Three essays on agglomeration economies in the Korean manufacturing sector

This dissertation consists of three essays on agglomeration economies in the Korean manufacturing sector. The first essay investigates the existence of potential external benefits from labor market pooling using establishment-level data. A pooled labor market enhances better matching between firms and workers by allowing firms to easily find workers with specific skills, and it raises the probability of a firm-specific idiosyncratic demand for labor to be offset between firms. According to the theoretic model by Krugman (1991), an increase in individual firms\u27 responsiveness to the firm-specific idiosyncratic demand for labor leads to an increase in expected profits. The empirical results of this essay show that establishments in the larger labor pool are likely to experience more flexible adjustments in employment. A doubling of own industry employment within the commuting distance of the area where an establishment locates increases the establishment\u27s flexibility in employment adjustment over two years by 37 percent. The second essay revisits the concept of agglomeration economies by estimating the effects of localization, urbanization, and local competition on labor productivity in Korean manufacturing industries. The results show that, when an establishment locates in a more localized/specialized, more urbanized/diversified, and more competitive area, its workers become more productive, due to external benefits from agglomeration. However, the external effects from the spatial proximity of other establishments vary across the categories of industry type, age, size, and the legal form of organization 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 localization. Externalities exist for existing establishments aged between 2 and 7 years, having at least 10 workers, being corporate establishments, and having multi-plant (or being non-headquarters). The third essay investigates the magnitude of localization economies by analyzing the relocation pattern of establishments in the Korean manufacturing sector. In this essay, relocation of establishments is identified by their move across the border of wards, counties, or cities and distinguished between beyond and within their workers\u27 commuting distance. It seems that relocation beyond commuting distance costs more than that within commuting distance since the former includes additional costs related with searching for, hiring, and training new workers. Key findings of this essay show that external benefits from agglomeration are large enough to be recognized and cared about by entrepreneurs through relocation beyond the border of their workers\u27 commuting area. When the own industry\u27s share of employment in all manufacturing industries becomes doubled through relocation, the probability for establishments to relocate over a long distance across the boundary of their workers\u27 commuting area rises by 17%. The results for sub-samples divided by the age of establishments show that older establishments are more likely to relocate over a long distance to an area with disproportionate presence of establishments in the same industry. These results seem to fit product life cycle theory by Duranton and Puga (2001). As the production process of the product becomes standardized, the firms producing that product tend to relocate to the specialized area where they can reduce the production costs by increasing dependence on the existing intermediate input suppliers, who are more likely to appear in a more specialized area