Chapter 9: Heterogeneity versus Specialization
9.1 INTRODUCTION What type of economic activity will promote positive externalities and, therefore, economic growth? This question is important given the debate in the literature about the nature of economic activity and how it affects economic growth. The Marshall–Arrow–Romer (MAR) externality concerns knowledge spillovers between firms in an industry. Arrow (1962) presented an early formalization; the paper by Romer (1986) is a recent and influential statement. Applied to cities by Marshall (1961 [orig. 1890]), this view says that the concentration of an industry in a city facilitates knowledge spillovers between firms and, therefore, the growth of that industry. According to this approach, externalities work within industries (Loesch 1954). These theories of dynamic externalities are extremely appealing because they try to explain simultaneously how cities form and why they grow. MAR, in particular, predict that industries cluster geographically to absorb the knowledge spilling over between firms. In addition, they predict that regionally specialized industries grow faster because neighboring firms can learn from each other much better than geographically isolated firms. A very different position has been attributed to Jacobs (1969). Jacobs perceives information spillovers between industry clusters to be more important for the firm than within-industry information flows. Heterogeneity, not specialization, is seen as the most important regional growth factor, so Jacobs’ theory predicts that industries located in areas that are highly industrially diversified should grow faster.1 Glaeser et al. (1992) analyze the six largest industries in each of 170 US cities. Their results are consistent with the presence...
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