Factors affecting Regional Competitiveness

1
Factors affecting Regional Competitiveness

• A Presentation to the Committee of the Regions
• Growth Pole Workshop

Saxon Brettell, Cambridge Econometrics
9 December 2005
2
Overview of the presentation

• Objectives of policy
• Sapir conclusion
• CE/ECORYS/CU study for DG Regio and the Cohesion
  Report
• Cambridge Econometrics-led in association with
  Ecorys and with Ron Martin of Cambridge
  University
• a contextual review of regional assets
• empirical findings on growth and convergence
• update
• Implications for the Regions

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Objectives of policy

• To raise competitiveness and productivity of EU
  as a whole, by improving performance of lagging
  regions
• To help EU catch up with the USA, in line with
  Lisbon target of making the EU the most
  competitive and dynamic knowledge based economy
  in the world by 2010
• To increase social, economic and regional
  cohesion across the EU
• To help regions adjust to shocks of EMU,
  enlargement, globalization and technological
  change

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Sapir conclusion in 2004

• ..despite the considerable institutional
  achievements of the EU its economic performance
  has been mixed. While macroeconomic stability has
  considerably improved during the 1990s and a
  strong emphasis on cohesion has been preserved,
  the EU system has failed to deliver a
  satisfactory growth performance

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What is regional competitiveness?

• Regions not like nations, nor like firms, but
  stuck in the middle (Cellini and Soci, 2001)
• But most definitions of regional competitiveness
  refer to
• the ability or regions to produce goods and
  services which meet
• the test of international markets (EC, 1998)
• This links regional competitiveness with a
  regions export base, and with notions of
  comparative advantage
• However, this ignores the non-tradable component
  of a regions economy

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..it is a complex concept
Target outcomes
Regional
Quality of life
Standard of living
Regional performance
Gross regional product
Revealed Competitiveness
Labour
productivity
Employment rate
Sources of
Research and
Infrastructure
Institutions
SME
technological
and
and
FDI activity
Competitiveness
development
development
human capital
social capital
Economic
Innovative
Regional
Skills of
structure
activity
accessibility
workforce
Environment
Decision
centres
Social structure
Regional culture
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A one-fits all theory that can underpin
regional policy choices does not exist!

• Depends on your view of regional development
  processes
• Different theories stress different determinants
  of productivity and growth
• imply different regional economic evolutions
• Variant theories
• Standard growth/trade theory
• Various increasing returns theories (Kaldorian,
  Endogenous Growth Theory, etc)
• New Economic Geography models

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Standard Growth/Trade Theories

• Regions compete on basis of factor endowments and
  technological efficiencies - ie comparative
  advantage
• Economic integration promotes regional trade, and
  specialization
• Assumes geographical diffusion of technology, and
  mobility of factors
• This and specialization through comparative
  advantage promote regional convergence of
  productivity over time
• That is, initially low productivity regions
  should catch up with initially high productivity
  ones (though patterns of comparative advantage
  can change)

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Increasing Returns Theories

• In endogenous growth theories, regions compete on
  basis of human capital and technology/knowledge
• Economic integration promotes trade, factor
  mobility and increasing returns to scale
• Geographical diffusion of technological advance
  assumed localised
• Regions that initially lead in technology and
  have concentrations of skilled workers attract
  further labour and capital - generate local
  externalities - give certain regions absolute
  advantages
• Regional differences in growth and productivity
  likely to be self-reinforcing (cumulative)
• May be little regional convergence, even
  divergence over time

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New Economic Geography Models

• Localised increasing returns (external economies)
  key source of regional competitive advantage
• Creative labour may provide a comparative
  advantage
• Economic integration promotes trade, regional
  specialisation and spatial agglomeration (at
  various scales)
• Spatial agglomeration and clustering important
  sources of external increasing returns
• Regional specialisation may enhance the risk of
  regional shocks
• Factor mobility reinforces spatial disparities in
  growth and productivity
• Hence regions may not converge over long run, and
  may display persistent core-periphery and other
  patterns of inequality

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From theory to evidence

• Empirical results suggest
• productivity convergence across EU-15 regions has
  been very slow
• regionally-based externalities and localised
  spillovers are important
• Neoclassical theory does not provide an adequate
  representation of regional growth process
• causal factors differ across different types of
  region
• So there are good arguments for regional policy
  intervention
• but regional policies thus far do not seem to
  have had much success in fostering convergence?
• nature of intervention should vary from one type
  of region to another?

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The empirical findings

• Cambridge Econometrics study - assessing growth
  and convergence over 1980-2001
• explanatory factors
• Contextual policy features
• EU enlargement
• Objective 1 and Cohesion policies

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Context of empirical study enlargement of the EU
has been dramatic
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Convergence and growth in the EU15 NUTS2 Regions,
1980-2001
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Convergence and growth by phases 1980-2001 NUTS 2
changes and starting levels analysis
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Convergence by NUTS II regions
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Recent evidence some convergence but small and
variable
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Divergence in the new member states
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Conclusions 1 space

• Slow rates of convergence experienced in EU15
• The good performance of the top regions has not
  been at the cost of poor performance in poorer
  regions but the effects are small
• The small increase in observed rates of
  convergence in EU15 during growth periods
• coincidence?
• enlargement effects?
• more effective Objective 1 funding in growth
  periods?
• Williamson curve effects?
• Regional divergence within the new member states
• where we are currently seeing substantial
  regional divergence
• But signs of slackening in divergence and move to
  convergence?

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Conclusions 2 specialisation

• A new economic view that emphasises the dynamic
  effect of union in concentrating capital,
  knowledge-based activity and trade in certain
  regions seems better supported by the evidence
• The better performance of the top quartile of
  regions seems to come from established processes
  of knowledge generation with regional growth
  positively associated with high rates of RD
• Firms employing highly skilled workers are both
  productive and innovative

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Conclusions 3 knowledge sectors

• ICT Research and development processes generate
  and facilitate the trade in knowledge-intensive
  products
• cluster externalities are likely to be important
  in building the knowledge base for RD in a
  region
• a common resource of venture capital and skilled
  workers eases information dissemination
• an important role for the creative class?
• more likely to see links with other regions that
  can exploit their knowledge base
• trade is the primary medium for technology
  transfer

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Tools and statements contribution

• A one-region fits all approach is not justified
• Dynamic productivity effects from knowledge-
  building and innovation in a liberalised EU space
  will be best harnessed by policies encouraging
  competition and cohesion that can balance the
  benefits of regional concentration and
  differentiation so as to encourage trade
  spillovers.