Productivity Spillovers from Physical Proximity in the Manufacturing Industries

Theoretical models have long shown that spillovers from knowledge investments are of great economic importance to sustained economic growth and innovation and that these spillovers may be facilitated by physical and technological proximity. However, such localized spillovers have not been identified using data from developing countries. In this paper, we use a general measure of knowledge and a measure of geographical distance to examine the relationship between knowledge spillovers and both technological and geographical proximities using micro panel data from the Census of Manufactures in Taiwan (1986-1996), South Korea (1983-1988) and Indonesia (1990-1995). Our results suggest that both physical and technological proximity are economically and statistically significant among manufacturing firms in all three countries. In particular, a firm’s expected future TFP is positively and significantly affected by having more neighbors in the same location and industry: for any given location and industry, firms in the top half of the productivity distribution are significant sources of knowledge spillovers while firms in the bottom half are not. In addition, more productive firms are more likely to continue production while younger firms are more likely to exit.