Agglomeration Effects and Financial Performance

Abstract

This study empirically tests the trade-off between the costs and benefits of agglomeration for a large sample of firms. In line with the existing literature, it is found that population and employment density benefit productivity, but increase labour and real estate costs. To test the trade-off of benefits and drawbacks of agglomeration, the analysis focuses on the relation between agglomeration and profitability. For a sample of single-establishment Dutch firms, it is found that on average the costs of settling in an area with a dense spatial distribution of employment outweigh the benefits, an effect that holds for both urbanisation and localisation measures. In general, doubling the employment density will decrease the average return on assets by more than one percentage point.