Based on R. L. Martin „A study on the Factors of Regional Competitiveness”

Classical theory (A.Smith 1776, D. Ricardo 1817)-key elements Key assumptionsKey driving factors Division of labour decides on technological diffreneces across countries Investment in capital improve division of labour and raises productivity Trade based on absolute advantage (Smith) and later comparative advantage Trade an engine for growth (static gains from the trade) Factors of production pefectly mobile across industries

Classical theory – implications for regions) competitiveness All countries participate in the division of labour but if the productivity the same across countries (regions) no basis for trade exists Higher labor productivity (absolute advantage) does not guarantee ability to compete successfully. An industry has to have a comparative advantage Labor not internationally mobile. Higher wages may be maintained in technologically superior comparative advantage industry.

Neo-classical theory (Heckscher- Ohlin)- key elements Key assumptions Perfect competition (pefect information, constant returns to scale, full divisibility of production factors) Trade an engine for growth (static gains from trade) Trade based on labour and capital endowments Factors of production perfect mobile across industries

Neo-classical theory – implications for (regional) competitiveness Division of labor based on relative factor proportion. If the same across countries (regions) no base for trade. Theory relevant for North-South trade, Factor prices equalization makes convergence of returns to capital and labor. Low productivity countries (regions) should catch up with high productivity ones Competitiveness not relevant in the long run because of perfect competition

Keynesian theory (1936) – key elements Key assumptions Price adjustment slow, lead to adjustments in quantity Capital intensity Markets not in equilibriumInvestment Possibility of false trading (against non- equilibrium prices) Government spending Capital and labor not complementary

Keynesian theory implications for (regional) competitiveness Government can intervene successfully, timing is crucial Imperfect markets allow for regional differences, convergence of regions achieved through economic policy Capital intensity increases productivity and growth

Development economics, Rostow 1960, Myrdal 1957,- key elements Key assumptions (observed facts)Key driving factors (observations) Incomes do not converge over timeShift from agriculture to higher value added sectors Some countries develop more successfully than others Openness to trede Economic policy plays an important role Foreign direct investment (foreign) development funds

Development economics implications for (regional) competitiveness Regions with initial productive advantages will most probable maintain their lead over peripheral regions Catch-up in productivity between regions a slow process Policies should take into consideration a region’s stage of development Policies needed to promote „spread effects”, e.g. through FDI or development funds

Endogenous growth theory (Romer, Martin 1998)-key elements Key assumptions Technological progress no manna from heaven Key driving factors Incresing returns from accumulation of knowledge R&D expenditure Human capital as production factorInnovativeness (patents) Markets do not automatically generate optimum Education level Path dependency („a history matters”)Spending on human capital Effective dissemination of knowledge (knowledge centers)

Endegenous growth theory implications for (regional) competitiveness Regional differences in productivity caused by differences in technology and human capital Engines for growth: improvements in technology and human capital Open trade supports growth and technological development Investment in research are crucial Key importance of human capital improvement

New trade theory (P.Krugman 1970-early 80s) Traditional theory explains trade between countries with different technology/factor endowments Unable to answer why trade takes place between similar countries and regions and why different production structures occur in similar regions New trade theory explains trade between developed countries It focuses on scale economies, imperfect competition and product differentiation

New trade theory – key elements Key assumptionsKey driving factors Techology- endogenous factor of production Factors that enable quick realization of economies of scale Decreasing returns in the production of new technologies - Skilled labor Increasing returns to scale in the use of technology - Specialized infrastructure Technology mobile across companies and countries, but imperfect mobility of the ability to use technology - Network of suppliers Production of new technology creates externalities - Localised technologies Imperfect competition

New trade theory-implication for regional competitiveness Specialization needed to allow external economies of scale Size of home market crucial to obtain internal economies of scale Investing in skilled labor, specialized infrastructure, networks of suppliers and localized technologies enhance external economies of scale

New economic geography models (Fujita, Krugman) Spatial agglomeration/clustering are key sources of externalities and increasing returns (labor, knowledge spillovers) that give local firms higher productivity Economic integration increases tendency to spatial agglomeration and specialization, leading to core- periphery equilibrium and persistent differences in productivity Limited geographical range of spillovers due to local socio-cultural, political and institutional structures and practices

Convergence or de-convergence Neoclassical theory – thesis on the accelerating convergence at country and region level Endogenous growth model, new trade model and NEG model: increasing specialization, spatial concentration and hence no convergence

The Growth Pole Theory Based on the belief that governments can induce economic growth by investing in capital intensive industries in large urban centers or regional capitals The growth is supposed to spread to the less developed regions The role of economic policy: - supporting new competitive advantages ( growth poles – growing polarization) - making possible diffusion of factors diminishing in- equalities (education opportunities, access to traditional and modern infrastructure (ICT)

Effects of growth pole theory Positive impact on the development of both groups of regions: poor and reach Positive economic and social effects The high stability of economic policy required (no political cycles!) The long-run approach needed theory popular in less developed countries (spreading the growth from urban to rural areas) It is present in Polish government strategy (Poland 2030) Not accepted by regional authorities, especially those from periphery regions

D. Rodrik „One Economics. Many recipes” An interesting book – opens discussion on the type of theory and policy to foster development, may be applied to regional development as well The role of „Washington Consensus” the views of Washington based institutions (IMF, WB, US Treasury – 1980s), being revived version of 19. century economics referred to as neo-liberalism But a wide variety of economic institutions are compatible with high growth of income Discussion on merits of alternative policies remained unresolved Mainstream economics gives many policy recipes and it is difficult to decide between them

Why are there so many failures of policies? Why does not convergence between countries and regions happen? Partial explanation: some countries in a low-level trap Basic preconditions for growth: civil order and good education system are missing Therefore the choice of policy may not matter Some recipes bad, not worth to try: complete autarky applied in North Korea, economic policy in Argentina According Rodrik different initial conditions required different policy approaches Mixed success of the policy transfer from one region to another (what about good practices strategy?) Washington consensus: across- the- board liberalization; It has not gone away despite the failure in the countries that applied it most fully and.. Has been transplanted from developing countries to developed part of the world

Ten design principles for industrial policy (1-5) according D. Rodrik 1. incentives only to „new activities”, to diversify the economy and generate new areas of comparative advantage 2. clear benchmarks or criteria for success and failure: recipients can receive support despite poor outcomes 3. public support targeting activities not sectors ( bilingual training, infrastructure investment, risk and venture capital instead of tourism or biotech), this facilitate structuring support as corrective to certain market failures 4. built in sunset clause for withdrawing support 5. subsidized activities having the clear potential to provide spillovers

Ten design principles for industrial policy (5-10) 6. the authority for carrying out industrial policies in agencies with high competence (to fight corruption and bureaucracies) 7. agencies monitored closely by political authority at the highest level 8. good communication between agencies and the private sector 9. minimize the costs of mistakes in „picking the losers” 10. activities having capacity to renew themselves

5 concepts relevant for regional competitiveness Urban growth theory New institutional economics Business strategy economics Schumpeterian evolutionary economics

Urban growth theory (Jane Jacobs 1969) Fusion of economic and sociological aspects City regions crucial for wealth creation Urban systems create increasing returns through exchange of knowledge across firms and economic agents within geographic regions More diversity in the local economy associated with higher rates of growth (M. Feldman, 2002) Diversity a „geography of talent”? Urbanization economies may turn into diseconomies; cities can lose their competitiveness

New institutional economics R. Coase „transaction costs”, elaborated by O. Williamson The size of a firm can not be explained by economies of scale, but rather by transaction costs Those costs include: costs of communication, coordination and decision making Large firms save in transaction costs by long-term contracts Williamson notion of transaction costs elaborated by geographers and used to explain the emergence of industrial clusters

Business strategy economics FDI and behavior of transnational firm (Dunning 1993) Foreign investment unequally spread over time and space Theory based on business economics and new trade models Explains why firms go multinational: better serve local market and get low-cost inputs Examples: investment in advanced countries (Japanese cars in US) Large scale relocation of production in low-cost locations (China) M. Porter cluster theory the best representative of business strategy economics

Schumpeterian/evolutionary economics, 1911 Entrepreneurs facing competition and declining profits driven to innovations creative destruction waves of innovation provides profit across industries Schumpeterian evolutionary economics opens space for policy intervention