Nature & Effects of Agglomeration Economies and Manufacturing Firms in Punjab

Abstract

This research quantifies the nature of agglomeration economies and its effects on the annual turnover of the manufacturing firms located in Punjab, a province of Pakistan. Using firm level cross-section data, this research first explains the nature of agglomeration within manufacturing firms in Punjab by calculating the agglomeration indicators such as urbanization and localization. We used the firm’s distance from urban centre as a proxy for urbanization. We used spatial autocorrelation as a measure to show the localization of firms. We constructed the translog production function to measure the effects of urbanization and localization on firms’ annual turnover. This research has used spline regression to measure the impact of distance of the firm from urban centre on the annual turnover of the firm. The overall impact of both agglomeration economies is positive on firms’ turnover. However, the effect of urbanization economies is more prevalent than the effects of localization economies in Punjab. At two-digit sector level, thirteen out of twenty-three manufacturing sectors showed positive effect of urbanization on firm’s turnover. For localization, seven sectors showed positive effect on firm’s turnover. Spline regression shows there is a negative relation between distance of the firm from urban centre and the annual turnover. Firms’ annual turnover attenuates with the increase in its distance from urban centre. The results are consistent with the literature and the existing status of manufacturing sector of Punjab.