Agglomeration

Agglomeration is the concentration of economic activity in a particular place, such as a city or metropolitan region, where firms, workers, and institutions are located in close proximity. The proximity generates agglomeration economies, a set of benefits that arise from clustering activities and people.

Key sources of these benefits include labor pooling, which provides a large local pool of workers with varied skills; input sharing and specialized suppliers and services; and knowledge spillovers, where ideas and innovations spread more readily through close interaction. Reduced transport and transaction costs, along with thicker product and service markets, also contribute to higher productivity within agglomerations.

Different forms of agglomeration exist, including urban agglomerations (cities), regional clusters (industry-specific areas within a region), and global production or innovation networks. Well-known examples include Silicon Valley in the United States, the Rhine-Ruhr region in Germany, the Pearl River Delta in China, and industrial districts such as Emilia-Romagna in Italy. These concentrations are often supported by transport infrastructure, institutions, and policy frameworks.

Agglomeration also carries potential downsides. Congestion, pollution, rising land and housing costs, and increased competition for amenities can create diseconomies of scale if growth is unbalanced or unmanaged.

In theory, agglomeration dates to Alfred Marshall, who highlighted labor pooling, input sharing through specialized suppliers, and knowledge spillovers as core mechanisms. Modern work in new economic geography and cluster theory models how proximity and increasing returns to scale reinforce regional growth, while empirical measures use location quotients, density, and related indicators.