Does geographical concentration affect the profitability of Russian enterprises?

Abstract

The article shows that profitability is, first, the best measurable approximation to productivity at the level of individual enterprises, and, second, an indicator that captures the possible benefits (or costs) of geographical concentration (agglomeration externalities) in their entirety. The analysis of open microdata of Rosstat and the Federal Tax Service on organizations with an average number of employees of no more than 250 reveals that in Russia the differences in profitability between cities and between industries with different levels of spatial concentration are small and poorly related to geographical conditions (the so-called benefits of localization and urbanization). Worse terms of trade, in particular higher labour costs, outweigh the productivity gains from concentration. At the same time, there are weak signs of a smaller spread of profitability among enterprises in more central territories due to better opportunities for imitation and exchange of experience. The profitability of enterprises is significantly influenced by their industry, but this relationship does not arise due to differences between industries in the degree of their geographical concentration. To assess the agglomeration effects, new measures of centrality that appreciate the network nature of territorial relations between residents of localities were used.