Micro-mechanisms of agglomeration : evidence from an industrial park

Abstract

 Geographical concentration of industries and businesses is one of the most remarkable phenomena since industrialization. Existing literature focuses on measuring the scope and scale of agglomeration, identifying its sources, and attempting to differentiate between them. To delve deeper into these mechanisms, however, we require more specific microdata. This paper examines a comprehensive logistics park in Xinjiang, adding novel empirical evidence to the micro-mechanics of agglomeration. Based on the data of firms entering the industrial park from 2013 to 2020, we first describe the entire formation process of an economic cluster, i.e., the process of an industrial park emerging from nothing with gradually diversified industries and increasing scale. We are more concerned with the underlying micro-mechanisms of its formation, namely the factors that influence the entry decisions of firms. Specifically, we examine three mechanisms: agglomeration economies, the anchor firm effect, and the social network effect. Utilizing exogenous variations in conditions that could potentially influence firm entry decisions, we employ a two-way fixed effects model to identify the influences of these factors on the entry decisions of firms. The empirical results of this paper confirm the positive externality of business agglomeration: if the number of existing firms in the same industry within the park increases by 1%, the entry probability of firms will increase by 3.4 percentage points (with the average monthly entry probability of firms being 12.9%). Positive externalities only exist within the same industry. According to additional heterogeneity analysis, the upstream and downstream links within the industry may be the most influential driving factor. In addition, we investigate the less-discussed anchor firm effect and hometown social network effect. The empirical findings indicate that both of these mechanisms contribute significantly to the concentration of businesses in the park. These two mechanisms can be comprehended better through a deeper examination of heterogeneity. The anchor firm effect is highly significant for anchor firms but not for non-anchor firms, indicating that for non-anchor firms, the strong competition effect brought by anchor firms exceeds the positive spillover effect. In contrast, the hometown network effect is extremely significant for non-anchor firms, but not for anchor firms. This result demonstrates that social capital, a form of intangible capital, is a substitute for market competitiveness. Similarly, the hometown network effect will significantly influence the entry decisions of non-local firms, but not local firms. According to the contract type, the effect has no bearing on firms that enter the market through purchasing rather than leasing. This is partially due to different planning horizons: firms entering via leasing will be more affected by the current state of the park, whereas those entering via purchase will consider more long-term factors. The following are the primary contributions of this paper: This paper focuses on the mechanisms of externalities that drive business agglomeration. In addition to confirming the existence of agglomeration economies as described in the literature, we also investigate the anchor firm effect and social network effect by employing copious firm-level micro-data to enrich and supplement the traditional Marshallian Effects. Thirdly, this paper investigates the development process of an economic cluster growing and expanding from nothing, as well as its driving factors, which can provide park managers and national policymakers with certain reference values for industrial development.