Externalities and Industrial Development

Using panel data for five capital goods industries, this paper estimates dynamic externalities. In contrast to previous studies, panel data allow separation of externalities from fixed effects and identification of a lag structure. I find strong evidence of Marshall–Arrow–Romer (MAR) (own industry, or localization) externalities. For Jacobs (urbanization) externalities effects are smaller. In terms of lag structure, for MAR externalities the biggest effects are typically from several years ago, but die out after six years. For urbanization phenomena, effects persist to the end of the time horizon of the data–eight or nine years back.