It takes concentration: measuring the impact of agglomeration on growth
Date
2013-10
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Abstract
Essential for overall development, economic growth has always been a primary concern of developing countries, including the Philippines. The role of agglomeration economies in promoting growth, however, is often overlooked and dismissed to be mere externalities. Agglomeration economies provide benefits to firms locating near other firms by increasing efficiency due to easier, faster, and cheaper access to inputs, may it be in the form of capital, labor, or knowledge. These geographical concentrations are further classified into two broad
categories: localization economies and urbanization economies. Although, from a theoretical perspective, they are expected to have positive impacts on growth, prior empirical studies do not show consistent results. More so, there is little existing literature that relates these two domestic phenomena in the context of the Philippine economy. This study aims to fill this gap by answering the question: Do patterns of agglomeration in the Philippines help drive economic growth? This is achieved by exploring the impact of localization economies and urbanization economies on the level of employment from the years 2006 to 2011 across 17 regional divisions and 10 major industry groups using the fixed effects regression model. The location index an inverse relative Hirschman-Herfindahl index are calculated as a measure of the degree of specialization (associated with localization economies) and the degree of diversification (associated with urbanization economies) for the considered regional industries. Results demonstrate an existing significant and U-shaped relationship between measures of agglomeration and regional employment levels, thereby providing empirical proof that growth does, indeed, take concentration.
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Agglomeratrion, Economic growth, Philippines