To a great extent it is often presupposed that proximity between the manufacturer and
the producer service provider is important. Hansen (1990), for example, notes that the
relationship between producer services and regional productivity differences assumes
tight geographical closeness between producer services and the manufacturing sector.
Also, in the aforementioned type of modeling, such as in Klaesson (2001), it is frequently
assumed that the intermediate sector produces in proximity to the final sector, i.e. the
presence of localization economies is often taken for granted. The intermediate sector is
in principle only a necessary element in order to explain concentration of the final sector.
The typical raison d’être for the role of proximity between the manufacturer and the
service provider is that the cost to the former for obtaining the services from the latter
rises with distance. Examples of such costs are travel time to meetings and frequency of
contacts, etc., (c.f. O’Farrell & Hitchens, 1990a). Coffey & Bailly (1991, p.109)
emphasize the role of frequency of contacts and mark; “...it is the cost of maintaining
face-to-face contacts between the producer on the one hand, and their inputs and markets,
on the other hand, that is potentially the most expensive element of intermediate-demand
service production”.
The reasoning above implies that manufacturing firms have much to benefit from
being co-located with producer services. Notwithstanding the fact that many producer
services is produced for other industries in the service sector, as shown by inter alia Goe
(1990), producer service firms also have much to benefit from co-location with
manufacturing firms since the latter sector constitutes a market for the former sector. The
purpose of the present paper is to investigate the tendencies of co-location between the
producer service sector and the manufacturing sector in Swedish functional regions. The
employment in these sectors is modeled as being determined simultaneously, i.e. the
location of the producer service sector is a function of the location of the manufacturing
sector and vice versa. The rationale for the simultaneous approach comes from the
assumption of an input-output schedule between the two sectors. A model developed by
Venables (1996) is used to derive the linkages between the two sectors, which in turn
leads to the result that the location of the two sectors is interdependent. Furthermore,
previous empirical research has indicated simultaneous elements. Marshall (1982), for
instance, confirms a bi-directional relationship between manufacturing and producer
services. More precisely, the author finds that the organizational structure of the producer
service industry affects manufacturing demand for such services at the same time as the
organization of the manufacturing sector influences the supply of producer services4. To
account for the described interdependency a simultaneous-equations model is employed
for estimation. That is, how the size of the manufacturing sector affects the size of the
producer service sector (and vice versa) is investigated. The study is based on Swedish
employment data in 2000 and is a static cross-section investigation. Thus, the study looks
for a static picture of co-located sectors, which can be interpreted as an equilibrium
outcome, (c.f. Johansson, 2001). A distinction is made between knowledge-intensive
advanced manufacturing and traditional manufacturing on the one hand, and knowledge-
intensive and non knowledge-intensive producer services on the other. Accessibility
based on time distances is incorporated into the analysis to allow for inter-regional
4 Marhall’s (1982) study is based on a postal survey in the British city regions of Birmingham, Leeds and
Manchester and, hence, is based on a limited sample of manufacturing establishments.