Increasing Returns, Decreasing Returns and Regional Economic Convergence in the EU
Regional Growth; Economic Convergence; Non-linear models JEL: R11, R58 Regional economic development is driven by the accumulation of production factors. More traditional factors like labour and physical capital are accumulated under the law of diminishing returns. This, in turn, allows less developed regions to better perform. Recent branches of theoretical and empirical literature have paid attention to the role of increasing returns in an attempt to explain the persistence in regional economic disparities. Increasing returns are commonly attributed either to the accumulation of non- traditional inputs such as human and knowledge capital or to the presence of local externalities generated by the spatial concentration of economic activities. The aim of the present paper is to address the importance of both decreasing and increasing returns for the economic growth of European regions. While economies will definitively converge in the long-run if production is characterized by decreasing returns, divergence is the likely outcome in presence of increasing returns. As regional growth is probably the result of a combination of both, from a policy perspective it is important to understand where the sooner stops and the latter starts. In this paper the economic performance of 186 European regions is analysed by using the ordinary growth regression approach. An empirical specification which simultaneously accounts for the presence of both decreasing and increasing returns is derived. The study is intended to examine the extent to which regional development originates from the (un)balance between convergence, driven by diminishing returns and divergence, boosted by increasing returns. Results indicate that the accumulation of traditional inputs leads the economic development of less favoured areas while the presence of increasing returns plays a more crucial role in developed regions. More in the detail increasing returns seem to be generated by the accumulation of knowledge and human capital while there is no clear evidence of agglomeration externalities. By using a non-linear specification for the growth equation it is also found evidence of important threshold effects in entering the stage of development characterized by increasing returns. Regional development process is accordingly depicted as a far more complex process than what the simple dualism between increasing and decreasing returns may help to figure out, with very important implications for policy.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul Krugman & Anthony J. Venables, 1995.
"Globalization and the Inequality of Nations,"
NBER Working Papers
5098, National Bureau of Economic Research, Inc.
- Krugman, Paul & Venables, Anthony J, 1994. "Globalization and the Inequality of Nations," CEPR Discussion Papers 1015, C.E.P.R. Discussion Papers.
- Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
- Nikolay Nenovsky & S. Statev, 2006. "Introduction," Post-Print halshs-00260898, HAL.
- Baldwin, Richard E & Forslid, Rikard, 2000. "The Core-Periphery Model and Endogenous Growth: Stabilizing and Destabilizing Integration," Economica, London School of Economics and Political Science, vol. 67(267), pages 307-324, August.
- Aghion, P. & Howitt, P., 1990.
"A Model Of Growth Through Creative Destruction,"
DELTA Working Papers
90-12, DELTA (Ecole normale supérieure).
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
- Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
- Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
- Krugman, Paul & Venables, Anthony J., 1996.
"Integration, specialization, and adjustment,"
European Economic Review,
Elsevier, vol. 40(3-5), pages 959-967, April.
- N. Gregory Mankiw & David Romer & David N. Weil, 1990.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Bart Verspagen, 2010.
"The spatial hierarchy of technological change and economic development in Europe,"
The Annals of Regional Science,
Springer;Western Regional Science Association, vol. 45(1), pages 109-132, August.
- Verspagen, Bart, 2007. "The Spatial Hierarchy of Technological Change and Economic Development in Europe," MERIT Working Papers 012, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
- Jan Fagerberg & Bart Verspagen & Marjolein Caniëls, 1997. "Technology, Growth and Unemployment across European Regions," Regional Studies, Taylor & Francis Journals, vol. 31(5), pages 457-466.
- Maarten Bosker, 2007. "Growth, Agglomeration and Convergence: a Space-time Analysis for European Regions," Spatial Economic Analysis, Taylor & Francis Journals, vol. 2(1), pages 91-100.
- Sterlacchini, Alessandro, 2008. "R&D, higher education and regional growth: Uneven linkages among European regions," Research Policy, Elsevier, vol. 37(6-7), pages 1096-1107, July.
- Barro, R.J., 1989.
"Economic Growth In A Cross Section Of Countries,"
RCER Working Papers
201, University of Rochester - Center for Economic Research (RCER).
- Gabriele Tondl & Harald Badinger & Werner Müller, 2003.
"Regional convergence in the European Union (1985-1999). A spatial dynamic panel analysis,"
ERSA conference papers
ersa03p455, European Regional Science Association.
- Harald Badinger & Werner Muller & Gabriele Tondl, 2004. "Regional Convergence in the European Union, 1985- 1999: A Spatial Dynamic Panel Analysis," Regional Studies, Taylor & Francis Journals, vol. 38(3), pages 241-253.
- Badinger, Harald & Müller, Werner G. & Tondl, Gabriele, 2002. "Regional convergence in the European Union (1985 - 1999) : a spatial dynamic panel analysis," HWWA Discussion Papers 210, Hamburg Institute of International Economics (HWWA).
- Alexiadis, Stilianos & Tomkins, Judith, 2010.
"Technology adoption and club convergence,"
21260, University Library of Munich, Germany.
- Guastella Giovanni & Timpano Francesco, 2010.
"Spillover Diffusion And Regional Convergence: A Gravity Approach,"
Regional Science Inquiry,
Hellenic Association of Regional Scientists, vol. 0(2), pages 71-82, December.
- Gianni Guastella & Francesco Timpano, "undated". "Spillover Diffusion and Regional Convergence: A Gravity Approach," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1070, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
- Galor, Oded, 1996.
"Convergence? Inferences from Theoretical Models,"
Royal Economic Society, vol. 106(437), pages 1056-1069, July.
- Quah, Danny T., 1996. "Empirics for economic growth and convergence," European Economic Review, Elsevier, vol. 40(6), pages 1353-1375, June.
- Eric von Hippel, 1994. ""Sticky Information" and the Locus of Problem Solving: Implications for Innovation," Management Science, INFORMS, vol. 40(4), pages 429-439, April.
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-1037, October.
- Quah, Danny, 1993.
" Galton's Fallacy and Tests of the Convergence Hypothesis,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 95(4), pages 427-443, December.
- Quah, Danny, 1993. "Galton's Fallacy and Tests of the Convergence Hypothesis," CEPR Discussion Papers 820, C.E.P.R. Discussion Papers.
- Jan Fagerberg & Bart Verspagen, 1996. "Heading for Divergence? Regional Growth in Europe Reconsidered," Journal of Common Market Studies, Wiley Blackwell, vol. 34(3), pages 431-448, 09.
- Roberto Basile, 2008. "Regional economic growth in Europe: A semiparametric spatial dependence approach," Papers in Regional Science, Wiley Blackwell, vol. 87(4), pages 527-544, November.
- repec:hhs:iuiwop:430 is not listed on IDEAS
- Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 501-526.
- Badinger, Harald & Tondl, Gabriele, 2002.
"Trade, human capital and innovation: The engines of European regional growth in the 1990s,"
ERSA conference papers
ersa02p043, European Regional Science Association.
- Gabriele Tondl, 2002. "Trade, Human Capital and Innovation: The Engines of European Regional Growth in the 1990s," Computing in Economics and Finance 2002 237, Society for Computational Economics.
- R. Paci & F. Pigliaru & M. Pugno, 2001. "Disparities In Economic Growth And Unemployment Across The European Regions: A Sectoral Perspective," Working Paper CRENoS 200103, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
- Sandy Dall'erba & Julie Le Gallo, 2003.
"Regional Convergence And The Impact Of European Structural Funds Over 1989-1999: A Spatial Econometric Analysis,"
0310005, EconWPA, revised 12 Feb 2004.
- Sandy Dall'erba & Julie Le Gallo, 2008. "Regional convergence and the impact of European structural funds over 1989-1999: A spatial econometric analysis," Papers in Regional Science, Wiley Blackwell, vol. 87(2), pages 219-244, 06.
- Sandy Dall'Erba & Julie Le Gallo, 2008. "Regional convergence and the impact of European structural funds over 1989-1999 : a spatial econometric analysis," Post-Print hal-00485031, HAL.
- Andrés Rodríguez-Pose & Riccardo Crescenzi, 2008.
"Research and development, spillovers, innovation systems, and the genesis of regional growth in Europe,"
LSE Research Online Documents on Economics
23326, London School of Economics and Political Science, LSE Library.
- Andres Rodriguez-Pose & Riccardo regstdcenzi, 2008. "Research and Development, Spillovers, Innovation Systems, and the Genesis of Regional Growth in Europe," Regional Studies, Taylor & Francis Journals, vol. 42(1), pages 51-67.
- Enrique Lopez Bazo & Esther Vaya Valcarce & Antonio Jose Mora & Jordi Surinach Caralt, 1997. "Regional economic dynamics and convergence in the european union," Working Papers in Economics 12, Universitat de Barcelona. Espai de Recerca en Economia.
- Riccardo Crescenzi, 2005. "Innovation and Regional Growth in the Enlarged Europe: The Role of Local Innovative Capabilities, Peripherality, and Education," Growth and Change, Wiley Blackwell, vol. 36(4), pages 471-507.
- Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-596, September.
When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa12p344. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier)
If references are entirely missing, you can add them using this form.