Marshall’s Scale Economies and Jacobs’ Externality in Korea: the Role of Age, Size and the Legal Form of Organisation of Establishments

This paper revisits the concept of agglomeration economies by estimating the effects of localisation, urbanisation and local competition on labour productivity using establish-ment-level data in Korean manufacturing industries. It is found that, when an establish-ment locates in a more localised/specialised, more urbanised/diversified and more competitive area, its workers become more productive due to external benefits from agglomeration. Issues of self-selection bias and omitted variable bias are addressed by instrumenting the variables measuring localisation economies and controlling for the fixed effects of establishments/location and industries/year. However, the external effects from the spatial proximity of other establishments vary across the categories of industry type, age, size and legal form of organisation of establishments. Establishments in traditional heavy manufacturing industries receive more external benefits in a less diversified area, while those in transport equipment manufacturing industries enjoy the largest benefits from localisation. Externalities exist for establishments aged between 2 and 7 years, having at least 10 workers, being corporate and having multiplants (or not being headquarters). Establishments in relatively young industries rely more on diver-sified environments, while establishments in relatively old industries receive greater external benefits in the same industry cluster. This result supports the product life-cycle location theory of Duranton and Puga. 1