Effects of regional network economies on industrial productivity in Japan: dynamic total factor productivity function approach

Abstract Improving productivity performance is essential for achieving regional economic sustainability. With the advent of the network society, regional economic agents have benefited not only from local within-region interactions but also from external out-of-region economies. However, it remains unclear whether localized external economies or spillovers of externalities through inter-regional networks are more significant in improving productivity performance. Therefore, this study examined the relationships between productivity performance and geographical externalities from an industry perspective using regional economic data for Japan and employed a dynamic total factor productivity function approach. It also assessed the impact of high-quality transportation infrastructure improvements on productivity catch-up. The results revealed the long-run effects of inter-regional networks on the productivity performance of industries. Furthermore, it revealed that, as a geographical externality, the “borrowed size” effect contributed significantly to productivity improvements in both manufacturing and non-manufacturing industries. These findings suggest that enhancing both high-quality transportation infrastructure and inter-regional transportation networks is likely to improve industry productivity performance.