Too close for comfort? Micro‐geography of agglomeration economies in the United Kingdom

The issue of whether firm productivity is affected by agglomeration externalities is a longstanding area of research. However, the appropriate geographical level to better detect the effects of agglomeration economies and at which level these externalities work is still unclear. Using detailed firm ‐ level longitudinal data on 4927 manufacturing firms in the United Kingdom over the period 2008 – 2016, we investigate the relation between the microgeography of external agglomeration economies and firm productivity. We compare different geographical levels: city ‐ wide and narrowly defined neighborhoods around a firm. Results from a multilevel (mixed ‐ effect) model show that urbanization externalities play a role at a higher level of geographical aggregation, such as the city, whereas localization externalities operate at a finer level, within the city and in a closer neighborhood to the firm. Failing to control for more granular levels of geography results in confounding the two types of externalities. We also provide novel evidence that these externalities vary across firm (such as age, size, and productivity) and location (such as population density) characteristics. due to the key role played by knowledge spillovers. whether firm productivity is associated with external agglomeration economies. A consistent body of the theoretical and empirical literature recognizes the extent of external urbanization and localization agglomeration economies, their role on location attractiveness, and the effect of agglomeration on industry, location, and firm growth, as well as on performance. However, the literature has not reached a consensus on the appropriate geographical unit of analysis to detect the effects of agglomeration externalities on productivity, and at which level of geographical unit urbanization and localization externalities operate. Recent studies highlight that these two types of externalities may coexist in the same area rather than compete. Following this insight, we examine whether urbanization and localization externalities may operate at different spatial scales, but simultaneously. Using data on a sample of 4927 single ‐ plant firms based in the United Kingdom and operating in manufacturing sectors over the 2008 – 2016 period, we estimate a multilevel mixed ‐ effect analysis that allows to control for both individual and contextual characteristics affecting firm productivity, as well as to investigate the heterogeneity of individual firms' productivity to agglomeration economies. that urbanization externalities play a role at a higher level of geographical aggregation, which in our case corresponds to a city ‐ wide area (and its immediate neighborhood) as delimited by the postcode area, whereas localization externalities operate at a finer level, within the city in a closer neighborhood to the firm km ), suggesting that proximity between economic parties is more conducive to increasing firm productivity when there is a closer industrial relationship. Also, our results suggest that failing to control for within ‐ city effects may lead wrongly support the coexistence of specialization and urbanization externalities at an aggregate level. we effects are boundaries of the