Geographical factors and business failure: An empirical study from the Madrid metropolitan area

Abstract

Geography has been considered a decisive factor in different fields of business-related research. This paper provides some evidence concerning the role of geography on business failure in urban environments. The paper use spatial econometric methodology to evaluate the impact of the geographical location of external economic agents on the probability of business failure. In addition, it is shown that probabilities of business failure for geographically close firms are correlated. A firm-level empirical application based on 3125 industrial small and medium firms (SMEs) located on the Madrid metropolitan area (Spain) confirms that the geographical proximity between firms, external economic agents and transport facilities has a determinant impact on business failure among these companies. This study contributes to gaining a greater understanding of the factors that determine SMEs business failure, highlighting the importance of geographical factors.