The Pitfalls of Using Location Quotients to Identify Clusters and Represent Industry Specialization in Small Regions

Andrew Crawley (), Todd Gabe and Mariya Pominova
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Andrew Crawley: https://umaine.edu/soe/people/andrew-crawley/

No 1329, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines the use of location quotients, a measure of regional business activity relative to the national benchmark, as an indicator of sectoral agglomeration in small cities and towns, and as a measure of industry specialization that might impact the number of new business startups in these places. Using establishment-level data on businesses located in Maine, our findings suggest that the addition of one "hypothetical" establishment in very small towns leads to a dramatic change in the magnitude of the region-industry location quotient. At population sizes of about 4,100 or more people, however, location quotients are reasonably stable. Regression results from an analysis of the relationship between new business activity and regional industry specialization show that the effect of location quotients on business startups switches from "inelastic" to "elastic" at a population size cutoff of about 2,600 residents. Overall, our findings suggest that researchers and practitioners should exercise caution when using location quotients to study small regions.

Keywords: Agglomeration; Industrial Cluster; Location Quotient; Regional Economics; Rural (search for similar items in EconPapers)
JEL-codes: R10 R11 R12 (search for similar items in EconPapers)
Date: 2021-09-10
New Economics Papers: this item is included in nep-geo, nep-isf, nep-sbm and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1329

DOI: 10.17016/IFDP.2021.1329

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