Testing urbanization economies in manufacturing industries: urban diversity or urban size?

Whether urbanization economies are caused by urban diversity or urban scale is not clear in regional and urban economics literature. Many empirical studies have used either city population size or urban industrial diversity to measure urbanization economies and have reached different conclusions. This paper argues that city size mainly captures the pure scale economies of urban public goods, and may generate net diseconomies when a city size is too large. Urban industrial diversity can also enhance firm productivity. Using the 2004 China manufacturing census data, we test simultaneously the effects of urban size and industrial diversity on firm productivity, controlling for localization economies and human capital externalities. We found that city size effect does exist, but too large a city size indicates net diseconomies. Firms also benefit from industrial diversity, and the strength of such benefit increases with city size but decreases with firm size. The overall results support Jacobs's idea that small firms benefit more from urban diversity