New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 11: Increasing Returns and the Distribution of Manufacturing Productivity in the EU Regions
Bernard Fingleton and Enrique López-Bazo 1 INTRODUCTION Despite the diﬀusion of new technologies to many rural or low productivity regions, diﬀerences in manufacturing productivity levels and growth rates persist across the EU. In this paper we set up a model to account for these growth rate variations, and use the model to estimate the impact on long-run equilibrium productivity levels of alternative assumptions about returns to scale. Our model is inﬂuenced by the new wave of theory in urban and geographical economics, which for the ﬁrst time allows a general equilibrium solution within the context of increasing returns to scale. Our analysis shows that the increasing returns hypothesis stands up to empirical scrutiny, and therefore adds to the growing body of evidence (see for example Hanson, 1997; Brülhart, 1998; Ottaviano and Puga, 1998; Fingleton, 2001a,b, 2003; Henderson and Thisse, 2003; Brakman et al., 2004) supporting the new theory, although, almost irrespective of their theoretical provenance, many regional economists and economic geographers would agree that increasing returns are a fundamental prerequisite for a proper understanding of regional disparities. However, if we restricted ourselves entirely to our chosen theoretical context, we would be in deep trouble analytically. Geographical economics theory, at least in its most elemental form, is diﬃcult to turn into empirical models without sacriﬁcing formal elegance, because it is apparent that pecuniary externalities are by themselves insuﬃcient for an unbiased econometric speciﬁcation. To help us go down this road in...
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