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The Determinants of Geographic Concentration of Industry: A Quantitative Analysis

Taking the early U.S. automobile industry as an example, we evaluate two competing hypotheses on geographic concentration of industry: local externalities versus employee spinoffs. Our findings suggest that both forces contribute to industry agglomeration through their specific channels, and the spinoff effect can be viewed as a special form of local externalities. Calibrating our model to the quantitative pattern of industry evolution reveals that traditional local externalities are main driving forces of agglomeration. Particularly, the local economy and related industries play an important role by fostering new entrants. Spinoffs play a secondary role and contribute to an increased concentration at later stages of the industry life cycle.