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


Labour productivity rates are known to vary across UK regions. Although some empirical studies seek to explain the source of these differences using aggregate, regional data we argue that this may be inappropriate because labour productivity rates are firm-specific. This paper employs cross-sectional regression analysis and British, firm-level data to identify empirically whether firm-level labour productivity rates are affected by factors that vary spatially. It focuses in particular on a measure of 'economic potential' based on a gravity-type model of economic potential. Initial estimates suggest that economic potential is important but its impact diminishes with the introduction of further explanatory variables. Nevertheless, even once interaction terms are included the effect of economic potential remains important. It suggests the clear need to take account of space in firm-level regressions.

JEL Classification: C21; R38; R58

Keywords: Productivity per Employee; Economic Potential; HM Treasury's key Drivers

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. …

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