Vertical linkages, agglomeration and the organization of production in European regions

In this paper we test for the presence of localisation economies due to input-output linkages between vertically related firms located in the same region. To undertake this we estimate, by duality, a quadratic cost function using a sector by sector panel at the European regional level in the period 1985-1995. Vertical economies are derived from the concept of scope economies and associated to regional advantages of having in the proximity specialised providers of intermediate goods. Several specifications are tested and results indicate that the necessary conditions for the existence of economies of vertical disintegration are satisfied as well as the sufficient conditions for some sectors, showing that vertical diseconomies are stronger for the more geographically concentrated industries. These effects are not pervasive since there are also opportunities for efficiency gains from a more vertically integrated production for some sectors in several regions.