Spatial Agglomeration and Firm Performance in Korean Manufacturing Industry, 2012

Abstract

This study tries to answer whether agglomeration economies lead to better firm performance or not. By adopting the random-intercept-multilevel model for 2012 Korean manufacturing data, we suggest an econometric specification strategy of the constant returns to scale (CRS) Cobb-Douglas production function in the multilevel structure, estimate the specified model, and analyze the results. Adopting two types of agglomeration economies represented by specialization and diversification, the results discussed in this paper can be summarized into three policy implications. First, specialization and diversification show the opposite effects on firm performances in most regions except the regions in some large metropolitan areas. In an ideal situation, both effects are not a trade-off phenomenon, and highly agglomerated cities are expected to have synergies from both effects. In the 2012 manufacturing sector in Korea, however, the offset between the two factors is observed. This means before the central and local governments implement industrial policy, they need to consider the existing mix of manufacturing sectors to not lose one of the agglomeration economies. Second, the specialization effect is relatively weaker than the diversification effect across regions. Even though there is no rule of proper effect size on both factors, these weak specialization effects can be seen as a big threat to the current economic growth strategies in Korea. If this specialization fails at a region level due to the weak specialization economies, the policy goal may not be achieved. Last, spatial heterogeneity in intercepts of the regional level dominates both specialization and diversification effects. In addition, diversification follows the trend of spatial heterogeneity. In 2012, the production performance of manufacturing firms leaned heavily on the region-specific factors not explained by the two agglomeration variables. Considering the fact that there have been many policy concerns to resolve regional imbalance in economic growth, this questions the effectiveness of the previous efforts. From this standpoint, the strong spatial heterogeneity and the following trend of diversification emphasize that the local or central government, which tries to boost the economy in a lagging region and to achieve a well-balanced regional economy in a county, may want to think about the human capital or the other factors to increase productivity rather than just industry allocation strategy.