By Giulio Cainelli (University of Padova), Robert Ganau (University of Padova & LSE) and Anna Giunta (Roma Tre University).
Global Value Chains and the concomitant international dispersion of production activities have reshaped the comparative strength of agglomeration economies to deliver competitive advantages to firms and territories. In this article, Cainelli, Ganau and Giunta explore the role of agglomeration economies in Italy and Spain in the context of Global Value Chains.
The globalisation of production activities occurring during the last 25 years has seriously undermined the competitive advantage arising from spatial agglomeration economies. Italy and Spain represent two interesting cases in this respect. In both countries, industrial districts have traditionally played a key role. Indeed, the organisation of production has traditionally been based on a strong, territorially bounded division of labour among small- and medium-sized specialised firms. The specialisation of these local firms in a particular industry has generally favoured the diffusion of locally embedded practical and tacit knowledge; competitive advantages related to the availability of specialised workers; and low transaction costs based on high levels of trust and cooperation among economic agents.
Globalisation and international fragmentation of production have been a major blow to this industrial district economy, and turned many traditional strengths into weaknesses (Giunta et al., 2012). It progressively came to the fore that production was going to be easily dis-embedded from places, and the expectation arose that industrial districts would have lost the agglomeration strength of their social milieu – i.e. their true competitive advantage would have come to an inescapable decline (Sforzi, 2009). Yet, upon closer inspection, the World does not seem to be that flat!
In a recent article (Cainelli et al., 2018), we investigate the impact of agglomeration economies on labour productivity in the era of Global Value Chains (GVC). To this end, we consider a sample of manufacturing firms from two Southern European countries, namely Italy and Spain, that are both deeply involved into GVCs (OECD, 2012), and where the geographic concentration of production has been – and is still – quite significant (Cainelli, 2008; Boix, 2009).1 We bring the GVC perspective into the ‘agglomeration-productivity’ nexus by considering firms’ positioning along the value chain, thus distinguishing between final firms – i.e. producers that serve end markets – and suppliers – i.e. producers that sell to other firms – based on information on produced-to-order goods (Accetturo and Giunta, 2016; Agostino et al., 2015). This distinction is relevant for several reasons. First, suppliers are generally described as suffering from a productive discount in comparison with final firms, that operate in the most highly rewarding GVC stages (Razzolini and Vannoni, 2011). Second, suppliers make up the bulk of the industrial structure in several countries, Italy and Spain among them.
By highlighting firms’ positioning along the value chain, we are also able to investigate the role of firm heterogeneity within the agglomerative space. In fact, firm heterogeneity, i.e. the co-existence of firms that differ in size, productivity, and technology, is a feature common to many agglomerated areas (Wang, 2015). Why is such heterogeneity relevant? Because firms with different characteristics differ in their capability to absorb local externalities, and this affects the impact of agglomeration forces on productivity (Cainelli and Ganau, 2018).
Our empirical evidence, based on fixed effects and instrumental variable estimations, leads us to identify three key insights:
1) First, firms located within more highly agglomerated areas differ in their capability to absorb local externalities. This implies a more complex relationship between agglomeration and firm-level productivity, that can be better understood by taking the different forms of firm heterogeneity into account. In our case, the heterogeneity that derives from firms’ positioning along the value chain.
2) Second, a direct link between agglomeration and productivity is found only for supplier firms, i.e. the relatively weak type of firm operating along GVCs. Specifically, we do find that a 1% increase in local agglomeration leads to a 2.30% increase in Italian, and a 2.33% increase in Spanish suppliers’ productivity. This is an important result in the era of production globalisation, because a lack of positive agglomeration externalities, in tandem with a relatively small operational size, can be expected to increase the probability of suppliers to exit the market.
3) Third, our evidence indicates that the effect of agglomeration on final firms is most likely only indirect, i.e. it stems from vertical relationships among suppliers and final firms within the agglomerated area. More efficient local suppliers may transfer a part of their agglomeration benefits to final firms, thus boosting the aggregate productivity of the local system, and impeding further territorial dis-embeddedness.
- Firm-level data are drawn from the EFIGE dataset (Bruegel), and integrated using balance sheet information drawn from the Amadeus database (Bureau Van Dijk). We consider an unbalanced panel dataset consisting of 2,235 Italian and 1,790 Spanish firms observed over the period 2010-2014.
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This post is based on
Cainelli G., Ganau R., Giunta A. (2018) Spatial agglomeration, Global Value Chains, and productivity. Micro-evidence from Italy and Spain. Economic Letters, 169, 43–46.
About the authors
Giulio Cainelli is Full Professor of Economics and Director of the Department of Economics and Management “Marco Fanno” of the University of Padova (Italy).
Roberto Ganau is Assistant Professor of Economics at the Department of Economics and Management “Marco Fanno” of the University of Padova (Italy), and Research Affiliate at the Department of Geography and Environment of the London School of Economics and Political Science (United Kingdom).
Anna Giunta is Full Professor of Applied Economics at the Department of Economics of the Roma Tre University, and Director of the Manlio Rossi-Doria Center for Economic and Social Research.