Measuring industry coagglomeration and identifying the driving forces

Abstract

Understanding industry agglomeration and its driving forces is critical for the formulation of industrial policy in developing countries. Crucial to this process is the definition and measurement of agglomeration. We construct a new coagglomeration index based purely on the location of firms. We examine what this index reveals about the importance of transport costs, labour market pooling and technology transfer for agglomeration processes, controlling for overall industry agglomeration. We compare the results based on our new measure to existing measures in the literature and find very different underlying stories at work. We conclude that in conducting analyses of this kind giving consideration to the source of agglomeration economies, employees or entrepreneurs, and finding an appropriate measure for agglomeration, are both crucial to the process of identifying agglomerative forces.