Explaining the Distribution of Manufacturing Productivity in the EU Regions

In this Chapter, simulations of manufacturing productivity levels across the EU provide detailed insights regarding possible long-run distributions under various alternative assumptions about the determinants of productivity growth. The explanation of manufacturing productivity growth by region is based on an econometric model embodying recent developments in urban economic theory and geographical economics, which includes both internal and external increasing returns and spatial externality (spillover) effects. The model implies market interdependence involving a competitive manufacturing sector and producer services under monopolistic competition. The assumption of technological externalities and the presence of cross-region spillovers in the model lead to a specification that is typical of recent approaches in spatial econometrics, which seeks to avoid bias by a specification involving spatial interdependence. The Chapter uses recent developments in the analysis of growth empirics, involving the application of the estimated density function and the stochastic kernel, in order to visualize the long-run stochastic distributions under various assumptions. We control for the effects of various ancillary factors assumed to influence the equilibrium distribution so as to isolate the impact of each individual factors of interest. The visualizations enabled by the stochastic kernel clearly identify the effect of the different model variables on the entire regional distribution of manufacturing productivity.