Abstract: In the process of urban economic development, spatial agglomeration, due to its positive impact on technological progress and economies of scale, becomes an important driving force in improving the total factor productivity of the manufacturing sector, as well as optimizing the urban production space. Because of its importance, further research is needed on agglomeration externalities and their effects on productivity. This paper focuses on related variety as a special type of agglomeration externality, bases on the framework of new economic geography, includes the dynamic effects of heterogeneous enterprise entry and exit, and describes the impact mechanism of urban related variety on manufacturing productivity. Based on the product space theory, this paper also calculates the relevant variety index of China's urban manufacturing industry and tests the theoretical hypotheses empirically, using micro data from Chinese industrial enterprises. The results indicate that relevant variety has a positive effect on urban manufacturing industry. Its promoting effect not only comes from the agglomeration externalities of sharing, learning, and matching, but also from the dynamic impact on the emergence and exit of heterogeneous enterprises. This article can provide decision-making references for optimizing urban industrial spatial layout and improving urban manufacturing productivity.
