Since the Industrial Revolution, the functional boundaries of cities have changed significantly with increased mobility and the development of information technology. The central place theory of Christaller focuses primarily on explaining the distribution, size, and number of cities and towns, and the location of economic activity. Based on the central place theory, classical regional and urban theories such as polarization-diffusion have emerged. On the other hand, the empirical research of the urban systems dissects the organization of urban systems and the nature of urban networks. Urban systems are defined as regional, national and global connected and interdependent urban spaces. With the incorporation of the network dimension into external economic and urban growth studies, urban studies have shifted from agglomeration externalities to network externalities. The interplay between economic entities that are not spatially adjacent will also generate externalities, which some scholars call “urban network externalities”, “regional externalities”、“externality fields” , and “borrowed size”.

As early as the 18th century, agglomeration economies were formed in some countries and regions, in which the same (similar) industries or complementary industries agglomerated in specific and adjacent geographic locations to form industrial clusters or economic networks. Duranton and Puga summarized three micro-mechanisms of agglomeration economy: “sharing” of intermediate inputs and public facilities; “matching” between market entities and factors; “learning effect” of knowledge interaction and technology diffusion. Agglomeration theory gives an explanation of urban economic development from a microscopic level. Agglomeration externalities refer to the additional benefits obtained by economic actors from being located in agglomeration areas under these mechanisms, including cost reduction and income increase brought by factor sharing, and learning opportunities brought by knowledge spillovers. In addition, scholars of new regionalism believe that knowledge spillovers are also affected by social embeddedness, cultural proximity and institutional thickness, pointing out their regional features.

Development of transportation and information technology has strengthened the endogenous correlation of economic development between cities, and “spaces of flows” constituted by information flow, technology flow, human flow, and logistics have integrated cross-regional structures. Agglomeration economies are no longer limited to isolated space. Local places are absorbed into the inter-city network flows. From the perspective of the global system, the embeddedness of most cities in domestic and international city networks has a greater effect on city performance, compared with the impact of city’s scale, that is, city status is determined by its position in the network, rather than local agglomeration capabilities. Capello first proposed the concept of “urban network externalities”, pointing out that network economic cooperation participants can obtain the advantages of network externalities Network externalities may stem from economies of scale, knowledge effects, transaction cost reductions and organizational advantages. The agglomeration externality decreases by distance, while the network externality is not strictly confined in space and changes with the strength of the urban functional relations.

The agglomeration externalities at the urban scale refer more to the close upstream and downstream relationships between enterprises, knowledge and information spillovers, and large-scale labor markets. Due to the proximity of space, enterprises in different industries generate new ideas due to the spatial gathering of industries and people, and promote local economic development. In contrast to industrial clusters' cooperative networks based on spatial proximity, network externalities emphasize the benefits of information or financial linkages beyond regions and cities, highlighting the effects of non-localization.

The agglomeration externality at the urban agglomeration scale means that cities within the urban agglomeration generate agglomeration economies through resource sharing, mutual competition and mutual learning, thereby promoting spatial spillovers. Cities within the urban agglomeration will continue to attract the spatial agglomeration of factors of production and economic activities, and continue to expand the agglomeration. The network externalities at the urban agglomeration scale means that with the strengthening of transportation and economic links, cities within the urban agglomeration acquire externalities outside the urban agglomeration, share resources through network channels, and learn from each other. With the help of the trend of networking, cities absorb the external economic factors of urban agglomerations, improve resource allocation efficiency, match resources on a larger spatial scale, and improve production factors allocation efficiency, thereby generating network externalities and promoting economic development.

This entry is adapted from the peer-reviewed paper 10.3390/land11040586