Academic journal article Journal of Economics and Economic Education Research

External Economies of City Size and Technology of Production of Manufacturing Industries

Academic journal article Journal of Economics and Economic Education Research

External Economies of City Size and Technology of Production of Manufacturing Industries

Article excerpt


The purpose of this paper is to examine the effects of urbanization economies on production technology of manufacturing industries. Agglomeration economies are external size factors which affect production costs and technology. Urbanization economies are external economies of scale to the firm and industry while localization economies are external economies of scale to the firm.

Most empirical research on agglomeration economies are based on a production function or a relationship derived from a production function. In this study the effects of urbanization economies on a labor demand equation derived from a production function have been measured. Measuring the effects of agglomeration economies directly from a production function is problematic because of lack of data on capital stock, a labor demand equation resolves this problem because it does not require data on capital stock.

The research investigates the following question: Do external economies of city size affect the production technology of manufacturing industries within the city? It is hypothesized that agglomeration economies significantly affect elasticity of substitution parameter. In this study, urbanization economies have been defined by the extent of industrialization of each city, availability of business services and population of each city.

The extent of industrialization of a city has been measured by total manufacturing employment of each city. The number of business service firms measures the availability of the business services within the city. The least square regression analysis has been applied to the labor demand equation to test the effects of urbanization economies on the elasticity of substitution.

The data covers 19 two digit industries within 47 SMSAs for 1972, 1977 and 1982. The U.S. Census of Manufacturing publishes the industry data every five years, the latest available data is for the 2007 and the next conducted for the year ending December 2012, will be available in December 2013. One reason for use of the historical data for 1972, 1977 and 1982 was due to the lack of availability of data for 2012 at the time this research was conducted, the available data for 2007 was also considered outdated. Therefore the researcher decided to use the earlier years data to give room for structural changes from 1982 to 2012. This study is part of a broader study which will continue to test the model for 2012 when the data comes out in December 2013.

The study uses a production function and labor demand approach to test the impact of the city size on the parameters of a production function, e.g. elasticity of substitution. Although, the historical data of this paper pertains to earlier years, but the theoretical foundation of the study should confirm the validity of the results. However, the model will be also test for 2012 data to compare and contrast the results of 1982 and 2012. For the current study data has been collected from Census of Manufacturers, Census of Industry, Census of Population and State and Metropolitan Area Data Book.

The analysis of findings in this study allowed the following conclusions: In regards to the technology of production, the elasticity of substitution was found to be significantly affected by the urbanization economies variables in half of the industries. The study also reveals that total manufacturing size of each city and business service availability within each city are independently more important means of agglomeration economies than population.


Spatial agglomerations or clusters have external economies of same sector businesses and employees for firms within that industry that is called localization economies, while urbanization economies are external economies of total economic and social institutions size of a location which decease production costs of all firms and industries in that location (Harrison, Kelley & Gant, 1996; Hoover, 1971; Isard, 1956; Weber, 1957). …

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