Academic journal article The European Journal of Comparative Economics

Explaining Spatial Variation in Business Performance in Great Britain

Academic journal article The European Journal of Comparative Economics

Explaining Spatial Variation in Business Performance in Great Britain

Article excerpt

1. Introduction

Issues of competitiveness and productivity at a regional level have increasingly been a focus for academic and policy concern. As Gardiner et al (2004) observe, differentials in competitiveness and productivity have been a focus for policy concern on grounds of both equity and social cohesion. Increasingly as well, the policy goal of reducing differentials, specifically by raising the competitiveness of the less buoyant regions, has been seen as a key to raising overall levels of productivity at a national or European level and closing the gap on competing territories in a global context.

Harris and Li (2005) found evidence that spatial agglomeration is associated with a higher probability of exporting which is in turn linked to higher productivity. Work by Boddy et al. (2005) also started to explore the effects of 'peripherality' as a measure of spatial factors that might impact on productivity and found that peripherality accounted for a significant proportion of the productivity gap between the regions and countries of Great Britain, having already taken into account factors including capital stock, skills, foreign ownership and a range of other variables.

This paper seeks to extend this analysis of spatial factors by building a measure of economic potential based on a gravity-type model into an establishment-level analysis of productivity across Great Britain. We then seek to identify whether this variable is an important factor in determining the labour productivity of plants across Great Britain using cross-sectional regression analysis. Our results suggest that the importance of this economic potential is overstated as it is correlated with several other contributory factors; nevertheless it remains important even after other factors have been taken into account.

The rest of this paper is structured in the following way. The next section presents a review of the literature which is followed in Section 3 by the model specification. Details of the data used in the econometric part of this study are presented in Section 4. The results are presented in Section 5. Conclusions are presented in Section 6.

2. Survey of the theoretical and empirical literature

In the UK, the government has specifically emphasized the importance of the regional dimension to its central economic objectives (HM Treasury, 2001; HM Treasury, 2004; Department of Trade and Industry, 2004) (1):

   The government's central economic objective is to achieve high
   and stable levels of growth and employment. Improving the economic
   performance of every country and region of the UK is an essential
   element of that objective, firstly for reasons of equity, but also
   because unfulfilled economic potential in every region must be
   released to meet the overall challenge of increasing the UK's
   long-term growth rate (HM Treasury, 2001, v)

It notes the 'significant and persistent differences in economic performance between and within the UK regions' and goes on to argue that:

   This is why any regional economic policy must be focused on
   raising the performance of the weakest regions rather than simply
   redistributing existing economic activity. Real economic gain for
   the country as a whole will only come from a process of
   'leveling up'. (ibid)

The English Regional Development Agencies have been specifically charged with the policy goal of closing the productivity gap and this has also been a key policy goal in both Wales and Scotland.

Similarly, at an EU level, regional competitiveness and productivity differentials have been seen as particularly significant both in terms of closing the gap between the EU, the USA and other major competitors in a global context but also specifically in relation to objectives of social cohesion at European scale--particularly in the context of monetary union and the enlargement of the EU to include a wide range of less economically buoyant regions and nation states (Gardiner et al, 2004). …

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