Theories of Endogenous Regional Growth

A rich literature has grown up around the concept of the rise in the importance of regions in the global economic system. According to this view global trade has the form of interaction between functional regions, rather than between countries. As this vision has evolved, empirical observations suggest that global and national economic change should be understood as a process, which is dependent on local dynamics operating on the regional level. Perceptions and models of such change can be underpinned with various theoretical perspectives generally referred to as the new endogenous growth theory. The term endogenous implies that economic growth is influenced by the use of “investment resources” generated by the economy itself — in contradistinction to the reference made to exogenous factors in the Solow type growth models.

Regional economic development involves a wide array of factors whose importance varies across regions and time. Thus, an economy that is resource dependent will have different defining characteristics than one that is service based. Likewise, an economy embedded in a transition to a knowledge based structure will exhibit different attributes than at an earlier time when it was manufacturing based. This understanding is not new. However, two types of factors are essential to the understanding of regional economic systems: endogenous and exogenous. In all regional economic systems these factors are entwined and intermingled, and functionally inseparable.

Recognizing the salience of waged labor and labor-force characteristics for regional development, this chapter proposes an institutional framework for analyzing local or regional labor processes and underscores the potential utility of that framework for effecting change in regional labor (re)production, “quality”” allocation, and wages.

The dynamic relationship between the interregional division of labor, division of consumption and the determination of price structures in the global economy is a main concern of contemporary economics. In fact, economists have produced different trade theories, which deal with various aspects of international and inter-regional trade. Although Adam Smith held that a country could gain from free trade, he failed to create a convincing economic theory of international trade. It is generally agreed that David Ricardo is the creator of the classical theory of trade. The theories of comparative advantage and the gains from trade are usually connected with Ricardo. In this theory the crucial variable used to explain international trade patterns is technology. The theory holds that a difference in comparative costs of production is the necessary condition for the existence of international trade. But this difference reflects a difference in the techniques of production. According to this theory, technological differences between countries determine the international division of labor and consumption and trade patterns. It concludes that trade is beneficial to all participating countries. This conclusion is in contradiction to the viewpoint about trade held by the doctrine of mercantilism. In mercantilism regulation and planning of economic activity are held to be efficient means of fostering the goals of a nation. This theory assumes that production costs are independent from factor prices and the composition of output. Since it lacks consideration of the demand side, the theory cannot determine how and at what value the terms of trade are or should be.

The continuing onset of globalization does not mean the End of Geography, when regions cease to matter as conceptual or empirical devices. Likewise, increasing attacks from alternative approaches to knowledge do not make theory any less important. It is a fundamental tenet of this paper that both regions and theory matter a great deal.

In recent years, we have seen some fundamental developments in economic theory concerning the understanding of economic growth. The traditional growth theory, which is based on the famous Solow-model (Solow, 1956), was replaced by a set of models and arguments that are commonly known as “new growth theory”. These developments are fundamental in the sense that they demonstrate that some of the basic assumptions of the traditional growth theory — and most of neo-classical economic theory in general — are inconsistent with basic phenomena of the modern economy, and that they attempt to overcome these assumptions.

Two significant consequences of the pervasive economic changes of the past 25 years or so, associated with internationalisation if not actually globalization¹, involve substantial increases in the intensity of competition, and in the economic importance attributed to place (i.e. to specific spatial externalities). In both cases, it is also argued that qualitative factors (involving the presence or absence of multiple qualities), rather than simply availability and price, have come to play an increasingly important role. Thus Porter (1990)² argues both that traditional concepts of comparative advantage are inappropriate to a world in which quality competition prevails, and that qualitative attributes of a firm’s national and city-regional environment play an important role in enabling it to develop competitive advantage. A natural corollary is to expect the growth of forms of inter-place, or territorial competition, involving attempts to boost local economic performance through collective efforts to enhance qualitatively significant attributes of particular places — which would be relatively new to European cities and regions, if not in the United States. Even Krugman (1996) who has argued strongly that competitiveness is an attribute of firms not of collectivities, recognises that the role of agglomeration economies makes spatial outcomes potentially dependent on chance or governmental influences operating at an urban-regional (or national) scale. Since there is in this situation no unique equilibrium outcome, ‘an intellectually respectable case’ can then be made in support of selective interventions as a means of boosting local real incomes — though Krugman is suspicious that such cases will usually turn out to be unwarranted pieces of special pleading on behalf of more specific interests.

In recent decades an embryo of a new theory of specialisation and trade has been developed with an emphasis on differentiated competition, scale economies and size of the “home market” (e.g. Krugman, 1990). As regards the size of the home market several contributions focus on the country as the potential home market (e.g. Porter, 1990), which may be described as an ad hoc approach without any clear theoretical underpinning. In response to this type of deficiencies, this paper introduces a theoretical framework based on the concepts of a functional region and its product-specific market potentials. This approach is developed to improve the analysis of small and medium-sized regions, with an emphasis on their internal and external market interactions.

As the process of global integration has reached the boundaries of developing countries, there has been concern about the role to be played by these nations in the new world economic order. In many parts of the developing world, efforts are being made to transform economic activities so as to enhance their international competitiveness. Parallel to these efforts, market-oriented policies have been generally adopted based on World Bank and IMF recommendations, supported by the recognition of the distorting effects of government intervention.

In Japan, since the end of World War II, the three largest metropolitan areas (Tokyo, Kinki, and Chukyo) have constantly experienced population growth and, in particular, the Tokyo metropolitan area has been attracting positive net population in-migration. In brief, population and economic activities have continued to concentrate in a few of the larger areas. The central government has attempted to alter this tendency to concentrate so as to disperse population and economic activities from central metropolitan areas to peripheral, less-dense areas through transportation system improvements, industry-related infrastructure investment, lower taxes and subsidies. However, this effort has not been very successful because such policies have not been effective in modifying the results brought about by market forces. In other words, planners intending to change the spatial structure of the economy need to investigate carefully the market forces prevailing in the existing system of regions. The present research is motivated by this conclusion.

Much research on agglomeration economies, and particularly recent work that builds on Marshall’s concept of the industrial district, postulates that benefits derived from proximity between businesses are strongest for small enterprises (Humphrey, 1995; Sweeney and Feser, 1998). With internal economies a function of the shape of the average cost curve and level of production, and external economies in shifts of that curve, a small firm enjoying external economies characteristic of industrial districts (or complexes or simply urbanized areas) may face the same average costs as the larger firm producing a higher volume of output (Oughton and Whittam, 1997; Carlsson, 1996; Humphrey, 1995). Thus we observe the seeming paradox of large firms that enjoy internal economies of scale co-existing with smaller enterprises that should, by all accounts, be operating below minimum efficient scale. With the Birch-inspired debate on the relative job- and innovation-generating capacity of small and large firms abating (Ettlinger 1997), research on the small firm sector has shifted to an examination of the business strategies and sources of competitiveness of small enterprises (e.g., Pratten, 1991; Nooteboom, 1993). Technological external scale economies are a key feature of this research (Oughton and Whittam, 1997).

With the growing importance of non-material resources in the dynamics of development today, more emphasis is placed on constructed resources (skills, know-how, qualifications, but also methods of doing and acting) than on natural resources. Indeed, within the framework of globalisation, nations and firms are obliged to base their competitive advantage rather on their non-material resources and on the abilities of the actors to co-operate and to develop synergies amongst each other (untraded interdependencies). As with these constructed resources, this knowledge is not learnt once and for all, the various actors (firms, organisations, regions) must attend to keeping them up to date, to reproduce and to process them. This is why learning processes become so important, since it is thanks to them that new knowledge emerges and existing knowledge is transmitted.

According to an (if not true, then well found) anecdote the world’s champion in heavy weight boxing walking along a nice sunny beach wants to take a swim. Taking off his clothes he thinks to protect them from getting stolen by putting a note on them: “These clothes belong to the world’s heavy weight champion in boxing.” Returning after a nice swim he finds his clothes gone, the note still there with the words written on the other side: “Thank you. Sincerely yours, world champion in long distance running.”

The Italian economy has always been characterized by a relatively large presence of medium and small size firms, a feature that has received a range of definitions and has been the subject of a large number of studies even in the international literature. The continued and sometimes large relative presence of small plants and firms has long been considered a kind of anomaly. However, the alleged inefficiency and unsustainability of small scale productions is in patent contrast with the durability of the phenomenon, with the good economic performance of those regions where small scale production dominates, with the often high innovation performance of small firms, with their export performance and with the high degree of internationalisation of many small and medium size firms. Small wonder then that in the last twenty years there has been a complete revision of the interpretation of the small firm’s role in economic theory, mainly along the lines of evolutionary economic theory (Section 14.2).

Although local innovations may have little effect on the total production system of a nation, some generic technologies involve spillovers from one innovation to another, and from one sector producing the technology to others using it. Some key innovations may be complementary, giving rise to dynamic increasing returns to scale through clustered interdependencies among innovation, investments, information and knowledge. If the continuous upgrading and diversification of goods and services is extrapolated to the national level, innovation becomes endogenous within each country. As a result, the relative growth of internationally open economies is closely related to the ability to innovate and gain market shares, in contrast to neoclassical models that typically assume closed economies with exogenous technological change. Because newer models recognize that there is a constant flow of innovations coming from the competitive process itself, they are dynamic and sequential, and they indicate that no one unique equilibrium growth path usually exists.

From June 14 to 16, 1998, an international workshop on “Theories of regional development - lessons for regional economic renewal and growth” was convened in Uddevalla, Sweden. During the workshop, presentations and discussions focused on a wide range of theories and models that help explain patterns of regional development and market structure.

Since the early eighties, resulting from major structural changes in modern economies, a new wave of regional economic development policies has begun to emerge both in the US and in Europe (Atkinson, 1991; Isserman 1994; and Osborne, 1994). While traditional approaches (i.e., “smokestack chasing” via providing attractive financial conditions and business climate for relocating companies) were suitable tools for boosting localities in the era of mass production, they are no longer appropriate in the age of technology-led economic growth when economic globalization and the preeminence of knowledge and information in production have given rise to a renewed importance of regions (Acs, 1998; Florida, Gleeson and Smith, 1994: and Scott, 1996). This new set of policies, called “self-improvement” (Isserman, 1994), or “high-performance economic development” (Florida, Gleeson and Smith, 1994) aims at advancing a region’s technology base and human infrastructure through the implementation of specific, technology related programs. In collaboration with the regional industry, governments support technology development, assist in industrial problem solving, provide start-up assistance, and help local firms finance new technologies (Coburn, 1995).

For over a century the U.S. South has been considered a lagging region in which its rates of income and employment growth relegated it to second class economic status. This was reinforced by a dominantly rural agrarian economic base. Despite reasonable economic growth rates, the gap between the South and the rest of the country did not seem to close significantly until the late 1960s and early 1970s. As industrialization took hold and urban agglomeration stimulated related supporting production and business service development, economic restructuring began to change the South and in the 1970s, the gap suddenly began to close. Manufacturing seems to have played a central role in closing this employment, income and wealth gap and in 1980s the South became part of growing “sunbelt” which until that time had been dominated only by western states. It is the role of manufacturing that is examined in this study to understand its present role in regional economic growth in the U.S. South.

The regional policy in Sweden is usually divided in two parts. The specific regional policy comprises the responsible national ministry’s means for regional development whereas the broad regional policy includes other policy areas with an important geographical dimension, e.g. education, infrastructure and subsidies to local and regional public sector bodies to equalise public service capacity all over the country. The specific Swedish regional policy was introduced in 1965 as a means to solve certain contradictory demands: on one hand enterprises’ demand for labour and on the other the growing problems of depopulation of the sparsely populated areas, mainly in Norrland, the five northernmost counties of Sweden. A broad regional policy has in a sense always existed, but it was not until the introduction of the specific regional policy in 1965 that the regional dimensions of other policy areas were more systematically recognised and became objects of regional policy considerations.