The new economic geography literature encompasses these two ideas: firms located in an agglomerated area can take advantage from a larger market and the proximity of intermediate products’ suppliers (localization and urbanization effects), but this positive externality can be counterbalanced by high congestion costs and increased competition from other firms located in the same place. Urban agglomeration can thus reinforce or reduce firms’ productivity depending on which of these forces prevail, and these forces depends on the characteristics of the place where the firm is located (population density, accessibility to other places, congestion effects, industrial specialization of the location, access to financial and other professional services...).

For instance, using two-digit Japanese manufacturing data, Nakamura (1985) estimates that a doubling of industry scale leads to a 4.5% increase in productivity, while a doubling of city population leads to 3.4% increase. Henderson (1986) finds almost no evidence of urbanization effects, while a 10% increase in own industry employment induces a 1% increase in output. Moonmaw (1983) finds evidence of both, while Rosenthal and Strange (2003) and Henderson (2003) find stronger evidence of localization effects. Taken together, all these papers are more favorable to the existence of localization economies than urbanization economies.

More recently, Lall and others (2004) used a genuine plant-level database to examine the impact of improved market access, intra-industry localization economies and interindustry urbanization economies on Indian’s manufacturing firms’ productivity. They found that access to market through improved interregional infrastructure is an important determinant of plant-level productivity, whereas the benefits of locating in dense urban areas do not appear to offset the associated costs.

In this paper, we use Turkish two-digit manufacturing data and geographical, infrastructural and socio-economic data to assess the impact of the increasing urbanization of the country on sectoral productivity. A parsimonious model linking sectors’ productivity to accessibility, localization and urbanization economies proxy variables, and controlling for sector and sector-time specific effects is estimated using various adjustments of the initial database. The specifications pooling all the sectors indicate a positive correlation between sectoral productivity and:

- (i) a better accessibility to local, national and international markets;

- (ii) the number of firms operating in the same sector;

- (iii) the total number of firms operating in the same province.

This suggests that both localization and urbanization economies, as well as market accessibility are some productivity-enhancer factors in Turkey, although the causation link between productivity and these agglomeration measures is not clearly established. The sector-by-sector estimation confirms this result, although the localization economies effect is negative for non-oil mineral sector, and the urbanization economies effect is weak for natural-resource-based sectors such as Wood and Metal industry.

Although the data used cover the period up to 2000 and thus ignoring the financial crisis that hit Turkey in 2001, the current structural transformation of country away from the agricultural sector gives room to use the insights of these results as a preliminary step to understand the new challenges faced by the Turkish manufacturing sector. The results 4