Does spatial proximity raise firm productivity? Evidence from British manufacturing

Abstract

The UK's economy is one of the most regionally imbalanced in Europe. The government's recent industrial strategy discusses various means of addressing this, one of which is the strengthening of existing clusters. Using plant-level indices of spatial proximity derived from postcode district data, this article investigates the extent of spatial concentration and its impact on total factor productivity in advanced manufacturing sectors in Great Britain. The results from estimation of production functions indicate that, in most advanced manufacturing sectors, spatial concentration has a negative impact on productivity in small plants and a positive effect in larger plants. Large plants likely benefit more from knowledge spillovers due to their higher levels of absorptive capacity.