Industrial agglomeration and production costs in Norwegian salmon aquaculture

Abstract

During the last decade, empirical evidence of regional agglomeration economies has emerged for some industries. This paper argues that externalities from agglomeration are not only present in some manufacturing and service sectors, but can also occur in primary industries, such as aquaculture. Econometric analyses in this literature have primarily estimated rather restrictive production function specifications on aggregated industry data. Here, cost functions are estimated on firm-level observations of Norwegian salmon aquaculture farms. This approach provides us with measures of the cost savings due to agglomeration externalities. Furthermore, we avoid aggregation biases and can test a rich set of hypotheses on how these externalities affect the structure of costs at the firm level. According to the econometric estimates, there are significant cost savings associated with localization in regions with a large salmon aquaculture industry, suggesting the presence of positive agglomeration externalities. In fact, the results here suggest that for small firms localized in clusters, agglomeration externalities can compensate for internal economies of scale, making them competitive relative to larger firms localized outside clusters. The econometric results imply that there are significant welfare gains to be made from changes in the government regulation of the industry.