Urban agglomeration and innovation in developing economies

Abstract

Abstract Theory and evidence from developed economies suggests that innovation activities benefit from agglomeration economies associated with urban economic density. However, whether the same is true of developing countries has not been investigated by large-scale cross-country analysis, despite the fact that eighteen of the world’s top twenty cities are in developing countries. We propose that the development path followed by cities in developing countries creates agglomeration costs that largely limit innovation. We build a unique database to measure consistently both urban economic density and innovation across a large number of developing countries. We find that in developing countries, innovation eventually declines as urban economic density increases, with the decline being most prominent in the largest cities. That is, the largest cities in developing countries are not able to act as sustainable sources of innovation. Our results suggest the importance of addressing urban agglomeration costs as a means to facilitate innovative activity.