Agglomeration Economies in Japan: Technical Efficiency, Growth and Unemployment

This paper examines if the effects of agglomeration economies get manifested in technical efficiency and generate faster economic growth and higher (lower) levels of employment (unemployment). Using the prefecture level data for each of the two-digit groups of industries in Japan, the paper estimates region-specific technical efficiency index based on the stochastic frontier production function framework. The results of the factor analysis show that in most of the industry-groups (with a few exceptions) efficiency has a positive association with external scale variable(s). Though the relationship is not seen to be very strong, it would be equally erroneous to ignore the effect of agglomeration economies on efficiency. In the case of some of the light goods industries the agglomeration effect is relatively stronger. Further, economic growth varies positively with external scale variable(s) and unemployment rate tends to fall with respect to growth and concentration. All this tends to suggest that measures against industrial concentration may be counter-productive, particularly in the context of globalisation when countries are in dire need of raising productivity.

Application of factor decomposition techniques to vertical specialisation measurements

The increasing importance of vertical specialisation (VS) trade has been a notable feature of rapid economic globalisation and regional integration. In an attempt to understand countries’ depth of participation in global production chains, many Input-Output based VS indicators have been developed. However, most of them focus on showing the overall magnitude of a country’s VS trade, rather than explaining the roles that specific sectors or products play in VS trade and what factors make the VS change over time. Changes in vertical specialisation indicators are, in fact, determined by mixed and complex factors such as import substitution ratios, types of exported goods and domestic production networks. In this paper, decomposition techniques are applied to VS measurement based on the OECD Input-Output database. The decomposition results not only help us understand the structure of VS at detailed sector and product levels, but also show us the contributions of trade dependency, industrial structures of foreign trade and domestic production system to a country’s vertical specialisation trade.