September 2021

The Pitfalls of Using Location Quotients to Identify Clusters and Represent Industry Specialization in Small Regions

Mariya Pominova, Todd Gabe, Andrew Crawley

Abstract:

This paper examines the use of location quotients, a measure of regional business activity relative to the national benchmark, as an indicator of sectoral agglomeration in small cities and towns, and as a measure of industry specialization that might impact the number of new business startups in these places. Using establishment-level data on businesses located in Maine, our findings suggest that the addition of one "hypothetical" establishment in very small towns leads to a dramatic change in the magnitude of the region-industry location quotient. At population sizes of about 4,100 or more people, however, location quotients are reasonably stable. Regression results from an analysis of the relationship between new business activity and regional industry specialization show that the effect of location quotients on business startups switches from "inelastic" to "elastic" at a population size cutoff of about 2,600 residents. Overall, our findings suggest that researchers and practitioners should exercise caution when using location quotients to study small regions.

DOI: https://doi.org/10.17016/IFDP.2021.1329

PDF: Full Paper

Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.

Back to Top
Last Update: September 10, 2021