Tracing the Sources of Local External Economies

Abstract

In a cross-sectional, establishment-level analysis using confidential secondary data, the paper evaluates the influence of commonly postulated sources of localised external economies-supplier access, labour pools and knowledge spillovers-on the productivity of two US manufacturing sectors (farm and garden machinery and measuring and controlling devices). Measures incorporating different distance-decay specifications provide evidence of the spatial extent of the various externality sources. Chinitz's (1961) hypothesis of the link between local industrial organisation and agglomeration economies is also investigated. The results show evidence of labour-pooling economies and university-linked knowledge spillovers in the case of the higher-technology measuring and controlling devices sector, while access to input supplies and location near centres of applied innovation positively influences efficiency in the farm and garden machinery industry. Both sectors benefit from proximity to producer services, although primarily at a regional rather than a highly localised scale.