The Dynamics of Agglomeration Externalities along the Life Cycle of Industries

This paper investigates the changing roles of agglomeration externalities along the industry life cycle. It is argued that industries have different agglomeration needs in different stages of their life cycles because their mode of competition, innovation intensity, and learning opportunities change over time. For twelve Swedish manufacturing industries, it is determined for each year between 1974 and 2004 whether the industry is in a young, intermediate, or mature stage. Whereas Marshall-Arrow-Romer (MAR) externalities steadily increase with the maturity of industries, the effects of local diversity (Jacobs' externalities) are positive for young industries, but decline and even become negative for more mature industries