The Influence of Agglomeration Externalities on Manufacturing Growth Within Indonesian Locations

Abstract

Differences in agglomeration externalities and industrial regimes between locations generate performance differentials for their localized economic activities. For more than two decades, scholars have debated which externality is dominant for growth and under which regime. This study aims to resolve this debate by analyzing the influence of agglomeration economies on the growth of five‐digit manufacturing sectors and firms for Indonesian cities and regencies between 2000 and 2009. This is investigated employing the recent reconceptualization of variety based on sectoral linkages distinguishing related and unrelated varieties, which allow assessing their idiosyncratic economic roles. The findings support that economic relatedness is the dominant source for expansion of sectors and firms within Indonesian locations. Specialized clusters and competition are inversely related to manufacturing growth, although the latter fosters sectoral employment within Indonesian regencies. Population density and human capital show antithetic effects between cities and regencies due to their distinctive urbanization trajectories and industrial compositions.

The effect of knowledge spillovers and human capital through technological intensity on employment growth in Indonesia

“…Based on the definition of the elasticity and estimated results are shown in Table 2 (elasticity of specialization is − 0.15), it can be inferred that a 1% increase in industry specialization decreases the 5-year employment growth rate between 2010 and 2015 from 22.14 2 to 21.99%. This result is in line with that of other studies (Glaeser et al 1992;Bishop and Gripaios 2010;Ercole and O'Neill 2017;Khoirunurrofik 2018).…”

“…The methods and empirical specifications employed in this study are a modification of the specifications designed by Glaeser et al (1992), Combes (2000), and Ercole and O'Neill (2017). The empirical specification (basic model) that we designed is:…”

“…In the case of Indonesia, Khoirunurrofik (2018) discovered that, in general, whereas specialization results in the undesirable effects of the employment growth in the manufacturing industry diversity indicates favorable outcomes. A study by Ercole and O'Neill (2017) noted that diversity and competition have positive impacts on the employment growth, while the effects of specialization on this concern are statistically insignificant. The various findings of the previous studies are as a result of the different analyses of aggregation of sectors/industries/regions, measurement variables, and the foremost control variables employed in the model (Combes 2000;Van Oort 2007;De Groot et al 2016).…”

Creative industries agglomeration and industrial efficiency in China

“…However, the role of concentration ratio in industrial efficiency may need to be further explored and with more evidence provided. Some scholars suggest that the monopoly setting in a particular industry provides both a stronger incentive and greater ability for technology innovation (Combes, ; Ercole & O'neill, ; Martin et al, ), while others argue that market competition among different firms in a given cluster can produce more externalities (Feldman & Audretsch, ; Glaeser et al, ; van der Panne, ). To sum up, the mechanisms of regional specialization and geographical concentration both are expected to be positive, while the impact of industrial concentration on efficiency increase may be indeterminate in the literature.…”

“…Existing studies theoretically and empirically support the notion that agglomeration in manufacturing can produce the scale economics and externalities, consequently increasing firm‐level and regional‐level efficiency (Andersson & Lööf, ; Cainelli, Ganau, & Iacobucci, ), but it has not yet been empirically supported whether the efficiency effect happens in the context of CIA. More importantly, although different dimensions of agglomeration economies (e.g., specialization, variety, and competition), based on the work of Glaeser, Kallal, Scheinkman, and Shleifer (), have been well extended from the evidence of different countries both at the firm‐level and at the region‐level (Baptista & Swann, ; Ercole & O'neill, ; Martin, Mayer, & Mayneris, ; Thornhill, ), few studies addressed this effect from a sector‐level perspective.…”