2.8 Urban Density Is Associated with Higher Firm Entry

in advanced economies such as Spain (De la Roca and Puga 2017). Over a working life, these gains could amount to between 50 percent and 125 percent, Duranton (2015) estimates. Access to inputs (labor, finance, materials, energy), a more conducive business environment, or cultural amenities will attract better and more entrepreneurial firms.

Figure 2.8 uses data from the World Bank Enterprise Survey to show that as countries urbanize, the density of new firms increases. In the United States, larger cities are found to offer more jobs in start-ups: the elasticity of employment in new startups per capita with respect to city scale is estimated to range from 0.07 to 0.22 (Glaeser and Kerr 2009). Urban regions in most member countries of the Organisation for Economic Cooperation and Development (OECD) also have higher levels of business dynamics, in terms of the rates of both business creation and destruction— particularly those urban regions that are at the frontier of national productivity (OECD 2017).7

Agglomeration externalities refer to gains in productivity arising from “learning” benefits intermediated outside (external to) the market related to knowledge creation and spillovers from new technology and innovation, networking, collaboration, and information sharing (Duranton and Puga 2004). For example, a firm may benefit from knowledge “in the air”—as Alfred Marshall called it. There is no market for this knowledge, and it has no price. Benefits can include the gains from being together with similar firms (often called localization economies), as stressed by Marshall (1890). They can also

FIGURE 2.8 Urban Density Is Associated with Higher Firm Entry

20

New firm density 15

10

5

0

20 40 60 80 100

Urbanization New firm density Fitted values

Source: World Bank staff elaboration based on data on the density of new firms from the World Bank Enterprise Survey and database and urban density from the United Nations Population Division, World Urbanization Prospects: 2018 Revision. Note: New firm density is defined as the number of new businesses and new limited liability corporations registered in the calendar year. Urbanization refers to people living in urban areas per unit area, as defined by national statistical offices.

include the spillovers across diverse sectors (often called urbanization economies), as emphasized by Jacobs (1961). Workers may gain human capital by interacting with a larger number and higher quality of workers, thus contributing to the dynamic learning effect (see dashed diagonal line in figure 2.7). US cities that experience higher growth in the number of college graduates also see a rapid increase in average wages, beyond the obvious compositional effects, than those with stagnating stocks of human capital, suggesting important knowledge spillovers (Moretti 2004). More recently, researchers have recognized that improving benefits from agglomeration is not only about bringing more and better “clones” to the city but also a greater variety of them—which is arguably an aspect of agglomeration externalities (see Duranton 2016; Diamond 2016; Atkin, Faber, and Gonzalez-Navarro 2018; Handbury and Weinstein 2015). For instance, the higher prices in cities are offset by the accessibility of products and the extensive varieties of goods and services available, meaning that actual prices are not any higher than that in other locations, Handbury and Weinstein (2015) observe.

Cities also allow for learning among firms through spillovers in knowledge-intensive activities, such as innovation in products and processes, and research and development (R&D). R&D is much more spatially concentrated than economic activity in general,8 partly due to the sharp attenuation with distance of such sharing.9 More than 90 percent of the patents in the United States have been granted to residents of metropolitan areas, and virtually all venture capital investments have been made in major cities. The core of Silicon Valley contains three-quarters of the industrial patents filed from the San Francisco Bay area and 18 of the top 25 regional zip codes in terms of patenting (Kerr and Kominers 2015; Chatterji, Glaeser, and Kerr 2014). In Germany, patents tend to be concentrated in 11 of the 97 regions (Fornahl and Brenner 2009). Similarly, venture capital investment within the biotech sector is particularly concentrated in areas of a 10-mile radius or less (Audretsch and Feldman 1996; Gompers and Lerner 2001; Kolympiris, Kalaitzandonakes, and Miller 2011). In France, six regions account for 75 percent of all corporate R&D workers, compared with 45 percent of the production workers (Carrincazeaux, Lung, and Rallet 2001). The departments of the three main cities in Colombia that host 40 percent of the population generate more than 70 percent of innovation in the country (Nieto Galindo 2007). Higher integration of technology-intensive manufacturing or knowledge-intensive services in global value chains is associated with enhanced concentration (Grover and Lall 2021) (see detailed discussion in chapter 1).

Agglomeration costs refer to the fact that concentrating populations have costs as well as benefits, including higher crime; congestion in transport, land, and housing; and disease. Indeed, COVID-19 has spread most rapidly in the major cities, raising questions about their future in an era in which the internet permits working from the suburbs. Such costs—and the compensation and remedies for such costs—are often not considered in interpreting estimates of the wage elasticity. For instance, attracting a worker to a higher crime urban area may require employers to offer a higher wage without any presumption that productivity will increase.