Agglomeration and New Establishment Survival: A Mixed Hierarchical and Cross-Classified Model

Recent empirical studies in regional science and urban economics show that agglomeration economies may be one source of the uneven distribution of economic activities and economic growth across cities and regions. At the same time, the body of research into the importance of agglomeration economies for the performance of firms is still growing. Such development is necessary, as the theories that underlie agglomeration economies are microeconomic in nature, but still insufficiently understood. In this study, we focus on the determinants of survival among new establishments in the advanced producer services sector in the Netherlands. Employing a mixed hierarchical and cross-classified probit regression, we introduce a model of establishment survival that is specific to characteristics of the internal and external environment of the establishment. Controlling for firm and sector characteristics, we conclude that location accounts for about 4% of the variance in the probability of survival of new establishments. We also find that localization and urbanization economies have a positive effect on the survival of new establishments. However, new establishments with large start-up sizes appear to profit more from agglomeration economies than new establishments with small start-up sizes.