When are localization and urbanization economies important?

The objective of this paper is to analyze the influence of industry characteristics on the localization and urbanization agglomeration patterns of new firm location. To this end, we analyze the location decisions of new manufacturing firms in Spain. First, for a 3-digit level, we identify for each industry which type of agglomeration economies –localization or urbanization- explain new firm’s location. And second, using the coefficients obtained in these estimations for both agglomeration economies, we analyse which industry characteristics are the sources that explain differences in the strength of these economies. We focus on industry characteristics related to the three microfoundations of agglomeration that have been most prominent in the theoretical literature: labor market pooling, input sharing and knowledge spillovers. Our results point out that for industries with high influence of localization economies on their location patterns what matters is the labour market pooling mechanism. For the industries with higher effect of urbanization economies on their location patterns, knowledge spillovers and output sharing are the sources of agglomeration. The dependence of natural resources affects negatively the incidence of urbanization agglomeration economies on firm location.