California Center for Population Research

Dense concentrations of economic activity are generally seen as giving rise to increasing returns that may be shared by business units that cluster in particular locations. What are the sources of these increasing returns and do they benefit all businesses or only some? Theories of the firm and strategic management argue that competitive advantage originates in the development and exploitation of firm-specific assets or capabilities that may be internal or external to the firm. The extent of firm heterogeneity suggests that businesses search for profit in many different ways. We might anticipate that older, larger, foreign-owned and multi-plant firms draw upon internal resources more readily than young, small, domestic, single-plant firms. Do the benefits of agglomeration vary among business establishments according to these characteristics? We examine this question using plant-level longitudinal micro-data from the Canadian manufacturing sector. We show that most manufacturing plants benefit from co-location, but that plants with different characteristics benefit in different ways.