Who Needs Agglomeration? Varying Agglomeration Externalities and the Industry Life Cycle

Abstract

In this paper, the changing roles of agglomeration externalities during different stages of the industry life cycle are investigated. A central argument is that agglomeration externalities vary with mode of competition, innovation intensity, and characteristics of learning opportunities in industries. Following the Industry Life Cycle perspective, we distinguish between young and mature industries, and investigate how these benefit from MAR, Jacobs’ and Urbanization externalities. The empirical analysis builds on a Swedish plant level dataset that covers the period of 1974-2004.The outcomes of panel data regression models show that the benefits industries derive from their local environment are strongly associated with their stage in the industry life cycle. Whereas MAR externalities increase with the maturity of industries, Jacobs’ externalities decline when industries are more mature. This is in line with the hypothesis that young industries operate in an environment dominated by rapid product innovation and low levels of standardization. Hence, it pays off when knowledge can be sourced locally from many different sources, but there is still little scope for specialization benefits. Mature industries, in contrast, are associated with lower innovation intensities and a focus on cost saving process innovations. Therefore, there are major benefits to be derived from specialization, whereas knowledge spillovers from different industries are less relevant. The distinction between the product competition in young industries and price competition in mature industries is reflected in our finding that high regional factor costs are detrimental to mature industries, but not to young industries. This can also be related to the finding that high quality living environments, attractive for highly paid employees, are important to young industries. Overall, the outcomes stress that industrial life cycles have to be taken into account in the analysis of agglomeration externalities.agglomeration externalities, industry life cycle, urbanization, Sweden