New Estimates of Returns to Scale and Spatial Spillovers for EU Regional Manufacturing, 1986—2002

Abstract

This paper presents some new estimates of the degree of returns to scale for European regional manufacturing, for the period 1986-2002. To obtain these estimates, the paper makes use of a Verdoorn law framework, estimating both demand-and supply-side versions of the law. Estimation is further embedded within a spatial econometric framework that allows for both "substantive" and "nuisance" sources of spatial autocorrelation. The former arises from cross-regional spillovers in the growth process, whilst the latter is a result of the use of the administrative NUTS1 definition of regions. Whilst the demand-side version of the Verdoorn law yields estimates of substantial increasing returns, the supply-side version is unable to refute the hypothesis of constant returns. It is argued, however, that the demand-side version is to be preferred on a priori grounds. The paper also gives consideration to the staticdynamic Verdoorn law paradox and successfully tests a recently proposed explanation of this paradox.JEL codes: O18, O33, R11

Regional Growth and National Development: Transition in Central and Eastern Europe and the Regional Kuznets Curve in the East and the West

“…The importance of spatial processes has been also analysed in empirical studies employing the Verdoorn Law equation. Using this, McCombie (1998), Dall'erba et al (2008), Angeriz et al (2008), and others find evidence of increasing returns -and thus of a tendency for regional divergence and/or club convergence -across EU regions.…”

Making geographical sense of the Greek austerity measures: compositional effects and long-run implications

“…Consistent with the Kaldorian view of cumulative causation (but also with the endogenous growth literature for knowledge rather than demand-generated spillovers), a drop in the mass (Angeriz et al, 2008) or density (Ciccone and Hall, 1996) of economic activity in these regions will lead to an increasingly slower rate of productivity growth. Slower productivity growth will lead to a relative reduction in economic efficiency and in private returns (wages and profits), thus reinforcing the tendency for outmigration (brain-drain) and disinvestment.…”

Estimating Verdoorn law for Italian firms and regions

“…However, since k ij could be endogenous, we also follow Angeriz et al (2008) and estimate a version of the law that uses TFP growth in place of labour productivity to "depurate" the right hand side of k ij . Further, they add the initial level of TFP and regional output density to allow for catching up effects due to technology diffusion and increasing returns due to dynamic agglomeration economies.…”

“…Further, Angeriz, McCombie and Roberts (2008) estimate an alternative specification that considers total factor productivity in place of labour productivity in order to reduce potential problems arising from output endogeneity and the omission of the capital stock and emphasise the importance of the spatial dimension.…”

“…Third, it simultaneously estimates returns to scale for the firm level and for each region in the sample. 4 We further limit the omitted variable and endogeneity problems, comparing multilevel specifications of the simple Verdoorn law with alternative specifications which include capital or use total factor productivity (TFP) in place of labour productivity, as suggested by Angeriz et al (2008).…”