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Technology catching-up and regulation in European regions

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Abstract

This paper analyses the effects of the intensity of regulations in the product and labour markets on the growth of total factor productivity (TFP) for 121 European regions. A technological catch-up model is estimated for the period 1995–2007. We use the spatial lag of X (SLX) model to capture possible spatial interactions across spatial units. Our empirical findings show that lower levels of regulation are associated with higher TFP growth. Lower barriers to entrepreneurship and lower bureaucratic costs have a positive effect on productivity growth. Corruption raises operational costs, distorts the allocation of resources and negatively affects innovation activities, thereby reducing TFP growth. Further liberalization in the labour market (in terms of hiring and firing regulation, working hours regulation and employment protection legislation) has a significant positive effect on the growth of TFP. In addition, both regional technological and regional human capital have a positive impact on the TFP growth in European regional economies.

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Notes

  1. GDP at regional level, EUROSTAT Statistics Explained.

  2. The TFP levels and growth rates are available in Table A.1.1 of the Annex 1.

  3. More recent papers have directly addressed the influence of institutions on other macroeconomic variables. Hall and Jones (1999), Acemoglu et al. (2001), and Aghion and Griffith (2005) show that institutions are a major determinant of wealth and long-term growth. Countries that had better political and economic institutions in the past are richer today. On the other hand, substantial levels of regulations may have a negative impact on firms’ investment decisions (Alesina et al. 2005, for several sectors of many OECD countries and Escribá and Murgui 2016, for European regions).

  4. There are papers for the regions within the same country (see Bronzini and Piselli 2009; Marcos and Santaló 2010; Zárate-Marco and Vallés-Giménez 2012). However, there are studies for European regions that analyse the effect that the current labour market institutions have on the regional disparities in unemployment rates, such as Niebuhr (2003), Caroleo and Coppola (2006), Kosfeld and Dreger (2006), and Herwartz and Niebuhr (2011 and 2017).

  5. See European Commission (2016), Agnello et al. (2015) and Draghi (2015).

  6. This European regional database, in year 2000 Euros, is compiled by the Budget General Directorate of the Spanish Ministry of Economic and Financial Affairs and is available on the following web page: http://www.sepg.pap.minhap.gob.es/sitios/sepg/es-ES/Presupuestos/Documentacion/Paginas/BasededatosBDEURS.aspx.

  7. In Escribá and Murgui (2014a) the methodology used in the construction of capital stock series is explained. The series are included in the BD.EURS.

  8. In order to establish the robustness of our results, we use alternative measurements of the technology gap variable, using for example, the average TFP level of the nine European countries included in the sample to define the location of the frontier. Our results do not change significantly.

  9. The data used have been obtained from ESPON (The European Observation Network for Territorial Development and Cohesion), 2006. Air, Rail and Road indices are used but they are not statistically significant in any of the estimates and therefore have not been included in the empirical specification.

  10. For more details, see Nicoletti et al. (1999), Conway et al. (2005), Nicoletti and Pryor (2006), or for a more recent paper, Koske et al. (2015).

  11. For more details, see Block (1993).

  12. Annex 2 presents the correlations between the OECD and Fraser Institute indices.

  13. See Crafts (2006). This paper reviews theory and evidence on the ways in which regulation affects productivity outcomes.

  14. A detailed explanation can be found in Griffith and Harrison (2004) and Nicodème and Sauner-Leroy (2007).

  15. See Young (2003) for a survey of regulation effects in labour markets.

  16. Nicoletti and Scarpetta (2003) replace the R&D measure used in the Griffith et al. (2004) approach with their measures of product market regulation.

  17. Other regional factors have been considered, such as potential accessibility by air, road and train and indicators of specialization in agriculture, manufacturing or services, but they are not statistically significant in our estimates.

  18. See Fingleton and McCombie (1998), Lopez-Bazo et al. (1999) and Badinger et al. (2004) for European regions.

  19. The reason behind the choice of these matrices is explained later.

  20. As discussed in Annex 3, the SLX model describes the spatial dependence structure adequately.

  21. In the absence of country dummies, regulation indicators could be capturing other national aspects other than regulation.

  22. See Anselin (1988) and Anselin et al. (1996). Annex 4 presents the results of the estimates using a row-normalized binary contiguity matrix. The results of the different tests (acceptance of different hypotheses) are similar. In general the estimated values of all variables are similar except for the spillovers of human and technological capital, as will be discussed later.

  23. Only the results of the estimates of those components of the aggregate indices of PMR and MRL or BR that are statistically significant have been presented.

  24. In a spatial autoregressive model (SAR), it is assumed that the average TFP growth of a region depends on TFP growth rates of neighbouring regions through the spatially displaced endogenous variable in addition to exogenous variables. In a spatial autocorrelation in the error process (SEM) model, it is assumed that the average growth of a region is influenced by the anomalous growth (related to random or unanticipated shocks) of its neighbouring regions.

  25. LeSage and Pace (2009) argue that spillovers in the context of (cross-sectional) spatial regression models should be interpreted as comparative static changes that will arise in the dependent variable as the relationship under study moves to a new steady-state equilibrium.

  26. This result (at regional level) supports the hypothesis of the existence of correlation between the intensity of displacement of skilled labour and the TFP differential between the country of origin and the destination. Grossmann and Stadelmann (2013) found that the offset of qualified workers between OECD countries, far from contributing to closing the wage gap for these workers between the recipient and the sender, causes it to increase.

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Acknowledgements

The authors gratefully acknowledge the financial support of the ERDF as well as from the Generalitat Valenciana PROMETEO/2016/097. María José Murgui-García acknowledges the financial support from the Spanish Ministerio de Economía, Industria y Competitividad, Project ECO2015-65049-C2-1-P. The authors thank three anonymous referees for valuable comments and suggestions. They are grateful to R. Boix for helpful comments.

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  1. Department of Economic Analysis, Facultat dEconomia, Universitat de València, Av. dels Tarongers s/n, E-46022, València, Spain

    Francisco Javier Escribá-Pérez & María José Murgui-García

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  1. Francisco Javier Escribá-Pérez
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Correspondence to María José Murgui-García.

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Escribá-Pérez, F.J., Murgui-García, M.J. Technology catching-up and regulation in European regions. J Prod Anal 49, 95–109 (2018). https://doi.org/10.1007/s11123-017-0524-4

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