Externality Interdependencies: An Experimental Framework on the Economic Integration of Path Dependency on Externalities. Applying Multigroup Analysis in Structural Equation Modelling and the case of the Greater Pearl River Delta

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The aim of this study is, first, to extend standard agglomeration and endogenous growth methodology by highlighting the path dependent perspective of externalities, and second, by developing an experimental multivariate framework for empirically measuring these externalities. The importance of path dependency in agglomeration studies is rarely discussed, while it is a main determinant for bilateral externalities. To understand the dynamic relations surrounding these concepts, we introduce the notion of ‘externality interdependencies’. Where ‘externality’ refers to the complementary role of externalities in general, ‘interdependencies’ refers to the path dependent aspect of economic integration. This allows us to set up an econometric and statistical framework to investigate the dynamic relations of institutional distance, geographical proximity and industry similarity on ‘externality interdependencies’. Using data of eleven prefecture-level cities within the Greater Pearl River Delta agglomeration, an experimental framework of a multigroup SEM capturing city-specific bilateral ‘externality interdependencies’ is developed. This MSEM allows testing if externalities have significant differences based on their city-specific parameters, as well as effects between pre-specified concepts. Unfortunately, estimations and results for confirming the proposed dynamic hypotheses are lacking due to empirical under-identification. Several resolutions and revisions are proposed. Nevertheless, the outlined SEM framework is practicable for several applications regarding agglomeration studies, as well as the empirical understanding of measuring regional externalities.
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