The Dynamics of Agglomeration Externalities along the Life Cycle of Industries

Abstract

This paper investigates the changing roles of agglomeration externalities along the industry life cycle. We argue that industries have different agglomeration needs in different stages of their life cycles because their mode of competition, innovation intensity, and characteristics of learning opportunities change over time. For 12 Swedish manufacturing industries, we determined for each year between 1974 and 2004 whether the industry was in a young, intermediate, or mature stage. Whereas MAR externalities steadily increased with the maturity of industries, the effect of local diversity (Jacobs’ externalities) was positive for young industries but declined and even became negative for more mature industries.