The mechanisms of agglomeration: Evidence from the effect of inter-industry relations on the location of new firms

The objective of this paper is to explore the relative importance of each of Marshall’s agglomeration mechanisms by examining the location of new manufacturing firms in Spain. In particular, we estimate the count of new firms by industry and location as a function of (pre-determined) local employment levels in industries that: 1) use similar workers (labor market pooling); 2) have a customer-supplier relationship (input sharing); and 3) use similar technologies (knowledge spillovers). We examine the variation in the creation of new firms across cities and across municipalities within large cities to shed light on the geographical scope of each of the three agglomeration mechanisms. We find evidence of all three agglomeration mechanisms, although their incidence differs depending on the geographical scale of the analysis.