Abstract/Summary

The issue of whether firm productivity is affected by agglomeration externalities is a longstanding area of research. However, the appropriate geographical level to better detect the effects of agglomeration economies is still unclear, and at which level these externalities work. Using detailed firm-level longitudinal data of manufacturing firms over the period 2008-2016 in the United Kingdom, we investigate how the micro-geography of external agglomeration economies associates with firm productivity, comparing different geographical levels: citywide and narrowly defined neighborhoods around a firm. Results from a multilevel (mixed-effects) model show that urbanization externalities play a role at a higher level of geographical aggregation, such as the city, whereas localization externalities operate at a finer level, within the city and in a closer neighborhood to the firm. Failing to control for more granular level of geography results in confounding the two types of externalities. We also provide novel evidence that these externalities vary across firms (such as age, size and productivity) and location (such as population density) characteristics.