The Effect of Spatial Agglomeration of Industrial Activities on Total Factor Productivity in Chemical and Machinery Industries

explained by the amount of inputs used in production. As such, its level is determined by how efficiently and intensely the inputs are utilized in production. Economists have long recognized that total factor productivity is an important factor in the process of economic growth. It plays a critical role on economic growth and Comparative advantage of industries. So, identification of factors affecting productivity is very important. This paper aims to analyze the effect of spatial agglomeration of industrial activities on total factors productivity in Chemical and Machinery Industries by using the Generalized Methods of Moments (GMM) on panel data for 27 provinces of Iran over the period 2000-2011.The results have shown that the relationship between the variable of localization (specialization) and TFP has quadratic form -U inverse shape- and the urbanization index (diversification) has positive effect on total factor productivity in Chemical and Machinery Industries.