Knowledge Spillovers, Labor Pooling, and Firms’ Agglomeration: A Case Study of Pakistan

Asim Iqbal () and Anjum Siddiqui ()
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Asim Iqbal: University of Education Lahore
Anjum Siddiqui: York University

Journal of the Knowledge Economy, 2025, vol. 16, issue 5, No 27, 16338-16364

Abstract: Abstract The study investigates the various reasons for the persistent firms’ agglomeration in Punjab to understand if technological advancement and other external economies are driving such clustering. We first quantify agglomeration through the Ellison-Glaeser (EG) index and find evidence that firms choose to cluster in a select few districts only. However, the existing literature lacks comprehensive analysis on the specific microeconomic factors and natural advantages driving this agglomeration, particularly in developing regions such as Punjab. Our results indicate that knowledge spillovers significantly increase industrial concentration with a coefficient of 0.0033. Labor pooling also shows a significant effect, where a unit increase in labor force concentration decreases the EG index by 0.0152. Scale economies exhibit a notable impact with a coefficient of − 0.2496. We find evidence that a key factor for narrow clustering is the natural advantages of energy, resources, and water available in select areas. However, evidence on input sharing is weak, and transportation costs show mixed results in affecting agglomeration. We also find that the past pattern of industrial agglomeration has an important influence on the current location decisions of firms; one reason for this is that the spatial diversification policies of the government on manufacturing location have not been successful rather they have contributed to agglomeration. The study adds to our understanding why manufacturing clusters in a few districts in Punjab, offering lessons for other developing economies with similar geography or industrial policies.

Keywords: Geographical agglomeration; Industry; Knowledge spillovers; Labor pooling; Natural advantages; Scale economies (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13132-024-02416-8

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