Innovation Diffusion and the Evolution of Regional Disparities

An important part of modern theory on regional disparities identifies in the innovative activities the source of competitive advantage and, consequently, of the observed differences in economic development. However, since differently from a standard physical factor of production, knowledge can be used in many different places and many productions at the same time, innovation is the basic but not the only feature of the process: an essential role is also played by imitation, the acquisition of external knowledge through devoted efforts, and diffusion, the non costly acquisition of external knowledge. If, for example, the diffusion of technology were instantaneous and not protected by any form of patenting, the physical place in which innovation takes place would be irrelevant. Since knowledge is instead 'sticky', the innovative region get an advantage, but the extent of this advantage still depends on the easiness of diffusion. This mechanism of knowledge creation and diffusion has been affected by two important changes: the first one is the ‘technological revolution’, as some scholars called the process that, in the past century, changed innovation from being the outcome of initiatives of single entrepreneurs, to the outcome of specifically designed R&D departments of the firms; this has determined an increase in the innovation pace. The second change is the recent fast development of new means of communications, called ICTs, which have made easier, faster and cheaper the transfer of blueprinted knowledge across places. This is determining an increase in the speed of diffusion of knowledge, even if, in order to use it, it is always necessary to have people able to understand and implement it. This article investigates the effect that the interaction between the creation and the diffusion of technology brings on regional disparities. We will show that an increase in the pace of innovation, as the one that took place in the XXth century, can engender regional income disparities; we will also show that if, afterwards, the speed of diffusion also increases enough, these disparities can fade out. We will not, at this stage, guess which effect will prevail. To analyse the problem, we will first build a simple model with technological disparities as the source of income disparities and a set up aimed at representing all knowledge flows. The basic model will then be used in two different ways for the study of innovation and diffusion mechanisms. We will show that the most important variable to determine if income disparities exist is the ratio between the speed of diffusion and the speed of innovation. In particular, when this ratio is low, the most likely prediction is an equilibrium with both technological and income disparities. For intermediate values, technological disparities will exist, but will not be large enough to generate income disparities; for higher values, there will not be technological disparities anymore and, consequently, no income disparities.

Regional policy from a supra-regional perspective

A large number of economic models has been developed in the past 15 years in order to explore the causes of endogenous regional growth and the location of economic activities with the consequent differentials of development among territories. At the same time regional policies have undergone major modifications with increasing importance attributed to bottom up policies and to the efficiency of spending, also due to a situation in which funds are a scarce resource. These developments appear however to have taken place without paying enough attention to the concurrent effects entailed by policies implemented separately by different regions. In fact competing regions can implement policies which are not optimal from an aggregate point of view. At the same time national policies designed to reduce regional inequalities may also be sub-optimal from a country perspective. Unfortunately, it is too often unclear under what values of the parameters regional policies are also able to increase the aggregate economic performance of nations or over-national communities and which policies are, instead, to be simply considered as a means to increase the equality of income across space. Therefore it is on the one hand important to detect which regional policies belong to each of the two categories, then to compare them with different policies (aiming at equality of income or at efficiency) to discover which ones are better suited to achieve the needed results with lower costs. On the other hand, it is important to further investigate which policies are more fruitful if implemented in a context of regional competition and which ones should be top-down. This article addresses the issues presented above. First there is a revision of the existing contributions in order to evidence the general tendencies of the existing literature, the results that can already be considered as achieved and the deficiencies that limit the ability to produce usable policy prescriptions. Then the paper analyses the relationship between regional policies and national competitiveness in a small number of selected existing models of regional growth and localisation, in particular with an extension to the case of competing countries, each composed of more than one region.

Regional Economies, Innovation and Competitiveness in a System Dynamics Representation

The System Dynamics methodology is used in this article as unifying approach in order to show how a number of theories about the performance of territories developed in the past 20 years can integrate the one with the other; to demonstrate this, a model of local economy coherent with these schools is constructed and simulated. According to these theories, the ability to produce and use knowledge is at the centre of regional competitiveness in the advanced world; the model and the paper illustrate the elements of the local economic system and how they have to work coherently towards the continuous process of innovation, needed to be successful. The model also shows in a new framework how, due to the cumulative nature of this innovation process, it is possible to obtain equilibria with regional income differentiation, even in the presence of identical territories. When this is the case, structural policies, aiming to allow lagging regions to better innovate and/or imitate external knowledge, are appropriate.

Measuring and Explaining Localisation: Evidence from two British Sectors

The degree of localisation of manufacturing, defined as the excess geographic concentration remaining after correcting for both sectorial concentration and the agglomeration of overall economic activity, has recently gained new techniques of measurement. These techniques are illustrated and theoretically discussed. The paper then investigates the sectorial scale of localisation, using evidence from two British sectors, SIC 244 (pharmaceutical) and 334 (optical and photographic), and respective sub-sectors. Applying the measures, it is evidenced that the individual sub-sectors are very differently localized both in extent and in location, even within the same sector. In addition to this, with survey data the paper shows that localisation is due to different economic explanations in different sub-sectors. This is a proof that the economic factors behind localisation are in this case at 5-digit level, making economically not meaningful the measurement of localisation at a different scale. The study implies that identifying localisation remains a delicate process, since the right sectorial scale has to be detected case by case, the use of more than one technique usually gives additional insights and, finally, the survey confirms that, in field studies, a mix of diferent theoretical models is generally needed to explain the observed patterns.

Migration and Regional Disparities: the Role of Skill Biased Flows

The persistence of disparities is one of the most striking features of regional development. We argue that movements of labour force, instead of being an always equilibrating mechanism, can also make persistent or even reinforce such inequalities. The most advanced regions are in fact generally more attractive, in terms of opportunities, especially to more qualified workers, who, in turn, are an essential ingredient of regional development and competitiveness because of the human capital they bear. We set up a two-regional framework, with a continuum of different skill- type individuals. Each agent’s utility function depends on the wage she earns through her skills, leaving the process of human capital formation out of this paper. Within this framework, we identify and model two complementary mechanisms for skill biased migration flows to take place. The first one resides in the way wages are set. If, in fact, the most skilled workers are not paid their productivity because of wage compression, they will have an incentive to move towards regions with a more dispersed wage scheme. The second mechanism dwells in the existence of some regional specific immobile assets, which make workers di®erently productive in different regions; this happens to a larger extent for those endowed with highest skills, which will therefore be more likely to overcome the mobility costs. Hence a Kaldor-type cumulative process bearing persistent regional disparities is set up.

Regional economic cycles and the emergence of sheltered economies in the periphery of the EU

It has been claimed that in recent years the evolution of regional disparities within European nations has become pro-cyclical, that is, disparities tend to increase in times of economic boom and to decrease during recessions. This represents a change with respect to the traditional patterns in the 1960s and 1970s, when growth in European lagging regions was higher than in the core during periods of economic growth, but lagging regions were more affected by economic crises. In this paper we first assess where and when this change has happened and then analyse what are the factors behind the change in the evolution of disparities. We use a 20-year long database, comprising NUTS II regions in five European countries (France, Greece, Italy, Portugal and Spain) which include the great majority of European lagging regions. The evidence supports the shift to pro-cyclical patterns in the evolution of regional disparities, especially in those countries with a large number of Objective 1 regions (Spain, Italy and, less clearly, in Greece) whereas in France such a change has not yet occurred. Looking for the determinants of regional economic cycles, we conduct regression analyses finding that the shift in growth patterns is related to the emergence of what is known as sheltered economies, i.e. economies that are increasingly detached from the market, and thus increasingly impervious to economic cycles. Lagging European regions have become over the period of analysis increasingly dependant on factors such as transfers, public investment, and public employment and therefore less exposed to changes in market conditions.

Between development and social policies: the impact of European Structural Funds in Objective 1 Regions

European regional support has grown in parallel with European integration. The funds targeted at achieving greater economic and social cohesion and reducing disparities within the European Union (EU) have more than doubled in relative terms since the end of the 1980s, making development policies the second most important policy area in the EU. The majority of the development funds have been earmarked for Objective 1 regions, i.e. regions whose GDP per capita is below the 75% threshold of the EU average. However, the European development policies have come under increasing criticism based on two facts: the lack of upward mobility of assisted regions and the absence of regional convergence. This paper assesses, using cross-sectional and panel data analyses, the failure so far of European development policies to fulfil their objective of delivering greater economic and social cohesion by examining how European Structural Fund support is allocated among different development axes in Objective 1 regions. We find that, despite the concentration of development funds on infrastructure and, to a lesser extent, on business support, the returns to commitments on these axes are not significant. Support to agriculture has short-term positive effects on growth, but these wane quickly, and only investment in education and human capital – which only represents about one eight of the total commitments – has medium-term positive and significant returns.

Unbalanced development strategies and the lack of regional convergence in the EU

European regional growth patterns have undergone two important changes in recent years. First, the process of convergence that dominated regional growth until the late 1970s and early 1980s has progressively given way to stability and divergence. Economic dynamism is increasingly concentrated in core metropolitan areas, whereas lagging regions in Europe are finding increasingly difficult to keep up with the pace of core regions. Second, the evolution of regional disparities, which in most countries tended to be pro-cyclical in the years of economic convergence is becoming anti-cyclical: lagging regions tend to outperform core areas in periods of relative economic decline. These two transformations are happening in spite of the efforts made by the EU, in order to promote development in the poorest regions of the EU, the so-called objective 1 regions. There are many possible reasons that may explain why European regional development policies have, so far, been unable to deliver greater growth in the periphery than in the core. Lack of adequate funding to curb centripetal market trends, lack of adequate co-ordination between actors are two of them. In this paper we will focus, however, on the inadequacy existing of regional policies. The implementation of unbalanced development policies, with a main focus on infrastructure development, together with other factors like the existing level of transfers and the rapid increase in non-market oriented jobs, is contributing to the generation of increasingly sheltered economies. The combination of these factors may be contributing, in our view, to the increasing of the gap between a competitive market-oriented core of Europe and an assisted and ill-prepared to compete periphery.

Territorial Scenarios for an Integrated Europe: Driving Forces of Change and Quantitative Forecasts

The paper presents the second step of an ambitious research project, which has the aim to provide territorial scenarios of the New Europe in 15 years, developed under different hypotheses on the most important driving forces of change in the fields of economy, demographic, society, technology and institutions. The first step was presented last year at the ERSA conference in Amsterdam. In that occasion, the paper dealt with the econometric model (labelled MASST – Macroeconomic, social, sectoral and territorial model) built for the forecasting activity, presenting its strengths and weaknesses and the main results obtained by the estimates of the model. In this paper the additional work is presented, and the main conceptual and methodological steps forward analysed. In particular, the aims of the paper are the following: - to present the main driving forces that influence the future of Europe and of its territory. These are of different nature: socio-cultural (future migration forces and future birth and death rates), institutional (deepening vs. widening of enlargement), macroeconomic (trend in the euro/$ exchange rate, trend in fiscal morality – i.e. trend in public debts, revision of the Maastricht parameters -, trend in interest rates, trend in inflation rate, geo-political orientation of FDI, rebalancing of external accounts of big emerging countries; increase in energy price), political (reforms of the structural funds and of the Community Agricultural Policy); - to present the different hypotheses under which the scenarios are built. The idea is to build three scenarios, a baseline scenario, a competitive and a cohesive scenario, and to present the differences among them; - to present the results of the simulation. The MASST model is able to provide both regional GDP growth rates and GDP levels, as well as regional population growth rates, and population levels, for the three scenarios. The model is able to provide the simulations for 27 Countries (the old 15 EU members, the new 10 Countries and Bulgaria and Romania) and for their 259 regions.

Regional policy from a supra-regional perspective

A large number of economic models has been developed in the past 15 years in order to explore the causes of endogenous regional growth and the location of economic activities with the consequent differentials of development among territories. At the same time regional policies have undergone major modifications with increasing importance attributed to bottom up policies and to the efficiency of spending, also due to a situation in which funds are a scarce resource. These developments appear however to have taken place without paying enough attention to the concurrent effects entailed by policies implemented separately by different regions. In fact competing regions can implement policies which are not optimal from an aggregate point of view. At the same time national policies designed to reduce regional inequalities may also be sub-optimal from a country perspective. Unfortunately, it is too often unclear under what values of the parameters regional policies are also able to increase the aggregate economic performance of nations or over-national communities and which policies are, instead, to be simply considered as a means to increase the equality of income across space. Therefore it is on the one hand important to detect which regional policies belong to each of the two categories, then to compare them with different policies (aiming at equality of income or at efficiency) to discover which ones are better suited to achieve the needed results with lower costs. On the other hand, it is important to further investigate which policies are more fruitful if implemented in a context of regional competition and which ones should be top-down. This article addresses the issues presented above. First there is a revision of the existing contributions in order to evidence the general tendencies of the existing literature, the results that can already be considered as achieved and the deficiencies that limit the ability to produce usable policy prescriptions. Then the paper analyses the relationship between regional policies and national competitiveness in a small number of selected existing models of regional growth and localisation, in particular with an extension to the case of competing countries, each composed of more than one region