Agglomeration, regional specialization and firm performance: revisiting and unravelling the old riddle

Research within economic geography has long recognized the importance of agglomeration and regional specialization for firm performance. Yet, despite decades of study it remains unclear whether the latter is primarily driven by agglomeration, regional specialization, or a combination of both. Using census data from Denmark, we estimate the impact of agglomeration and regional specialization on total factor productivity, finding that regional specialization has greater explanatory power. Agglomeration influences performance only when it interacts with regional specialization and primarily benefits knowledge intensive service firms. Additionally, contrary to common belief, it is not smaller firms but medium-sized ones that gain the most from agglomeration. We discuss theoretical, managerial, and policy implications.