A Study On Industrial Agglomeration, Localization Economy And The Optimal Agglomeration Scale

Industry agglomeration has always been an important issue that many researchersfocus on. Since Marshall has put forward the externalities theory for industryagglomeration, many scholars have tried to explain this phenomenon from differentangles. On the basis of sorting and summarizing relevant literature, this article attemptsto explore the existence of “localization economies” and how it affects the productivityof the whole industry. Based on that, this article also proposes the theoretical optimalscale for intra-industry enterprises to agglomerate in a certain region.This article constructs an econometric model by revising the traditionalCobb-Douglas production function. The econometric model in this paper uses industryproductivity as a dependent variable and the industry scale as the coreindependentvariable. According to the panel data of Hangzhou27two-digitmanufacturing industries from2003-2010, this paper carries out empirical research tocheck the existence and influence of “localization economies”. The main conclusionsin this paper are as follows.1. In municipal regions,“localization economies” hassignificant positive influence on industry productivity. Using Hangzhou as an example,the elasticity for “localization economies” on the overall manufacturing industryproductivity is about0.4355, which means the productivity will increase43.55%if theindustry scale expands by100%.2. There is an inverted-U pattern effect that industryscale has on the industry productivity. This implies that enterprises in a certain industryagglomerating in a particular region will promote the overall productivity for thisindustry. While exceeding a critical point, too many enterprises agglomerating in aparticular region will suppress the productivity.3. There exists a theoretical optimalscale for a certain industry. After calculation, the average optimal number ofenterprises for Hangzhou two-digit manufacturing industries is885. Different kinds ofindustries have different optimal agglomeration level. Theoretically, the optimal scalefor “raw-material industry” is314enterprises,“capital-intensive” industry is126enterprises and for “technology-intensive” industry the optimal industry scale is559enterprises. This suggests that “technology-intensive”industry can support a largernumber of enterprises to agglomerating in a certain region compared with some“resource-intensive” industries. At last, this paper also provides some policy advice according to the actualsituation in Hangzhou. First of all, the government should promote industryagglomeration properly. Second, the government should make different policies fordifferent industries according to their different characteristics. Finally, the governmentshould improve infra-structure and the bearing capacity of resources so that alleviatingthenegative impact of industry agglomeration as much as possible.