Various sources have been mobilized to construct the database used for this study. The core database is the manufacturing data from the Turkish State Institute of Statistics covering all the provinces over the period 1980-2000. The industries included in the database are classified according to the two-digit ISIC Revision 2 nomenclature. This database is complemented with population, geographical, infrastructure and socioeconomic variables at the provincial level. The manufacturing and population data cover the entire period 1980-2000, while the infrastructure and socio-economic data are available with some five-year gaps. Since we do not have sector price indices at the provincial level, we use the country two-digit wholesale price index as price deflator.

Although Turkey counts 81 provinces, some of them were established by a series of Laws adopted during the period 1989-1996, out of the territory of one or two of the initial 65 provinces.PF<sup>3</sup> FP In order to have a consistent database over time, we added these new provinces back to their parent provinces as described in Appendix 1.

The final database is a panel of 65 provinces, 8 sectors and 21 years, but including many missing observations since most of the sectors are concentrated in a few number of provinces and the infrastructure and socio-economic variables are available with some five-year gaps. The total number of observation is 10’920, and the total number of observations with non-missing sector output observation is 5’218. This unbalanced structure may cause some heteroskedastic problems, which we deal with by computing the White/Hubber robust standard errors in all the regressions.

In addition to the unbalanced panel feature, the variability of some key variables such as the number of operating firms and their total outputs is quite high from year to year. There are also many gaps in the panel patterns. To cope with this problem, we opt for two approaches: a five-year non-centered moving average and a simple five-year average.

While the simple average yields a balanced panel, the moving average leads to an unbalanced panel. It also raises the issue of the treatment of missing observations in the panel patterns. We propose two alternatives: (i) exclude from the computation all the missing observations preceded by two missing observations and succeeded by two missing observations, or (ii) keep all the missing observations and simply rely on the moving average process. Table 1 presents for each sector the percentages of observations with complete patterns, that is, with 21 non-missing observations (corresponding to the number of years) within the panel’s cells.

Some clarifications need to be made before presenting the estimation results. Since the infrastructure and socio-economic variables are available with five-year gaps, only the database constructed from simple five-year averages is used to estimate the specifications including _LOAN_ , _ELECT_ , _ROAD_ and _UNIV_ . Furthermore, in the moving average panels, only the productivity (<sup>_y_</sup> _s_ , _r_ , _t_ ), and number of firms ( _PN s_ , _r_ , _t_ and _N r_ , _t_ ) variables are

> <sup>3</sup> After 1990, new provinces were carved out of the old provinces. In 1989 (law No: 3578), Aksaray was formed out of Konya, Bayburt out of Gümüşhane, Karaman out of Konya. In 1990 (Law No: 3647), Batman and Şırnak were formed out of Siirt and some parts of Hakkari and Mardin. In 1992 (Law No: 3760), Bartın was formed out of Zonguldak. In 1992 (Law No: 3806), Ardahan and Iğdır were formed out of Kars. In 1995 (Law No: 4109), Yalova was formed out of İstanbul, Kilis out of Gaziantep and Karabük out of Zonguldak. In 1996 (Law No: 4200), Osmaniye was formed out of Adana. In 2000 (Law No: 4452), Düzce was formed out of Bolu.

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