Agglomeration Economies and the Profitability of French SMEs

This paper examines whether agglomeration economies – productivity gains arising from the spatial concentration of economic activity – translate into higher real profitability for French Small and Medium- Sized Enterprises. Relying on financial data from a panel of 675,000 French SMEs between 2017 and 2022 and on the characteristics of French employment areas, the analysis shows that while economic density increases value added, it raises labor costs to a similar extent, consistent with the literature on agglomeration effects on productivity. These two effects offset each other, so that real profitability, measured by gross operating surplus per worker, is no higher in economically denser areas. This result is supported by the analysis of sectoral heterogeneity, which shows that, within a given sector, both value added at factor cost and labor costs respond similarly to agglomeration variables, leading to at least partial compensation of the effects. The latter analysis nevertheless identifies a few sectors where this compensation is not complete.