Estimating scale economies, technological change and their effects on the regional concentration of industry.

Author:Karscig, Mark P.

    In the last two decades there have been significant increases in both the theoretical and empirical analysis of two major economic areas. The first of these fields is the concept of economic growth and the sources, causes, and limits associated with that growth. Such things as technological increases, the exploitation of economies of scale, and relatively inexpensive material resource prices have all been cited as contributing factors to the rapid, post World War II economic growth observed in the United States. There have been many studies attempting to estimate and identify the scale economies associated with various industries and regions, but the remaining questions and unexplored avenues are still great in number. Likewise, technological progress, although long regarded as one of the important causes of economic growth, drew little attention from economists until recently. This is due to the fact that it has generally been considered as an exogenous variable, one beyond the scope of empirical economic inquiry. Increased attention by economic researchers has also been given to the analysis of the concentration of industry in geographic space. Richardson (1973) has given us theories concerning economic growth in a spatial context. These theories have been developed on the belief that the concentration of industry implies certain advantages (as well as disadvantages) that may well shape the course of economic growth and change. The basis for this phenomenon has often been attributed to the concept of agglomeration economies. However the actual structure of these phenomena are still not very well understood. Several authors have attempted to list some of the advantages associated with the spatial concentration of industry (Hoover, 1948; Isard, 1956; Richardson, 1978). The empirical evidence which might lead us to added insights on the nature of these economies, as well as scale economies and technological change, has increased in recent years, but its scope remains relatively modest. Much of this work has also been limited by the availability of suitable data bases. Additional empirical studies of this sort are needed in each of these areas. Such studies are an essential aspect of theoretical development as the direction of further theoretical inquiry is shaped by the knowledge of empirical regularities already existing.

    The pioneering works by Solow (1957) and others in measuring technical change, and by Christensen (1976) in the empirical estimation of scale economies, have provided some of that aforementioned direction. There have also been recent contributions to the theory of production made possible by recourse to duality theorems which have aided these empirical studies. The most notable of these contributions has been the introduction of generalized functional forms of flexible production and cost functions. These contributions have allowed us to seek additional information concerning productivity, technological progress, and regional agglomeration economies. They have also caused an increase in the attempts to establish data bases capable of exploiting the potential offered by production functions themselves. As noted earlier, additional research is needed in order to fully understand and examine the significance that aspects of production--such as economies of scale and technical change--have in determining the extent of economic growth and also the spatial distribution of industry.

    Within the context of the above issues, the main purpose of this research is first: to modify and extend earlier empirical works which have sought to estimate industry productivity and/or returns to scale and to add to the existing sample size in order to expand the results. Specifically, a flexible functional form is used to isolate parameters for selected two-digit, Standard Industrial Classification (SIC) industries. These parameters, once estimated, are then presented in order to determine what effects they may have had in contributing to overall growth and productivity in the selected industries during the period 19481994 (previous studies' data set was from 1948 through 1973). The second portion of this research attempts to present a viable means of integrating the above parameters with the aforementioned regional economic area of agglomeration economies. One important aspect of these economies, as outlined by Isard (1956), is the concept of localization economies (i.e. those economies of scale attributed to a specific industry). The scale economies estimated in this research provide industry-specific information about localization economies.

    Before outlining the remaining body of this research, some attention should...

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