Agglomeration Economies and their Effects on Productivity and Efficiency of Manufacturing Firms: Evidence from Pakistan

While some industry sectors benefit from being geographically concentrated, other sectors see greater benefits when they are located in more diverse areas and can take advantage of inter-industry learning economies.

IGC research from Abid A. Burki and Mushtaq A. Khan (Lahore University of Management Sciences) examining large scale manufacturing in Pakistan suggests that sectors respond in different ways to agglomeration economies. While the textile and leather industries benefited from localisation economies (that is, learning from other local firms in their own industry, also known as intra-industry spillovers), other sectors including food, beverage, tobacco, chemical, rubber and plastics were much more likely to benefit from urbanisation economies (that is, learning from all firms in a district, regardless of sector, also known as inter-industry spillovers).

Inter-industry learning is a particularly important way to achieve agglomeration benefits and includes factors such as information transfers, availability of infrastructure, and access to specialised business, information technology or financial services.

Burki and Khan also find that while localisation economies had previously been more prevalent in Pakistan, suggesting that firms did not adequately value the importance of technology spillovers and inter-industry learning, this pattern was changing. Over time they observed a decrease in the value of localisation economies and argue that this may be due to the inability of firms to cope with increased regional competition within their sector.

The research, using the translog stochastic frontier and technical inefficiency effects model combined with cross-section data from Pakistan’s Census of Manufacturing Industries for 1995-96, 2000-01 and 2005-06, provides convincing evidence for industry agglomeration significantly benefiting firms. It therefore is a valuable contribution to the literature examining how agglomeration economies, and more specifically, technical inefficiencies in the production process, work.

It also is the first research to spatially map manufacturing industries in Pakistan. The research finds that 73.5% of industries in Pakistan are either highly or moderately agglomerated. The most highly concentrated industry is the ship-breaking industry, located in a single location in Pakistan, with the second most highly concentrated industry being the sports and athletic goods industry, located in Sialkot and its surrounding districts.