Sources of productivity improvement in industrial clusters: The case of the prewar Japanese silk-reeling industry

•We examined sources of productivity improvements in industrial clusters.•We focused on silk-reeling clusters in the early twentieth century Japan.•We found evidence of the existence of selection effect.•We found agglomeration effect in less productive plants.•Selection and agglomeration explain industrial clusters' productivity advantage.

We examine two sources of productivity improvements in localized industrial clusters of the silk-reeling industry in prewar Japan. Agglomeration improves the productivity of each plant through positive externalities which shift plant-level productivity distribution to the right. Selection expels less productive plants through competition, which truncates the distribution on the left. We find evidence of agglomeration effects that benefit less productive plants and selection effects in clusters. Here, a cluster is defined by the density of own-industry plants within an area. The results complement previous studies that find positive agglomeration effects in the most productive firms, but no selection effects in cities (Combes et al., 2012; Accetturo et al., 2011). Our results suggest that the sources of productivity improvements in localized industrial clusters might be different from those in cities.