Agglomeration and Firm-Level Efficiency in South Africa

Where firms cluster together, there are efficiency gains from outsourcing, labour pooling and knowledge spillovers. Earlier research into agglomeration in South Africa focussed on sub-national regions and found that capital stock, human capital, access to markets and exports are significant determinants of output growth. This paper examines whether location explains differences in efficiency at firm level. Data from the 2003 and 2007 World Bank Enterprise Surveys allow one to examine firms in the four major South African cities. This paper reports estimates of a firm-level production function that incorporates location-specific explanatory variables to examine the scope of agglomeration economies. The place-specific size of the home market, level of education and share of exports are found to be positively related to output per worker at firm level. A description of the survey data identifies possible indicators of the sources of agglomeration economies. The size and significance of the inland Gauteng Province’s economy is reflected in its firms’ use of intermediate inputs and skilled labour.