Published 01 March 2017

Connections between cities, agglomeration economies and business dynamics

– research overview and agenda

The purpose of this report is to summarize international research on the connections between cities, agglomeration economies and business dynamics. It aims to elucidate the growing, yet fragmented, international body of evidence of the forces that in interaction “produce” the city and its benefits for different actors. The overview brings together international and Swedish insights into agglomeration economies.

Cities have high rents of land and have historically been rather unhospitable environments. Despite congestion, firms and individuals stand in line for access to central locations. Firms in dense environments seem to be able to both cover high rents for central offices, as well as high nominal wages to their employees. This is particularly true in knowledge-intensive activities, both in manufacturing and in the service industries. Cities, and particularly the metropolitan regions, are also centers for the emergence of new economic activities and business dynamics. Economists have responded to these observations by positing that there ought to be economic benefits from being located close to other people (Henderson, 1974). If such economic benefits—agglomeration economies—do not exist, firms in cities would experience harsh competition from firms in sparser areas.

The purpose of this report is to summarize international research on the connections between cities, agglomeration economies and business dynamics. It aims to elucidate the growing, yet fragmented, international body of evidence of the forces that in interaction “produce” the city and its benefits for different actors. The overview brings together international and Swedish insights into agglomeration economies. A focus is on how the benefits of agglomeration gains and dense cities vary between different groups of actors (such as between industries or occupations), as well as the role of agglomeration economies in spurring business dynamics.

  • Dense environments (cities) may in an economic sense be viewed as arenas for sharing of indivisible investments, more effective labor-market matching, as well as for learning through the spillovers of knowledge and information.
  • The general association between the density of economic activity and productivity is very strong, i.e. actors in dense environments are more productive than actors in sparse environments.
  • When this difference is corrected for education, industry structure, firm size and other observable characteristics the productivity difference (an elasticity) decreases to about 5%, i.e. when density is doubled, productivity increases by 5%. This figure is representative of findings from a large range of industrialized countries.
  • When non-observable characteristics are considered, the estimate decreases to about 2%, also in line with findings from international studies.
  • This average figure is largely driven by knowledge-intensive and so-called non-routine activities. These activities gain more than the average from location in dense environments: they have much to gain from the city’s effective accumulation and diffusion of new knowledge.
  • Some of the city’s benefits are so-called neighborhood effects, i.e. the attenuate swiftly with space, even within cities. These include a range of effect driven by face-to-face interaction. Not just dense regions and cities, but dense neighborhoods as well, are an important source of competitiveness for knowledge-intensive industries.

Against this background, the report concludes with suggestions for future research areas of high interest, and points to needs for proper data and statistics to keep pushing the research front and the state of our knowledge forward.

Title
Connections between cities, agglomeration economies and business dynamics – research overview and agenda

Serial number
PM 2017:08

Reference number
2016/157

Download the report in SwedishPDF