concentration finding is simply due to better coverage of rural areas in the 2003 census than in the 1987 census, a fact documented by Kerr and McDougall (2019). There are also comparability issues between the 2003 and 2014 firm censuses that we use in this paper. We document these below and also describe how we address them.

The sources of firm‐level data mentioned above have also been used to answer several other questions about manufacturing in Ghana. These include the relationship between productivity and firm exit (Frazer 2005), the effects of credit constraints (Bigsten and Soderbom 2006) and the contributions of growth and selection to the evolution of the firm size distribution in Ghana (Sandefur 2010, Davies and Kerr, 2018). A recent paper by Cirera et al (2017) uses the 2003 Ghana firm census (as well as census data from three other African countries) and the method of Hsieh and Klenow (2009) to estimate the cost of misallocation of resources, finding that improved allocation of resources to more productive firms would raise total productivity by around 75% in Ghanaian manufacturing. There has been little work in Ghana, or for African economies more broadly, examining the role of agglomeration economies. We review this small literature after introducing the key ideas in the agglomeration economies literature in the next section.

# 2.2 Agglomeration and Economic Geography

Urbanization has traditionally been associated with agglomeration, the benefits of firms locating near other firms and workers. Agglomeration is an idea with a long history in economics, dating back to the work of Adam Smith and then Alfred Marshall (Duranton, 2016). Duranton and Puga (2004) classify agglomeration effects as either sharing, matching and learning effects. Combes and Gobillion (2015) emphasize that which of these three channels is driving any agglomeration effects is almost never investigated in the agglomeration literature, but the overall effect can be, both because this is what is important for policy makers and because it is very difficult to separate out which channel is actually driving agglomeration economies.

Despite this limitation it is possible to make some progress in unpacking the role of agglomeration economies. Combes and Gobillion (2015) distinguish between urbanization economies and localization economies when estimating the benefits of agglomeration. Urbanization economies are the positive externalities from firms locating in a particular area, irrespective of the industry the firm is in, for example due to the density of firms or individuals or the level of general human capital in an area. Localization economies are the externalities arising from the characteristics within a location of a specific industry, such as the level of competition of the firms in an industry in a specific location or the degree to which a location’s employment is concentrated in a particular industry.

Empirical analysis examining the role of agglomeration economies began with Glaeser et al (1992), who examined the impact of several localization and urbanization economies on city employment growth in the US. The authors found that sectoral diversity mattered for employment growth in US cities, where diversity was measured as the sectoral concentration of employment, excluding the sector for which the value is being created. Duranton and Puga (2001) formalized the idea that diversified cities would generate innovation and growth. Positive effects of diversity imply that urbanization economies are important in explaining employment growth. In contrast, Henderson et al (1995) also using data on US cities, found that specialization mattered for economic growth, where specialization is measured as the share of employment in each sector relative to its share at the national level. Since specialization is a localization economy, ie it is not a characteristic of a specific sector, this meant that localization economies were found to be more important by Henderson et al (1995).

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