Agglomeration and New Establishment Survival: A Mixed Hierarchical and Cross-Classified Model

Recent empirical studies in regional science and urban economics show that agglomeration
economies may be one source of the uneven distribution of economic activities and economic
growth across cities and regions. At the same time, the body of research into the importance of
agglomeration economies for the performance of firms is still growing. Such development is
necessary, as the theories that underlie agglomeration economies are microeconomic in nature,
but still insufficiently understood. In this study, we focus on the determinants of survival among
new establishments in the advanced producer services sector in the Netherlands. Employing a
mixed hierarchical and cross-classified probit regression, we introduce a model of establishment
survival that is specific to characteristics of the internal and external environment of the
establishment. Controlling for firm and sector characteristics, we conclude that location accounts
for about 4% of the variance in the probability of survival of new establishments. We also find
that localization and urbanization economies have a positive effect on the survival of new
establishments. However, new establishments with large start-up sizes appear to profit more
from agglomeration economies than new establishments with small start-up sizes.