ABSTRACT
This paper focuses on agglomeration circumstances influencing economic growth across
European urban regions. Empirical studies on agglomeration economies are characterized
by a high diversity of approaches. Rosenthal and Strange (2004) present a brief review of
papers focusing on urbanization economies as advantages of cities applying to every firm
or consumer. Noteworthy is that most early (pre-1990s) works on agglomeration simply
used cities’ population as a measure of agglomeration. These studies assume that the popu-
lation elasticity of productivity is constant. Rosenthal and Strange (2004) conclude that
this literature has found relatively consistent evidence: doubling the population of a city
increases productivity by 3-8%. After the findings of Glaeser et al. (1992), who
studied sectoral agglomeration effects more than the aggregated effect, it has become
more commonplace to analyse growth variables using employment in cities, suggesting
a relationship between agglomeration and economic growth and thereby introducing the
possibility that increasing returns in an urban context operate in a dynamic, rather than
static, context (Beaudry & Schiffauerova, 2009; De Groot et al., 2009; Melo et al.,
2009). Sector-specific localization economies, stemming from input-output relations
and firms’ transport cost savings, human capital externalities and knowledge spill-overs,
are generally offset against the general urbanization economies. A large body of literature
builds on this new conceptualization of agglomeration economies, as reflected in three
recent overviews and meta-studies. These studies show that the relation between agglom-
eration and growth is ambiguous and indecisive with regard to whether specialization or
diversity is facilitated by (sheer) urbanization as context. The first goal of this paper is to
take a step towards the concept of renewal as a possible way out of this currently see-
mingly locked-in debate and to introduce related variety and unrelated variety as concepts
in the empirical modelling of growth across European regions. These concepts have been
tested only at the country level in Europe,1 and no pan-European test has been provided
due to data limitations. This paper provides a first pan-European test of these concepts.
