The impact of spatial concentration on enterprise performance

Abstract

The objective of this paper is to reveal the impact of spatial concentration of business in the Russian cities on enterprise productivity. The hypotheses are the following: urbanization level and home market potential positively affect enterprise performance; localization economies are positive and start decreasing after some point due to congestion and excessive competition; regional transport infrastructure, business climate and human capital positively affect enterprise performance. We use firm level data augmented with city and regional data. Fixed effects are applied in order to deal with endogeneity. Agglomeration economies are considered in the light of opportunities for knowledge spillovers, input sharing and labor market pooling. Our results confirm that agglomeration economies and home market potential are important for the enterprise performance. We find positive urbanization and diversity economies, while localization economies have an inverted U shape. Results can be used to improve regional policy. For instance, significance of home market potential emphasizes the importance of transport infrastructure. Significance of agglomeration effects implies that if a sufficiently large number of firms work in a city, performance of each firm improves.