Staff Report 190

Localization of Industry and Vertical Disintegration

Thomas J. Holmes | University of Minnesota, Federal Reserve Bank of Minneapolis

Published April 1, 1995

This paper considers Marshall's argument that geographic concentration of industry facilitates specialization. I use Census data on manufacturing plants to examine the relationship between localization of industry and vertical disintegration. I find that establishments located near other establishments within the same industry tend to make more intensive use of purchased inputs than establishments without own-industry neighbors. This relationship only holds among industries that are geographically concentrated; having neighbors makes no difference in geographically dispersed industries. I argue that this pattern is consistent with a model in which increased opportunity for specialization is the reason some industries localize.

Published In: Review of Economics and Statistics (Vol. 81, No. 2, May 1999, pp. 314-325)

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