The spatial clustering of productive firms: Spillovers versus sorting into good locations

Abstract

A large literature in economics and regional science argues that firms benefit from proximity to both productive firms and greater amounts of overall economic activity. Using individual level data on all single-location firms in Montreal, Toronto, and Vancouver for the 2001 to 2012 period, this study empirically investigates these hypotheses. It finds that a 10 percent increase in the average quality of firms within 75 meters causes a firm to experience a 0.24 percent increase in productivity, with greater spillovers imparted by more productive firms. However, the study finds no evidence that firms become more productive if the total amount of economic activity increases within 500 meters holding the average quality of nearby firms constant.