This paper is one of the first to estimate how regions affect the productivity, wage cost and cost competitiveness (i.e. the productivity–wage gap) of firms. Detailed linked employer–employee panel data for Belgium and the Hellerstein–Neumark framework are used to estimate dynamic models at the establishment level. The findings show that interregional differences in productivity and wages are significant, but to a large extent due to drivers at the individual and/or firm level. The research provides evidence that the specificity of the Brussels region can be linked to its higher density compared with the rest of Belgium. Robustness tests suggest that the relatively better ceteris paribus performance of firms in Brussels is limited to the service sector. ; SCOPUS: ar.j ; info:eu-repo/semantics/published