Review of Industrial Organization 21: 3–20, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Vertical Industry Linkages: Sources of Productivity
Gains and Cumulative Causation?
KAREN HELENE MIDELFART KNARVIK
Centre for International Economics and Shipping, Norwegian School of Economics and Business
Administration and CEPR, London
Department of Economics, Norwegian School of Economics and Business Administration,
Helleveien 30, 5045 Bergen, Norway
Abstract. In this paper we analyse how vertical industry linkages may work as channels for ex-
ternalities. We test for activity based externalities stemming from output growth and output level in
vertically linked industries. Moreover, by comparing results on localised inter-industry externalities
as well as signiﬁcance of local sales linkages, we try to reveal the strength of self-reinforcing ag-
glomeration forces. A number of Norwegian maritime transport and services sectors are analysed.
The results are promising in the sense that the model allows us to distinguish empirically between
different sources of externalities, and unveils the extent to which vertical industry linkages give rise
to self-reinforcing agglomeration.
Key words: External economies of scale, industrial agglomeration, productivity growth.
JEL Classiﬁcations: C2,L8,O4,R1.
Studies of the turnover of ﬁrms and the dynamic evolution of industries have a
long tradition within Industrial Organization.
Determinants of industry structure,
ﬁrm size and growth have been analysed dating back to Gibrat (1931). Explanation
models divide between stochastic growth rates to systematic factors as advertising
behaviour and market power. In this paper we analyse one possible factor underly-
This research has been ﬁnanced by the Research Council of Norway. The authors would like to
thank two anonymous referees and the editor William G. Shepherd and Ottar Mæstad, Jarle Møen
and Tor Jakob Klette for valuable comments and suggestions.
See e.g., Jovanovic (1982), Eckard (1987), Lambson (1991), Hopenhayn (1992), Baldwin and
Gorecki (1994), Sutton (1997) and Davies and Geroski (1997). For earlier work, see Simon and
Bonini (1958) and Ijiri and Simon (1977).