Localization economies and establishment size: was Marshall right after all?

This article re-examines the relationship between industry localization and the employment size of establishments. To measure localization, we use an approach that builds on Ellison and Glaeser's (1997, Journal of Political Economy, 105: 889-927) dartboard location model. Our localization index is based on plant (establishment) counts and more closely reflects the firm externalities of Marshallian industrial districts, in contrast with broader measures of localization that include an establishment's internal economies, such as Holmes and Steven's (2002, The Review of Economics and Statistics, 84: 682-690) analysis based on employment location quotients. In line with Alfred Marshall's theory of external economies in industrial districts, we find evidence that plants located in areas where an industry exhibits localization, or excess concentration, are smaller than plants in the same industry outside such areas.