Cross-border agglomeration benefits

Spatial 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 distinguish 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 invariably different from those across borders.