A research on the effect of economic diversity
on regional productivity using growthaccounting data from R-JIP2017
Tokyo Institute of Technology, School of Environment and Society
Department of Civil and Environmental Engineering○Masaki Shimizu
Tatsuro Sakano
1The types of agglomeration economies
By Rosenthal (2004)• Localization (specialization) economies• Urbanization (diversity) economies

Both economies are understood as two types of“external economies of scale.”2What are localization economies?
Marshal l (1920)’s definition and Rosenthal & Strange (2004)
interpretation• Localization economies occur when the size of an industry in a city/region
shows positive externalities to the productivity of each firm/company.
• Three sources of externalities:
1) knowledge spillovers, 2)input sharing, 3)labor pooling
Nakamura(1985)• A doubling of an industry’s scale leads to 4.5％ increase in productivity
3What are urbanization economies?
Rosenthal & Strange (2004)’s definition• Urbanization economies occur when the size of a city/region shows
positive externalities in productivity of industrial activities crossing overthe industries → Economy of Scale• Diversity as a source of city/regional externalities
1)Marshall’s externalities work across over the industries2)As Jacobs (1969) argues if main source of crossover externalities
reside in knowledge spillover, “diversity” of economic activities isthe main source of innovation → Economy of Diversity⇒ Economy of Scale vs. Economy of Diversity Which is influential ?
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Conflicting Evidence about Scale vs. Diversity• Hollar(2006) argues localization (scale) works better in small district
while urbanization (diversity) does in metropolitan region.
• Tran(2011) showed localization brings about higher growth rate in short terms
but urbanization does stable growth in longer terms from the states levelcomparison in the U.S.
• Van Oort(2004) argues the network relationship among cities is also important.
⇒ The existing research cannot explain sufficiently the complex patterns.
⇒ It is still important to accumulate empirical knowledge in exploratory.

⇒ Which economies work at Prefectural Level in Japan?
5Research Questions
1. Are the agglomeration economies existed at prefecturallevel in Japan?

2. If they are, which economies Scale or Diversity contribute
more to prefectural economy?

6Labor Productivity and Its Growth Rate
Tokui (2018, p29-31)(Industry i , Prefecture r , t year)

𝑉𝑟𝑡
𝑌𝑟𝑡 = 𝐻𝑟𝑡

Δ log 𝑌𝑟𝑡 = Δ log 𝑉𝑟𝑡 − Δ log 𝐻𝑟𝑡

Δ log 𝐴𝑟𝑡 = σ23
𝑖=112𝑉𝑉
𝑆𝑖𝑟𝑡+ 𝑆𝑖𝑟𝑡−1
Δ log 𝐴𝑖𝑟𝑡

Δ log 𝑉𝑖𝑟𝑡 = Δ log 𝐴𝑖𝑟𝑡 + αΔ log 𝐾𝑖𝑟𝑡 + (1 − α)Δ log 𝐿𝑖𝑟𝑡′
𝑉𝑖𝑟𝑡 : Real Added Value 𝑉𝑖𝑟𝑡
: nominal added value
𝑌𝑖𝑟𝑡 : Labor Productivity 𝐴𝑖𝑟𝑡 : TFP 𝐾𝑖𝑟𝑡 : Capital

𝐿𝑖𝑟𝑡 : Labor 𝐻𝑖𝑟𝑡 : man-hour𝑉′′Τ𝑉𝑟𝑡
𝑆𝑖𝑟𝑡= 𝑉𝑖𝑟𝑡7

Entropy as a measurement of diversity
𝑣𝑖𝑟 :real added value of industry i in prefecture r
𝑣𝑟 :real added value of industry i in prefecture r
𝑝𝑖𝑟 : relative proportion of industry i in prefecture r23

23

𝑖=1𝑖=1𝑣𝑖𝑟
𝑣𝑖𝑟− ෍ 𝑝𝑖𝑟 𝑙𝑜𝑔 𝑝𝑖𝑟 = − ෍𝑙𝑜𝑔𝑣𝑟
𝑣𝑟

closer to 0, the more dependent on a specific industry
closer to 𝑙𝑜𝑔 𝑁, the higher diversity8

A comparison of three models
Dependent variable
𝑌𝑟 : Labor Productivity of Prefecture r
Independent variables
𝑆𝑟 : Scale of Industrial Activities of Prefecture r
𝐷𝑟 : Diversity of Industrial Activities of Prefecture rModel 1: 𝑌𝑟 = 𝛼1 𝑆𝑟 +𝛾1 + 𝜀𝑟
Model 2: 𝑌𝑟 =𝛽1 𝐷𝑟 + 𝛾2 + 𝜀𝑟
Model 3: 𝑌𝑟 = 𝛼2 𝑆𝑟 + 𝛽2 𝐷𝑟 + 𝛾3 + 𝜀𝑟
Measurement of the variables
𝑌𝑟 : average annual labor productivity
𝑆𝑟 : average annual real added value
𝐷𝑟 : entropy measured by proportion of industrial activities

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Data
R-JIP 2017 Data Baseby Research institute of Economy, Trade and Industry
Panel Data from 1970 to 2012 for growth accounting:(1)Real and nominal added value(2)Capital input(3)Labor input
for 23 industries by 47 prefecture
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The effects on labor productivity(1970~2010)
Labor productivity (1970~2010)1)α1 α2 β1 β2 are positive2)Adjusted R2 of Model 3
is the highest, and that ofModel 1 comes to second3)α1 > α2 and β1 > β2

Model 1Model 2Model 3BBB

p-valuep-valuep-valueconstant -6.052 0.000 -0.284 0.733 -7.218 0.000
𝑆𝑟

0.702 0.000

―

―

0.619

0.000

𝐷𝑟――

1.264

0.000

0.887

0.001

R2

Adj R2R2

Adj R2R2

Adj R20.494 0.482

0.245

0.228

0.608

0.590
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The above results show that1)Scale of industrial activities and diversity are positively correlated witheach other2)However, they have independent effects on labor productivity3)Implying that economy of scale and that of diversity, both operate atprefectural level, although the latter effect is weaker than the former.

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Possibility of Structural Change
108642-4-6• necessary to check if there any structural change
132009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

-2

1975

01973

• Labor Productivity growth rate
Catch up period⇒high averagehigh volatility
Frontier period ⇒low average
low volatility(national average)

1971

1) Catch up Economy 1970~1990
2) Frontier Economy 2000~2010

Labor productivity growth rate
Labor productivity growth rate (%)• Tokui(2018)and Mizohata(2018)
pointed out Japanese Economy
experienced structural change

The effects on labor productivity (period)
Labor productivity (Model 3)• In both periods, scaleand diversity shows
similar effects↓

The mechanism ofagglomeration economy
operates in the same way
even after the economy
becomes matured.

1970~20101970~1990

2000~2010

BB

B

p-valuep-valuep-valueconstant -7.218 0.000 -5.679 0.000 -8.917 0.000
𝑆𝑟

0.619 0.000

0.507

0.000

0.803

0.000

𝐷𝑟

0.887 0.001

0.579

0.021

1.042

0.008

R2

Adj R2R2

Adj R2R2

Adj R20.608 0.590

0.520

0.498

0.471

0.447
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The effects on labor productivity growth rate
• R2 is lower than themodels of laborproductivity

Labor productivity growth rate

• In Catch up period,
scale and diversity
show similar effects.

constant -0.594 0.762 -6.024 0.023 5.698 0.144• In Frontier Period,
explanatory power
becomes zero,

1970~20101970~1990

2000~2010

BBB

p-valuep-valuep-value𝑆𝑟

0.090 0.556

0.358

0.113 -0.299 0.273

𝐷𝑟

0.845 0.035

2.037

0.000 -0.048 0.945

R2

Adj R2R2

Adj R20.120 0.080

0.380

0.352 0.027 -0.017

R2

Adj R2

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The effects on TFP growth rate
TFP growth rate

• R2 is relatively higher thanlabor productivity growthrate but lower than that oflabor productivity.
• In Catch up period,
scale and diversity
show similar effects.
• In Frontier Period,
explanatory power
becomes zero,

1970~20101970~1990

2000~2010

BBB

p-valuep-valuep-valueconstant -5.630 0.007 -12.354 0.000 4.589 0.242
𝑆𝑟0.371 0.021

0.738

0.002 -0.309 0.262

𝐷𝑟0.745 0.065

1.872

0.001 0.010 0.988

R2

Adj R2R2

Adj R20.217 0.181

0.472

0.448 0.028 -0.016

R2

Adj R2

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Conclusion• It is confirmed that scale and diversity have independent effects on laborproductivity at prefectural economy• These effects have been stable during Catch-up period and Frontier period• However, their effects on labor productivity growth rate and TFP growth rate
disappears in Frontier period• This is probably because growth rates are influenced more by business cycles• As against the expectation that TFP would be the driving force of economic
growth in Frontier period, TFP growth rates of all prefectures remains low.
It is considered that there should be some factors to suppress innovation inJapanese economy, and that if they are removed, the agglomeration economy
may be set in motion in Frontier period.
17Reference• Hollar, M. 2006, Industrial Diversity and Agglomeration Economies,• Jacobs, Jane. 1969, The Economy of Cities, Random House.

• Marshall, Alfred. 1920, Principles of Economics, London: Macmillan• Nakamura, Ryohei. 1985, Agglomeration economies in urban manufacturing industries: A case ofJapanese cities• Rosenthal S S and Strange W C 2004 Evidence on the Nature and Sources of Agglomeration Economies• Tran, H.P.D. 2011, Industrial Diversity and Economic Performance: A Spatial Analysis,• van Oort, F.G. 2004, Urban Growth and Innovation, Routridge, N.Y.

• 徳井丞次，2018 日本の地域別生産性と格差 R-JIPデータベースによる産業別分析• 溝端幹雄，2018 日本の労働生産性に関する地域的接近
生産性格差に課題

医療・福祉への資源偏在と大規模事業所の地域間• RIETI R-JIPデータベース2017 https://www.rieti.go.jp/jp/database/R-JIP2017/index.html
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