DETERMINANTS OF AGGLOMERATION IN KOREAN MANUFACTURING INDUSTRIES

Despite accumulated findings on the effects of agglomeration on productivity of manufacturing industries in Korea, little is known about the determinants of agglomeration. Employing an approach similar to Rosenthal and Strange (2001) [Rosenthal, S and W Strange (2001). The determinants of agglomeration. Journal of Urban Economics, 50(2), 191–229.], but using a different agglomeration index, this study examines whether the three microfoundations of agglomeration economies are important to the geographical concentration of Korean manufacturing industries. While estimation results generally confirm that labor market pooling, input sharing and knowledge spillovers contribute to agglomeration, we found some differences with the previous literature. First, non-manufactured inputs are more influential on agglomeration than manufactured inputs. Secondly, aggregate innovation activities, rather than their share of shipments, are a better measure of knowledge spillovers to explain agglomeration. Thirdly, agglomeration of newly established firms is also influenced by the Marshallian externalities with labor market pooling having a stronger and consistent effect. These results are robust to instrumental variables estimation to control for endogeneity related to knowledge spillovers and labor market pooling.