This paper uses plant level data of Pakistan’s manufacturing sector and investigates whether industry agglomeration has a positive or negative effect on technical inefficiency of firms. We test this hypothesis by using the translog stochastic frontier and technical inefficiency model with cross-section data from CMI for 1995-96, 2000-01 and 2005-06. We also evaluate the nature and extent of industry agglomeration. The paper shows that geographic concentration of industries was widespread, but it was declining over time. Size of population, road density, and pool of technically trained workers all helped to promote agglomeration of industries. In the beginning, firms were not valuing the importance of technological spillovers, as they were benefiting from localization economies (or intra-industry spillovers). However, this trend had reversed in more recent years, which may be attributed to the inability of firms to cope with increased regional competition. Convincing evidence shows that industry agglomeration has significantly benefited firms, indicated by a strong negative association between the agglomeration index and technical inefficiency of firms. Moreover, increased localization was beneficial for textile and leather industry, but not so for firms in food, beverage and tobacco, and chemical, rubber and plastic industries where firms were greatly benefitting from urban diversity in the districts, including information transfer, infrastructure availability, access to business services, information technology, and financial services. These results have strong policy implications.
Abid Burki; Khan, M.A. Agglomeration economies and their effects on technical inefficiency of manufacturing firms: Evidence from Pakistan (IGC Working Paper). International Growth Centre (IGC), London, UK (2013) 38 pp.