How important is geographical agglomeration to factory efficiency in Japan’s manufacturing sector?

Abstract

In this paper, geographical spillover potential is modeled and empirically examined using factory-level data from Japan's Census of Manufactures. First, the efficiency of each factory is estimated using a non-parametric data envelopment analysis (DEA) model for each industry. Second, the geographical distances to the most efficient factory in the prefecture and Japan overall are estimated. Third, the determinants of the factories' performance are identified and estimated. We find that clustering occurs in each industry, and efficient factories concentrate in certain regions. The percentage of efficient firms out of the total number of firms is particularly high in the Chubu and Tohoku regions. The estimation results also suggest that proximity to the most efficient factories plays a statistically significant role in determining the efficiency of factories in Japan in most industries. However, this is not the case in high-tech industries.

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