Changes in Agglomeration Economies and Linkage Externalities for Japanese Urban Manufacturing Industries:1990 and 2000

Author Name NAKAMURA Ryohei  (Faculty Fellow, RIETI)
Creation Date/NO. December 2008 08-E-040
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Urban agglomeration economies are usually divided into two categories: urbanization economies and localization economies. In the 1970s and 1980s, a number of attempts were made to estimate urbanization economies and/or localization economies directly in the production function. Since the work by Glaeser et al. in 1992, however, historical effects on agglomeration called dynamic externalities in agglomeration are tried to estimate indirectly by use of the growth equation of urban labor force extensively. These externalities are called MAR in a dynamic sense, whereas traditional agglomeration economies are evaluated in static sense.

Alongside urbanization and localization, more traditional sources of industrial concentration are found in various industrial linkages, such as customer and supplier linkages or backward and forward linkages. These linkage effects come from the concentration of different kinds of industries whereas localization economies mean the benefit from the concentration of firms within the same industry. Also, linkage effects are often referred as pecuniary externalities.

This paper tries to clarify theose agglomeration concepts, and to construct an estimable model of linkage effects among industries as well as agglomeration economies, and to estimate these effects separately within the framework of the Translog production function. In this model intermediate inputs play an important role as linkage effects. Also, in order to investigate the change of agglomeration economies the estimations are implemented using data for 1990 and 2000.

The empirical analysis is based on two-digit data for manufacturing industries in Japanese cities. The estimated results regarding agglomeration economies vary significantly among the two-digit industries, but most of the agglomeration effects have fallen since 1990.