When Agglomeration is Necessary but not Sufficient for Productivity in Egypt

In a Nutshell

• Spatial agglomeration has always been the most important driver of industrial growth in developing countries thanks to significant spillovers.
• Our main findings show that, in the Egyptian context, productivity spillovers gained from agglomeration measures outweighed the negative effects of competition implied by congestion. The latter is chiefly due to the lack of good infrastructure.
• From a policy perspective, it is important to boost clusters to help SMEs expand. Indeed, our results show that micro and small firms are more likely to benefit from localization and diversification compared to medium and large firms.

This policy brief examines the nexus between firms’ productivity and economies of agglomeration in Egypt. In the Egyptian context, productivity spillovers gained from agglomeration measures outweighed the negative effects of competition implied by congestion. The latter is chiefly due to the lack of good infrastructure. Moreover, micro and small firms are more likely to benefit from localization and diversification compared to medium and large firms. The brief shows that agglomeration economies are necessary for productivity but not sufficient since they require a good infrastructure.