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Open Access Publications from the University of California

Agglomeration Economies and Industry Location Decisions: The Impacts of Vertical and Horizontal Spillovers


Economic analysis of production processes and performanace typically neglects consideration of spatial and industry inter-dependencies that may affect economic performance, although there is increasing theoretical recognition that such linkages may be both substantive and expanding. In particular, thick market or agglomeration effects may arise due to knowledge or other types of spillovers associated with own-industry (horizontal), and supply-side or demand-driven(vertical), externalities. In this paper we provide a conceptual and empirical framework for measuring and evaluating such spillovers, which allows us both to quantify their cost-effects, and to evaluate their contribution to location decisions. We focus on the U.S. food manufacturing sector, and the spillovers that may occur across states within the sector and from agricultural production (supply) and consumer buying power (demand). And we find substantive total and marginal cost-impacts in both spatial and industry dimensions, which appear to be motivating forces for regional concentration patterns of the U.S. food manufacturing industries.

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