Susan Helper, Case Western Reserve University

Productivity among small US manufacturing firms is widely dispersed: the most productive 10 percent of manufacturing firms have at least one and a half times the productivity of the median firm, even within narrowly-defined industries. Based on interviews and survey data on U.S. parts-manufacturing firms, we find that the most productive firms differ significantly from other firms in their ability to benefit from external economies. Location in an urban area is associated with a significant increase in productivity. The high-productivity urban firms compete in a different manner than do other firms. In particular, productive single-plant firms employ skilled urban product designers, and have CEO's that are active in networking. These external economies help them compete against rivals with lower land costs and lower wages. While parts- makers that do product design are more productive in urban areas, they are not more likely to locate in cities, probably because their owners do not appropriate many of the productivity gains, since these firms pay a significant wage premium there. This pattern of results suggests the presence of a variety of market failures.