The Effects of Spurious Agglomeration and Agglomeration Economies on the Productivity of Foreign-Owned Manufacturing Businesses in Ireland

The purpose of this paper is to examine the impact of spurious agglomeration and agglomeration economies on the productivity of foreign-owned manufacturing businesses operating in Ireland.
Substantial productivity differentials exist between indigenous and foreign owned manufacturing businesses operating in Ireland. While the higher productivity levels in foreign-owned businesses are commonly attributed to transfer pricing, the presence of agglomeration economies may also affect
productivity levels. Recent evidence shows that agglomeration economies have a significant impact on the productivity of manufacturing businesses in Ireland but the effects of agglomeration economies are significantly different for indigenous and foreign-owned manufacturing businesses in Ireland (Noonan, 2016). However, the effects of spurious agglomeration on the productivity of
businesses in Ireland have been overlooked. This study contributes to the literature by examining the effects of spurious agglomeration and agglomeration economies on the productivity of foreign
owned manufacturing businesses in Ireland.
Spurious agglomeration (DeCoster and Strange, 1993) occurs when firms concentrate in a particular geographic area in the absence of any agglomeration advantages. However, even if the location of the firm among other firms is not dependent on agglomeration economies, it does not mean that it is not benefiting from agglomeration economies (Parr, 2002) Therefore, this paper also considers the impact of four different types of agglomeration economies on the productivity of foreign-owned manufacturing businesses in Ireland. These are internal economies of scale, external localization
economies, related variety and external urbanization economies.
Utilizing data from the Census of Industrial Production 2009, a series of GMM regressions are estimated. The results show that spurious agglomeration has a positive and significant impact on productivity. Increases in the number of foreign-owned businesses of the same nationality in Ireland leads to productivity increases for businesses of that nationality. It may be the case that foreign
owned businesses operating in Ireland are sharing knowledge with other businesses of the same nationality in relation to successfully conducting business in Ireland. It may also be the case that the more foreign-owned businesses operating in Ireland, the stronger their bargaining power when lobbying the government. We also find clear evidence that urbanization economies have a positive and significant impact on productivity. The availability of a pool of skilled labour in the industry and in related industries is also
important for increasing productivity. The availability of domestic inputs has a negative impact on productivity. It may be the case that domestic inputs are more expensive or of a poorer quality than those available abroad.