Regional industrial firm growth under monopolistic competition and human capital externalities

Abstract

This paper analyses regional firm growth on industry level. To address this question the theoretical models of the New Economic Geography literature of Baldwin (1999), Baldwin et al. (2001) and Martin and Ottaviano (1999) are taken and augmented to a multi-sector approach to find an empirical specification. The main difference to existing literature on firm growth is that interregional demand linkages and human capital spillover and agglomeration effects are explicitly taken into account. They are derived by theoretical considerations. The approach is flexible enough to deal with competitive markets and monopolistic competition situations as well. From an empirical point of view a Spatial Durbin Model on industrial level results. Typically within the firm growth literature productivity per worker is a crucial explanatory variable. Our model suggests that average productivity per firm, and especially the market potential of a single firm, is relevant for firm formation. We employ German data (establishment history panel) in a Panel setting