Impacts of enhancing regional network economies on regional productivity and productive efficiency in Japan: evaluation from stochastic frontier analysis

With the advancement of technology and advent of a networked society, economic agents within a region benefit from local interactions within the region as well as the external economies. However, strengthening extra-regional ties may have negative consequences for regions near the center if all their economic resources are absorbed by the core. It is unclear, for regional economic agents, whether the negative network externalities dominate the positive ones. This has not been fully elucidated in the previous studies. To contribute to a breakthrough for this research topic, this study identified the impacts of network externalities on improvements in productivity and productive efficiency using stochastic frontier analysis. The analysis revealed that the borrowed size effect of agglomeration in the manufacturing industry significantly raises total factor productivity through shifts in the production frontier. It also revealed that the shadow effect of agglomeration does not adversely affect the productive efficiency of industry in either the manufacturing or non-manufacturing sector. These results imply that enhancing quality transportation infrastructure and improving inter-regional transportation networks can enhance the production performance of regional industries.