Firm location and agglomeration economies

Abstract

This chapter examines agglomeration economies and how they affect the location of firms. First, the relevant literature on agglomeration economies is introduced. Second, we investigate each component of these economies in terms of scale, scope, and complexity (spatially constrained internal and external economies). Internal economies are internal to the firm and external to the industry, while external economies are external to the firm and internal to the industry, with some exceptions. We also discuss negative elements, such as urbanization diseconomies. Third, the roles played by agglomeration economies in sustainable regional development are explored. We reveal that the enhancement of economic infrastructure elements is immediately beneficial to producers. A simple model framework is introduced to analyse how location advantages are related to agglomeration economies by comparing two physically separate locations. The impact on regional development of changes in agglomeration economies is then divided into two parts: economic elements and social infrastructure elements. Economic infrastructure elements that are relevant to industrial location are conventionally understood to be the trade-off between agglomeration economies and transportation costs. Other dimensions include social infrastructure elements, which are immediately beneficial to households and may affect the level of regional attractiveness for local residents. The policy implications for sustainable regional development need a well-balanced combination of both types of elements. Finally, we address further avenues of research on agglomeration economies, such as the importance of internal economies through the application of production and cost functions.