Determinants of regional change and income - Macro implications of innovation capabilities on regional performance in a European Perspective

The economic balance between regions within and between countries has changed for many reasons during the past decades. The purpose of the current study is to dig deeper into the forces behind processes and mechanisms. The central research question is to what extent national growth and productivity differences can be explained by differences in innovation performance (measured by Innovation Scoreboard data). Furthermore, the characteristics of the regions, i.e. urbanization and previous development performance with regard to convergence and divergence are included in the assessment. The analysis is based on European data, and covers all European Economic Area countries and Switzerland where data are available since 2000. The theoretical framework is based on a combination of new economic growth theory, forces of agglomeration and concepts of economic change and development, i.e. processes of convergence and divergence. The last two factors are included in the econometric analysis as two dichotomic dummies for agglomeration and diversity. The two initial hypothesis’s are, that large regional economic diversity (measured as GDP/cap) will have adverse effects on national growth performance, and that economic growth will be higher and faster in the most urbanized countries. Among the findings are, that countries are affected different as well as the impact of the global economic cycles differs between countries and affects the two main driver’s innovation and entrepreneurship. Furthermore, sectoral and demographic factors interfere differently depending on the type of regions, the economic system and the regional factor endowment. The overall approach of the paper is elaborated in section 2 based on a review of relevant literature and reports. Section 3 provides an overview of the empirical evidence in a European context. Furthermore, the section specifies the two dummies for diversity and urbanization are and the overall analytical set up of the study is presented. Section 4 offers an investigation of the factors explaining the variation in national growth performance in Europe Section 5 summarizes the main results with special attention on an evaluation of the linkages between innovation and entrepreneurial performance and differences of the fundamental characteristics of the analyzed countries. Key words: Convergence – Divergence – European Economic Area – Innovation – Entrepreneurship – Urban & Rural Regions JEL: R 1 - R11