Geographic Concentration of Business Services Firms: A Poisson Sorting Model
Tinbergen Institute Discussion Paper 2011-085/3
34 Pages Posted: 6 Jun 2011
Date Written: May 17, 2011
This paper examines the effects of specialization (within-sector clustering) and diversity (between-sector clustering) on business services profitability and location choice. We apply a semiparametric Poisson sorting model allowing for firm-specific effects. We find that for most firms, profitability of business services firms is substantially higher close to specialized clusters of business services firms. A standard deviation increase in business services specialization leads to on average a 40 percent increase in the probability that a business services firm locates there, supporting theories of Marshall, Arrow and Romer. It is also profitable for most business services firms to locate near a group of firms that belong to the same sector, not necessarily business services firms, so diversity is negatively related to location decisions. Almost all firms either benefit from within-sector clustering or between-sector clustering. Within-sector clusters are particularly profitable for large mature firms, whereas between-sector clusters are relatively more profitable for smaller innovative firms.
Keywords: sorting, agglomeration economies, specialisation, diversity, heterogeneity, semiparametric estimation
JEL Classification: R12, R14, R39
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