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There is abundant evidence that many firms cluster together in space and that there is an association between clustering and productivity. This paper moves beyond identifying the broad effects of clustering and explores how different types of firms benefit from agglomeration. It advances research on agglomeration by showing, first, that not all firms gain to the same degree from co-location and, second, that businesses with different internal capabilities capture different forms of geographical externalities.The empirical analysis focuses on Canadian manufacturing establishments operating over the period from 1989 to 1999. It finds young, small, domestic, and single-plant businesses, which typically cannot draw upon the internal resources available to older, larger, foreign-controlled, and multi-plant firms, benefit more from clustering in most but not all respects. These smaller and younger firms experience stronger productivity gains stemming from the localized pooling of workers with skills that match their needs and from knowledge spillovers, but weaker productivity gains from the presence of upstream input suppliers.

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