Hisamitsu Saito (p), Toshiyuki Matsuura

Productivity-enhancing effects of industrial agglomeration have attracted great attention in policy circles. For instance, Japanese government invested USD 1.1 billion in “Industrial Cluster Project” from 2001 to 2005. The body of empirical evidence appears to suggest that, all else constant, doubling market size lifts firm productivity by 3–8%.
Compared with the considerable research attention to agglomeration’s influences on productivity, its effects on product quality have not been adequately attended to. Product quality is widely regarded to be a precondition for economic development in this globalization era. To gain entry, for example, in any skill-intensive segment of the internationally fragmented production matrix, even firms in developed nations will improve the quality of the intermediate goods they offer. Hence, it is imperative that we focus on the kinds of agglomeration policies that will facilitate quality improvements essential to firm competitiveness.
This study has been an effort in that direction. Partly for consistency with earlier product-quality representations, we extend Berry’s (1994) logit demand framework by introducing a product quality dimension to the firm’s strategic decision-making. Our theoretical discussion indicates that the productivity improvement due to agglomeration economy frees the inputs necessary for quality enhancement. This finding motivates us to empirically explore the relationship between regional market size and quality improvement.
The Census of Manufactures, published by Japan’s Ministry of Economy, Trade and Industry, is the primary data source in this study. Using its microdata, we construct a panel of individual plant-products from 1994 through 2007. We follow Khandelwal (2010) to estimate product quality at each plant. As for market size variables, following earlier studies of agglomeration, we consider two types of externalities: localization and urbanization economies.
By regressing the estimated product quality on market size, we find statistically significant evidence that urbanization economies enhance product quality. Moreover, agglomeration’s impacts are more pronounced for small and medium sized firms, suggesting that they are more dependent on local economic conditions than their larger counterparts are.
We find that policies to attract new firms to a market area can have very strong product-quality implications. New arrivals to an urban area have an incentive to allocate their received agglomeration benefits to quality as well as productivity. This extra benefit can provide an extra incentive to agglomerate, intensifying the benefits enjoyed by the market incumbents and reinforcing the positive externality feedback.

Klebson Moura (p), Raul Silveira Neto (p), Roberta Rocha

Private or individual returns to education are known to be very high in Brazil, a fact that, together with a very unequal distribution of schooling, is regularly associated with the country very high income inequality. Much little attention, on the other hand, have been directed to measuring the external returns to human capital, in other words, to the gains associated with the spatial or local concentration of human capital in the country. As recent research about the external returns to human capital shows, these gains can be bigger than individual returns and, thus, can play an important role in explaining spatial urban inequalities (Moretti, 2004; Chen, 2007; Heuermann, 2011). Recent research about urban agglomeration gains in Brazil indicates that they are significant (Rocha et al., 2014; Baruffi et all., 2016), but these researches have not explored the importance of local concentration of human capital. The objective of this work is, thus, to identify and to measure the external returns to human capital in Brazil. The research considers all urban agglomeration of the countries and uses a panel data structure, considering the period 2002-2014, that contains individual information and was obtained and compiled from the Ministry of Labor’s Annual Social Information Report (RAIS). In order to identify the external returns to human capital in Brazil, we use a two stages strategy similar to the ones of Groot et al. (2014) and Barufi et al. (2016): it combines exploring the panel structure of the data (first stage) with using instrumental variables (second stage). In addition, we also follow Morreti (2004) and consider the external returns to human capital both for skilled and unskilled workers. The set of results indicates that, in the case of Brazilian urban agglomerations, the external returns to human capital are very high (equivalent to individual returns) and they benefit both unskilled and skilled workers. Consistent with theoretical expectations and similar to Moretti (2004) results, we also found that the impact of local human capital is stronger for unskilled than for skilled workers.

Moisés Obaco (p), Vicente Royuela, Alessia Matano

The literature on agglomeration externalities has in generally focused on analyzing the impact of spatial externalities in developed economies or in large emerging markets. In this paper, we contribute to the literature on agglomeration economies by studying the role spatial externalities in developing countries. We estimate the agglomeration effects of living in cities in Ecuador, a typical small open developing economy that is characterized by a set of unexplored characteristics within this literature such as: small geographical extension, small population size, low urbanization rate, low industrial activity, and huge informal sector mostly composed by unskilled workers. We use micro data for Ecuadorian workers from 2005 to 2015 and we consider Functional Urban Areas as spatial units in order to estimate agglomeration benefits. We find positive and significant evidence of agglomeration benefits: the wage premium of living in cities is around 4.5%. This positive result is robust to the use of different instruments suggested in the literature of agglomeration economies such as historical population and geological variables. Compared with the literature of agglomeration effects, this estimated parameter in Ecuador is slightly higher than in developed economies such as USA or Europe, but lower compared to large emerging markets such as Brazil, Mexico, India or China. In addition, we investigate agglomeration effects in dual labour markets: formal and informal sector, since informal activities represent a large share of the labour market in Ecuador. Using different indicators of informality such as having access to social security, no paying taxes, or the informality definition of the International labour Organization, we find that informality is as important as education level to explain wages. As for spatial externalities, we find a positive and significant impact of agglomeration in both formal and informal sectors. However, agglomeration effects seem to be higher in the formal sector than in the informal one. In particular, our findings suggest that agglomeration effects in the formal sector are from 1.33% to 3.33% larger than in the informal sector, depending on the definition of informality used in the analysis. This evidence shows that agglomeration effects are not unconnected to this reality and underlines the importance of deepening the analysis of the informal labour market in developing countries. Finally, we analyze the wage dynamics of migrant workers among cities. Evidence that is also scarce in developing countries.