Regional input-output models and the treatment of imports in the European System of Accounts

Input-output models are often used in regional science due to their versatility and their ability to capture many of the distinguishing features of a regional economy. Input-output tables are available for all EU member countries, but they are hard to find at the regional level, since many regional governments lack the resources or the will to produce reliable, survey-based regional input-output tables. Therefore, in many cases researchers adopt nonsurvey techniques to derive regional input-output tables (RIOT) on their own. The earliest applications of this type relied on the commodity balance (CB) method, and the simple location quotient (SLQ) method. Over time, numerous variations therefore have been introduced. The latest proposals have been the FLQ method (Flegg and Webber, 2000; Flegg et al., 1995) and the CHARM approach (Kronenberg, 2009). This increasing variety of methods has spawned a stream of literature comparing the relative performance of nonsurvey regionalisation methods. The present paper contributes to that literature by examining a largely neglected problem of nonsurvey techniques: the allocation of imports. In the European System of Accounts (ESA) there are two ways of allocating imports: inside the interindustry transactions matrix or outside. In the latter case, imported products are allocated to the sector that uses them (direct allocation). In the former case, they are allocated as imports in the sector that produces similar goods and as a delivery from that sector to the sector which uses them (indirect allocation). The present paper argues that the choice of a nonsurvey method should depend on the way in which imports are allocated. The argument is explained with reference to the theoretical and empirical literature. It is shown that if the nonsurvey method is not properly chosen the results of the procedure may be misleading and implausible. These findings suggest that LQ methods are better suited for regionalising input-output tables with directly allocated imports, whereas commodity-balance methods like CHARM are better suited for regionalising input-output tables with indirectly allocated imports.