Does spatial agglomeration affect firm fixed investments? Evidence from Italian NUTS 3 regions

In this paper we analyse if the composition of the local system in which firms are located does affect their fixed investment decisions. In particular, we ask if the level of firms’ investments in new machinery and equipment can depend on local banks availability within clusters characterized by a high level of sectoral specialization or variety. While in the former case firms and banks may benefit from specialization economies and higher knowledge of sector performance, in the latter they may find more profitable to diversify their credit portfolio and minimize financial risks. We measure these effects by interacting bank density and spatial agglomeration data for each Italian NUTS 3 region (i.e. Province). For the period 2000-2007 we estimate an Error Correction Model for investments, using an unbalanced panel of 13,000 Italian firms extracted from AIDA, a dataset collected by Bureau Van Dijk providing information on balance sheet data for more than 200,000 Italian joint stock companies. We estimate dynamic investment equations using the one-step system GMM estimator, which allows to control for potential endogeneity bias due to simultaneity and unobserved heterogeneity. Our preliminary estimates seem to support the existence of strong interactions between the local availability of banks and a relatively diversified local system of production which affect the level of investments of manufacturing firms. Since investments in new machinery and equipment can be considered as a proxy for capital-embodied technical change, our evidence not only confirms previous results stressing the role of bank development in increasing the probability of process innovation and in reducing the cash flow sensitivity of fixed investments spending, but also integrates it by emphasising the role of related variety in driving technical change.