Agglomeration economies in the finnish manufacturing sector

Abstract

Regional concentration of population and economic activity is a common phenomenon both in Finland and the other most developed countries, which refers to the existence of agglomeration economies. Two types of economies are usually recognized to be important: specialization (Marshall externalities) and diversity (Jacobs externalities) economies. The former refer to the geographical concentration of a specific industry and the latter to the industrial diversity of the local system. This study examines the relationship between agglomeration economies and regional productivity in the manufacturing sector in Finland. A distinction is made between the effects of urbanization and localization economies. The production function method is applied to the manufacturing sub-sectors in the 83 NUTS 4-level regions in 1995 and 1999. The results support the regional specialization more than diversification even if some differences can be seen between the manufacturing sub-sectors.

Acknowledgements

The author wishes to thank Professor Hannu Tervo for his helpful comments and suggestions. Financial support from the Local Development Foundation of Finland and the Academy of Finland (project number: 200856) is also gratefully acknowledged.

Notes

 An urban settlement refers to a group of buildings which are usually less than 200 metres apart and which together house at least 200 people (Statistics Finland, 2001).

 One possible explanation of productivity differences could be the level of education of the labour force. However, in this analysis a variable measuring the educational level was insignificant in all sub-sectors and for that reason it was excluded from the model specifications reported in this paper.