Revealing Agglomeration Economies with Stochastic Frontier Modelling in the Finnish ICT Industry

Agglomeration economies are sought with stochastic frontier methodology to analyse their role in the extraordinary productivity growth of the knowledge-intensive information and communication technology (ICT) equipment industry in Finland. Results suggest that the method, though imprecise, is useful for identifying developments in agglomeration economies. The main empirical result is that the highly increasing scale elasticities (i.e., relative to firm size) found in the sector are more industry and firm size related, than location related external economies of scale. Policy-wise, there are two neglected concerns: (i) Agglomeration economies have weakened with the industry life cycle, and the maturing of the underlying technology towards mass production is well under way in the industry, with R&D saving and labour using technical change. (ii) The deployment of R&D subsidies as instruments of regional policy may harm long term competitiveness in dispersing innovation intensive activities to low spillover areas and by disrupting the creation of persistent location-specific advantages.