Agglomeration economies as manifested in technical efficiency at the firm level

This paper makes an attempt to assess the significance of agglomeration economies in the case of two Indian industries, electrical machinery and cotton and cotton textiles. Using firm level data, an efficiency index based on a statistical stochastic frontier model is generated to examine its relationship with external scale variable(s). A positive association between technical efficiency and city size is evident although after a certain threshold level city size works more as diseconomies than economies of scale. Undue emphasis on industrial dispersal may, therefore, lead to suboptimal utilisation of resources. (C) 1999 Academic Press.