Agglomeration and productivity on the spotlight

The development of the transport system is known to affect e.g. labour availability and transport costs, but it also has an impact on the dissemination of know-how and the specialization of subcontracting chains through agglomeration.

Agglomeration refers to the regional concentration of economic activity. Agglomeration is based on micro-level factors related to the operations of companies. Transport system changes have an impact on business-to-business links, labour market interactions and the generation, dissemination and accumulation of knowledge and skills.

A study commissioned by the Ministry of Transport and Communications and the Finnish Transport and Communications Agency Traficom investigated the magnitude of the agglomeration effects caused by transport systems changes and the relationship between direct and indirect economic impacts of transport systems. The study also investigated the conditions to assess agglomeration effects caused by transport system improvements in Finland.

The agglomeration benefits of transport projects are typically around 0-30% of the direct economic benefits. However, not all of the benefits are additional to the direct benefits which are already assessed in the cost-benefit analysis. According to the literature, agglomeration effects are quite local and weaken rapidly as travel time increases. Thus, transport system improvements have significant agglomeration effects within urban areas but improving connections between cities produces only small agglomeration effects.

Today, it is possible to assess the agglomeration effects of transport systems in Finland improvements qualitatively based on the changes in generalised travel cost of commuting and business trips. Existing travel demand models can produce estimates of accessibility changes on commuting and business trips. These changes in accessibility can be used in assessing changes in agglomeration. Quantitative estimates of agglomeration benefits require further research and methodological development. The data available in Finland is well suited for studying the effects of agglomeration.

The study was carried out in collaboration with FLOU Oy, ETLA, Kaupunkitutkimus TA Oy and Ramboll Finland Oy. The final report can be found at https://www.etla.fi/julkaisut/ (in Finnish).