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External effects of agglomeration and human capital is a more than a century old research topic. Their theory and empirics have evolved over time to interact with more economic factors and to dig more deeply into heterogeneous effects, whose empirical evidence remains scarce, especially for developing countries. Furthermore, local human capital and agglomeration are often introduced in separate models rather than a single model in explaining productivity. These limitations motivate the implementation of this thesis. To achieve this, firm-level panel data from Vietnam is employed. This developing country provides an interesting case because its level of agglomeration and human capital is still low but its socio-economic conditions are highly dynamic with the high growth rates of urbanization and university-educated labor force (production inputs) as well as income (production output), in comparison with developed countries. The heart of this thesis lies on its chapter 2 and chapter 3, which are summarized as follows.
Chapter 2 aims at finding which agglomeration forces play the dominant role in affecting firms’ productivity and how agglomeration induces unequal influences across various firm characteristics. To achieve this, a six-year panel data set is employed, and the estimation is based on a production function that the left-hand side is firm’s total factor productivity while the righthand side is local technology which contains the agglomeration terms. In the first step of regression, consistent values of productivity are obtained following a strategy that combines the control function approach with the instrumental variables technique to tackle endogeneity caused by a possibility that firms choose their production inputs based on their productivity. In the second step, log of productivity is regressed on agglomeration proxies and controls, using multiple fixedeffects terms to control for unobserved factors and local shocks. Estimated results show that urbanization rather than specialization has a positive impact on productivity. Besides, the agglomeration effects are stronger for foreign-owned, small-sized, or young firms.
Chapter 3 shows attempts to find evidence of human capital externalities along with urbanization economies, given that the two external terms are rarely placed together in a single specification in literature. The estimation is implemented based on a production function whose context is an unique spatial equilibrium resulting from migration behaviors of entrepreneurs and workers. In this function, the externalities play the role of a region-specific productivity shifter. The model is regressed primarily with the instrumental variables technique to tackle possible identification problems. Between the two external terms, the resulting estimates confirm only the existence of urbanization economies. However, human capital externalities are found to be strong and significant in high-tech industries, implying that the effects of local human capital are very heterogeneous across different technological levels.