanz Suggested Citation: Büttner, Thiess (1997) : Externalities, location, and regional development: Evidence from German district data, Diskussionspapier, No. 43, Universität Konstanz, Forschungsschwerpunkt Internationale Arbeitsmarktforschung, Konstanz This Version is available at: http://hdl.handle.net/10419/92461 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Forschungsschwerpunkt "Internationale Arbeitsmarktforschung" Center for International Labor Economics ( CILE ) Fakultat fiir Wirtschaftswissenschaften und Statistik Universitat Konstanz Thiess Biittner Externalities, Location, and Regional Development: Evidence from German District Data y 752 (43) 1 3. SEP. 1397 Postfach 5560 D 139 Diskussionspapier 78434 Konstanz 43 - 1997 Deutschland / Germany Externalities, Location, and Regional Development: Evidence from German District Data Thiess Buttner Diskussionspapier Nr. 43 September 1997 Externalities, Location, and Regional Development: Evidence from German District Data Thiess Biittner l Faculty of Economics and Statistics Center for International Labor Economics University of Konstanz P.O.Box 5560 D 139 78434 Konstanz Germany email: Thiess.Buettner@uni-konsta'nz.de Abstract Local productivity externalities play an important role in the re- cent literature on economic geography and regional growth. But apart from case studies there is only weak empirical evidence. Using a sim- ple theoretic framework the paper derives two empirical implications of those externalities which are applied to district level data for German manufacturing industries. Although important regional concentration is found, significant correlation with local demand renders it difficult to draw conclusions. Yet, the importance of local externalities is sup- ported by the long-run development of single industries, as the extent of general manufacturing activities represented by employment and the number of establishments has positive effects on growth.This result is confirmed from an analysis of regional establishment growth, and is finally shown to be consistent with the aggregate development in manufacturing employment. 11 would like to thank B. FitzenborRPr. \V. Franz, and P. Winker for comments and criticism. 1 Introduction Recently, there has been a revival of interest into the concepts of localization and urbanization economies and their effects on regional productivity differences. Large potential effects of these local externalities on the regional allocation of activities have received broad attention in the literature on economic integration.2 Dynamic equivalents of localization economies, sometimes referred to as Marshall-Arrow-Romer externalities,3 also play a major role in the literature on economic growth. But compared to the importance of issues raised, empirical evidence abstracting from case studies is hard to obtain. Not only are regions quite heterogeneous, showing differences in their characteristics as well as in their interrelationship, but by stressing the endogeneity and the interdependence of agents location deci- sions the concepts of localization and urbanization economies are hard to identify empirically. In order to evaluate empirical content and relevance of local externalities basically two approaches can be distinguished: A descrip- , tive approach concerned with the study of the observed regional pattern of economic activities, and a more analytic approach concerned with its development over time. This paper presents an empirical study for German manufacturing employment along these lines. The focus on manufacturing is primarily due to the availability of data. But it is also justified by the fact that, compared to service industries, manufacturing industries are to a larger extent concerned with the production of tradeable goods, and therefore fit better into the interregional goods market assumption which is behind the agglomeration result. There exist only few corresponding studies for the German case: Lau (1996) is concerned with externalities and regional employment concentration, Brocker (1989) and Reimers (1984) study local externalities as determinants of sectoral employment growth, and Harhoff (1995a,1995b) investigates the role of externalities in the formation of firms. As the present study derives the empirical implications from the theory it shows how regional employment concentration, regional employment growth, and regional firm formation are related. Moreover, it explicitly distinguishes different types of externalities, thereby offering ad- ditional opportunities for identification. Furthermore, it critically examines and robustifies the finding of local productivity externalities in several di- rections. In the following section the two strategies of empirical research on the role of agglomeration economies are derived from the theory. Section 3 follows the more descriptive approach concerned with the hypothesis, that if agglomeration economies matter for manufacturing industries, their spa- tial employment distribution is pulled away from the general employment vSw. for instance Venables (1995). 3rf Claesrr et al. (1992) distribution. The emphasis lies on a general discussion of this descriptive approach and the problems involved. As a by-product some features of selected manufacturing sectors are discussed, which form the basis of the more analytic approach of section 4. Here the focus is on the regional development of employment in major manufacturing sectors and total manufacturing. The main purpose is to test whether positive local externalities can be identi- fied in a regional dataset but results on the persistence of the employment pattern are also obtained. 2 Empirical implications of agglomeration economies Dating from Weber (1909,1929) agglomeration economies have played an important role in location theory. Whereas broader definitions exist4 they are commonly explained by localized external economies of scale. Therefore, formal analysis can be carried out using the concept of increasing returns external to the firm by Chipman (1970) and Helpman (1984). Consider a set of regions each assembled in a single point in space. Assume a traded good is produced.in each of these regions with an industry production function where the externalities are captured in a separable productivity term: Xr = G{Lr\Lr)F(Sr,Lr,Kr) (1) where Xr is the output of the local industry and G is the productivity shift function with the regional labor input in the industry under consideration (Lr) and the total employment in the region (LT) as arguments. F is a linear homogeneous production function using three factors: labor (Lr), capital (Kr), and a specific factor (Sr). It is assumed that each firm in the local industry treats the shift function G parametrically, thus there are economies of scale external to the firm but internal to the local industry (first argument) or internal to the location (second argument). Whereas the former represent localization economies, the latter represent urbanization economies. Suppose the output of the local industry Xr is traded on the large interregional market such that the output price (P) is given. Under the assumption of zero profits the goods price equals the unit cost, formally: l P = C{Vr,Wr, R) Gr(Lr,Lr)~ (2) where C denotes the cost function, VT is the rental rate of the region-specific factor, WT the wage rate of mobile labor, and R the nationwide rate of 4According to Goldstein / Gronberg (1984, p. 97) agglomeration economies exist, "..'. when it is less costly to combine two or more product lines in one (urban) area." This definition not only applies to agglomeration due to nonconvexities but also to the case of an interindustry linkage with transport costs and a specific factor. return on capital. For the empirical application a log-linear specification of the productivity-shift term is assumed: G{Lr,Lr) = GrU^lf 7i>0 t = l,2 (3) where Gf captures exogenous productivity differences. By the requirement that 7,- > Oi = 1,2 negative externalities from the level of employment are prevented. Assuming a Cobb-Douglas form of the basic production function (F) the labor input consistent

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