AbstractSpatial correlations exist for many economic phenomena. We also know such interactions are typically weaker
across country borders than within countries, due to institutional, infrastructural or cultural factors. However,
in spatial econometric analyses, the effect of borders is rarely taken into account, and all borders between
regions are treated as equal. We distinghuish between different types of borders by splitting our weight matrix
in two, and creating separate lags for within-country and cross-border effects.
We demonstrate the effectiveness of this method in an analysis of average productivity in a region for several
manufacturing sectors. Without implying causality, we relate this productivity to average productivity in
surrounding regions as well as to agglomeration externalities both in its own region and in surrounding
regions. We find border effects are indeed quite present: spatial lags within the country are sometimes
statistically significant, those across borders never. However, the only agglomeration effect that is statistically
significant across borders is unrelated variety.
Keywords agglomeration externalities; spatial econometrics; border effects
Status Submitted to a journal