The effect of agglomeration economies mediated by technological proximity on Hungarian firm survival

Abstract

Empirical evidence suggests that firms do not have equal access to the agglomeration economies resulting from the spatial concentration of economic activities. It is especially so in the case of knowledge spillovers. Access to these requires the firms to already have productive knowledge somewhat proximate to the other, “spilled”, knowledge. Studies found that this technological proximity is beneficial for regional growth and to the emergence of new economic activities. However, we know much less about these new activities’ continued survival and technological proximity’s effect on it. For this reason, the paper aims, first, to study the relationship between new firm survival and agglomeration economies mediated by technological proximity. This exercise includes adapting the method, introduced by evolutionary economic geographers, for related variety measurement within regions. The second aim of the paper is to investigate possible differences between foreign and domestic-owned firms interms of firm survival and related variety relationship, as, in Hungary, there is a technological gap between these two groups.

In the paper, first, we summarize the literature on technological proximity and related variety and present the pronounced duality of Hungarian domestic and foreign-owned firms. Next, we present the empirical research design. We limit the sample to manufacturing firms functioning between 2005 and 2011 in Hungarian micro regions. Then, we present our results by using a Cox proportional hazards model on firm survival. For the empirical analysis, we rely on a firm level panel database made available by the Hungarian Central Statistical Office. Our findings show that new manufacturing firms benefit from a general variety of economic activities but, that this relationship is mainly due to regional industries’ related variety, reinforcing the regional path dependent economic structure. This indicates that economic policy could potentially increase new firm survivability by developing firms’ networking capacities, as a regional potential for knowledge spillover alone does not always translate into business practice. This is even more pronounced for firms new to the region and the industry. Finally, foreign-owned firms benefit more from related variety compared to their domestic-owned counterparts.