Agglomeration and Economic Growth: Some Puzzles

Knowledge spillovers and technical externalities play a fundamental role in basically all endogenous growth models. In a context of increasing returns to scale and transportation costs it seems reasonable to assume that regional agglomeration of production and R&D activities is linked to aggregate growth. This work is an empirical investigation of the predictions provided by some theoretical studies according to which agglomeration increases with growth and growth increases with agglomeration (Martin and Ottaviano, 2001, Baldwin and Forslid, 2000 and Fujita and Thisse, 2001). The behaviour of six European countries over twelve years (from 1984 to 1995) is analysed using panel data techniques. In particular, a "traditional" growth equation à la Barro, in which an index of regional agglomeration of industrial activities is added to the "typical" regressors, is estimated. Surprisingly, instead of concentration in a few areas, as theory predicts, equal dispersion of economic activities across regions sems to be good for national aggregate growth. Besides, there is also some evidence that regional dispersion of sectors with a high technological content is growth enhancing.