The spatial scope of human capital externalities and firms’ location in Brazil

What the paper says

Purpose This paper aims to analyze the existence and spatial scope of the effects of human capital agglomeration on firms’ location decisions within the context of Brazilian urban centers. Design/methodology/approach By leveraging unique micro-geographic data for all Brazilian manufacturing activities, we estimate the local determinants of new establishments’ location choices as a function of the concentration of college-educated workers within different distance bands, along with other economic and environmental characteristics. To achieve this, we employ a Poisson model with instrumental variables for the local number of college-educated workers and a control function approach. Findings The main findings indicate that the externalities associated with human capital concentration are spatially constrained in scope. The external gains of human capital are strongest within 1 km of the firm’s chosen location and dissipate entirely beyond 5 km. The results remain robust even when accounting for a comprehensive set of controls for both observable and unobservable local characteristics and align with the idea that human capital spillovers are more significant over shorter distances. Originality/value Our results provide the first evidence on the spatial scope of human capital spillovers and their influence on the location choices of new establishments in Brazil. Our findings contribute to the relatively scarce literature on the spatial extent of agglomeration economies in developing countries and carry significant policy implications, particularly for urban areas characterized by similar structural patterns and deficiencies in transportation infrastructure. Specifically, understanding the spatial scope of agglomeration gains can help design more effective regional policies.