Firm Profitability and Agglomeration Economies: An Elusive Relationship

Recent empirical research has questioned the ability of agglomeration economies to stimulate profitability and healthy financial performance in firms. We devise a cross-sectional sample of approximately 410,000 firms that were active in all subsectors of the manufacturing industry and that were located across 191 NUTS 2 regions of 15 European Union member states in 2005. For each firm, we calculate two profitability indicators and a labour efficiency indicator. We find that the part of the variance of the profitability and labour efficiency indicators that is attributed to regions is very small. Furthermore, fitted multilevel models show that the quantitative effect of regional specialisation, despite being statistically significant, is very small. The results are robust across more refined geographical scales and subsectors. However, the NUTS 2 level remains the major spatial scale of the design and implementation of European Union regional policy. Our results benefit from the power and safety of a large sample and challenge conventional approaches to agglomeration research and cluster policy.

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