Agglomeration economies in the Finnish manufacturing sector

Regional concentration of population and economic activity is a common phenomenon both in Finland and the other most developed countries, which refers to the existence of agglomeration economies. Two types of economies are usually recognized to be important: specialization (Marshall externalities) and diversity (Jacobs externalities) economies. The former refer to the geographical concentration of a specific industry and the latter to the industrial diversity of the local system. This study examines the relationship between agglomeration economies and regional productivity in the manufacturing sector in Finland. A distinction is made between the effects of urbanization and localization economies. The production function method is applied to the manufacturing sub-sectors in the 83 NUTS 4-level regions in 1995 and 1999. The results support the regional specialization more than diversification even if some differences can be seen between the manufacturing sub-sectors.