Unequal Competitive Performance Across the UK Regions Michael - - PowerPoint PPT Presentation

CBR Summit: Innovation and Governance 29-30 March 2006

Unequal Competitive Performance Across the UK Regions

Michael Kitson

(Judge Business School, University of Cambridge)

Ron Martin

(Department of Geography, University of Cambridge)

Maria Abreu

(Cambridge-MIT Institute)

Maria Savona

(Cambridge-MIT Institute)

CBR Summit: Innovation and Governance 29-30 March 2006

Structure

The New Focus on Regional Competitive

Performance

Regional Disparities in Performance: The

Scale of the Problem

Causes of Regional Growth Disparities: The

Issue of Regional Competitiveness

The Policy Challenge

CBR Summit: Innovation and Governance 29-30 March 2006

The New Focus on Regional Competitive Performance

Marked shift in thinking about ‘regional problem’

and ‘problem regions’ in recent years

From ‘structural deficiency of demand’ to

weaknesses in the ‘supply-side micro-economics

• f competitive performance’

Competitive performance equated with

productivity

Focus on raising regional and urban productivity

• Both as way of reducing regional disparities in per

capita GDP

• And as way of boosting productivity of UK economy as

a whole

CBR Summit: Innovation and Governance 29-30 March 2006

Productivity in the Regions: the Government’s Objective

‘The Government is… committed to strengthening economic performance across the regions, localities and countries of the UK, and to reducing the persistent gap in growth rates between the regions’ (Budget 2006, 22 March, p.44)

CBR Summit: Innovation and Governance 29-30 March 2006

Regional Productivity Disparities: The Scale of the Problem

Since the mid-1980s, major productivity gap has

• pened up between London and South East on one

hand, and rest of UK on the other

Only three regions have productivity above UK

average (London, South East and Eastern)

Productivity growth in the Northern regions has

been especially slower

The productivity gap is such that output per

employee in South East now more than 28 percent above that in Northern Ireland, and 20 percent above that in North East

CBR Summit: Innovation and Governance 29-30 March 2006

Regional Labour Productivity, 1980-2003 (UK 1980=100)

CBR Summit: Innovation and Governance 29-30 March 2006

Regional Productivity Disparities: The Scale of the Problem

Employment growth has also been unequal

across the regions

Highest in South East, Northern Ireland, South

West and Eastern region

Some regions have not fully recovered from

massive job declines of early-1980s (North East, North West and West Midlands)

South East only region to experience above

average growth in productivity and employment

CBR Summit: Innovation and Governance 29-30 March 2006

Regional Growth of Productivity and Employment 1980-2004

CBR Summit: Innovation and Governance 29-30 March 2006 GVA per capita, 2003

Source: Local Knowledge

550,000 1,100,000 275,000 Meters

GVA per capita (£)

7,000 - 12,000 12,000 - 13,000 13,000 - 14,000 14,000 - 15,000 15,000 - 16,000 16,000 - 17,000 17,000 - 18,000 18,000 - 19,000 19,000 - 20,000 20,000 - 200,000

GVA per Capita 2003

Source: Local Futures

CBR Summit: Innovation and Governance 29-30 March 2006 Change in GVA per capita, 1995-2003

Source: Local Knowledge

550,000 1,100,000 275,000 Meters

Change in GVA per capita (%)

15 - 30 30 - 40 40 - 42 42 - 44 44 - 46 46 - 48 48 - 50 50 - 60 60 - 100

Change in GVA per Capita, 1995-2003

Source: Local Futures

CBR Summit: Innovation and Governance 29-30 March 2006

Regional Productivity Disparities: The Scale

• f the Problem

If recent trends in regional productivity growth are

continued, the productivity of the South East will be 40% higher than that of the North East by 2020

Equalising productivity growth rates will not however

reduce absolute regional disparities in productivity, which will continue to widen

Assume, for example, in all regions productivity grows at

the UK average for 1980-2003, the absolute gap between South East and North East would widen by 85% by 2020

To equalise regional productivity levels by 2020 to that in

the South East (assuming it maintains its recent growth rate) would mean increasing annual growth rates in North East by more than 2 percentage points (more than doubling the current trend growth rate)

Regional Labour Productivity Growth Rates, 1980- 2003

Regional Labour Productivity: Actual and Continuation of Historical Trend, 1980-2020

GROWTH DIVERGENCE AND LEVEL DIVERGENCE

Regional Labour Productivity: Continuation of Historical Trend, 2004-2020

Regional Labour Productivity: Actual and Future Growth at the UK National Rate, 1980-2020

GROWTH CONVERGENCE BUT LEVEL DIVERGENCE

Regional Labour Productivity: Future Growth at the UK National Rate, 2004-2020

Changes in Regional Labour Productivity Growth Required to Reach the UK National Growth Rate

Annual Regional Labour Productivity Growth Required to Reach the South East Productivity Level by 2020

Changes in Annual Regional Labour Productivity Growth Required to Reach the South East Productivity Level by 2020

CBR Summit: Innovation and Governance 29-30 March 2006

The Causes of Regional Disparities in Productive Performance

Key focus by Government on critical ‘drivers’ of

regional (and urban ) productivity and competitiveness (Skills, Enterprise, Innovation, Competition, Investment)

Urban policy adds two others (Connectivity, Quality of

Life)

Regional innovation and enterprise appear to be the

two crucial drivers

But not clear why these factors chosen (what is the

theory of regional competitiveness or regional productivity behind the drivers?)

In addition - what drives the ‘drivers’?

CBR Summit: Innovation and Governance 29-30 March 2006

Drivers of Regional Competitiveness/Productivity According to HM Treasury/DTI/ODPM

SKILLS EN TERPRISE INN OVATION COMP ETITION IN VESTMEN T Entry of new firms raises competition Skill s raise firms’ capacity to develop and use new technology Management skill s raise entrepreneurship and business excellence. New firms create demand for skilled labour Increasing competition encourages competition Increasing competition creates incentives for business investment Investment in physical capital increases firms’ innovative capacity

CBR Summit: Innovation and Governance 29-30 March 2006

Four Different Aspects of Regional Competitiveness

Regional Absolute Advantage

• ‘Fundamentals’ key to growth
• Education base
• Social capital
• Institutions
• Infrastructures

Regional Comparative Advantage

• Trade key to growth
• Factor endowments
• Economic specialisation
• Some factors relatively

immobile (Universities)

Regional Locational Attractiveness

• To flows of skilled, creative

labour

• To mobile capital (productive,

financial, public sector)

• To knowledge and technology

Regional Competitive Advantage

• ‘External economies’ key to

growth

• Clustering and specialisation
• Innovation
• Investment

CBR Summit: Innovation and Governance 29-30 March 2006

The Causes of Regional Disparities in Productive Performance

Cumulative growth processes Interaction of supply and demand – successful regions

have higher net ’exports’ and attract skilled labour and knowledge capital which raises their productive potential

Competing over skilled and educated labour Long been a ‘drift’ of population to the South of UK Flows of skilled and educated labour are

• verwhelmingly in favour of South East and London

‘Talent magnets’ versus ‘talent drains’ Research excellence and R&D biased towards the south

A Cumulative Causation Approach to Regional Growth: A Region in a Virtuous Cycle

High Growth and Expanding Demand Agglomeration and Exploiting Increasing Returns Improving Competitiveness Exports Increasing Import Propensity Declining Importing Labour and Capital Increasing Productive Potential

An Endogenous (Self-Reinforcing) Growth View of Regional Competitive Success TALENT:

Education, skills, training. Well-qualified workforce Entrepreneurship

THE COMPETITIVE REGION

High demand, growth, Productivity and employment

The ‘Learning Region’ The ‘Innovative Region’ TECHNOLOGY:

Purposive innovation by local firms; absorption

• f technology throughout

regional economy

Talent and Technology attracted from

• ther regions

Indigenous Talent and Technology

The Impact of Factor Flows on Regional Growth Disparities

FEC South (no-factor inflows) FEC South (with factor inflows) FEC North (no factor outflows) F E C N

• r

t h ( w i t h f a c t

• r
• u

t f l

• w

s )

GDP per capita S2 N1 N2 S1 Time

FEC= Full Employment Growth Ceiling

Working Age Population and Total Employment: 1971–2003 (000s)

(Source: Rowthorn, 2005)

Growth in proportion of working age population with degree level qualifications 1991-2001

Source: The State of the English Cities Report, ODPM, March 2006

Regional 'Trade' in Graduates (employed minus educated as a percentage of total graduate population, 2001-2002 )

• 3
• 2
• 1

1 2 3 4 5 6 7 8 East South East South West Northern Ireland Wales West Midland East Midlands North West Scotland North East Yorkshire and the Humber London Net Gain/Loss as % Total Graduates

Source: Wales (2006)

CBR Summit: Innovation and Governance 29-30 March 2006

Talent Magnets

The major regional factors encouraging graduates to seek work in a region are, (according to Faggian and McCann, 2005):

• Innovative potential of the region
• Proportion of knowledge workers in the region

Strong cumulative knowledge accumulation process through the migration of skilled and educated labour

CBR Summit: Innovation and Governance 29-30 March 2006 Location of Research - Intensive Universities (based on RAE 2001, %

• f total departments)

Ranking 5 and 5* 1 to 4 London 18 17 South East 15 12 Scotland 12 14 Yorkshire & Humberside 10 8 North West 9 10 West Midlands 7 8 South West 7 8 Eastern 7 4 East Midlands 5 8 Wales 5 6 North East 5 5 UNITED KINGDOM 100 100

CBR Summit: Innovation and Governance 29-30 March 2006

Total R&D per capita in the UK Regions, 2002 (£)

Total R&D per capita by Region in 2002 100 200 300 400 500 600 700 Eastern South East South West East Midlands North West and Merseyside London Scotland West Midlands Yorkshire and the Humber Northern Ireland Wales North East Per Capital

DTI (2005) Regional Innovation Patterns

CBR Summit: Innovation and Governance 29-30 March 2006

Business Expenditure on R&D in 2002, £million

500 1000 1500 2000 2500 3000 3500 North East North West Yorkshire and H East Midlands West Midlands Eastern London South East South West Wales Scotland Northern Ireland

CBR Summit: Innovation and Governance 29-30 March 2006

Government Expenditure on R&D in 2002, £million

100 200 300 400 500 North East North West Yorkshire and H East Midlands West Midlands Eastern London South East South West Wales Scotland Northern Ireland

Innovative Regions are Prosperous Regions

CBR Summit: Innovation and Governance 29-30 March 2006

Virtuous Cycles: the Importance of Adaptive Capacity

Regions can become locked-in to inappropriate industrial structures and technologies

• See relative decline of the northern regions

Long-term persistent growth is dependent on the adaptability

• f regions
• Adaptable factors of production
• Adaptable institutions and structures

South East economy depends on knowledge-based activities which are more adaptable than conventional manufacturing and services which are highly dependent on sector specific factors of production South East benefits from global position of London and proximity to Europe which have stimulated continual institutional transformation

A Cumulative Causation Approach to Regional Growth: A Region in an Adaptive Virtuous Cycle Increasing Demand Agglomeration and Exploiting Increasing Returns within an Adaptive Structural Environment Improving Competitiveness Exports Increasing Import Propensity Declining Importing Adaptive Labour and Adaptive Capital Increasing Productive Potential

CBR Summit: Innovation and Governance 29-30 March 2006

The Policy Challenge

There are significant regional disparities in growth and productivity performance reflecting powerful long term dynamics Slowing or halting regional divergence is a major challenge and possibly an unrealistic goal The 5 ‘drivers’ approach is both partial and unbalanced Partial – it is the modern equivalent of Say’s Law and ignores aggregate demand. Demand and supply interact to create powerful regional cumulative growth cycles Unbalanced – policy is skewed towards two of the drivers: Enterprise Innovation Need to address ‘Regional Fundamentals’

CBR Summit: Innovation and Governance 29-30 March 2006

Unbalanced Regional Policy: Enterprise

More an ‘article of faith’ than ‘evidence-based’ ‘HM Treasury (2004) proposes a range of indicators…. But several enterprise variables raise

• problems. For example, it is by no means obvious

what relationship exists between productivity and the ‘fear of failure’ preventing people from starting a business.’ (Fawcett and Cameron, 2005) Regional perspective: creating an ‘enterprise culture’ is hampered by the economic history and industrial structure in the lagging regions Is enterprise a cause or an effect – or both?

CBR Summit: Innovation and Governance 29-30 March 2006

Unbalanced Regional Policy: Innovation

Paradox: “You can see the computer age everywhere these days, except in the productivity statistics". Robert Solow, 1987, (MIT, Nobel Laureate) Answer? Innovation takes time to have a major impact on economic growth Why? It is the use of technology not the generation of technology that has the biggest impact on growth Regional perspective: increased focus on the use and diffusion

• f technology can benefit regions dependent on more

conventional industries and services Distinction between ‘knowledge generating’ locations and ‘knowledge using’ locations

Three Key Policy Foci for Improving Regional Competitive Performance

Policies aimed at enhancing and upgrading a regionÕ s adaptive capability Policies aimed at enhancing and creating regional external economies

• Educational base
• Infrastructure
• Social capital
• Business culture
• Capital markets
• Innovation
• New firm formation
• Training and skills
• Institutional reform
• Market and technology

intelligence

• Knowledge

networks

• Labour market
• Supplier

networks

• Clusters
• Supporting

services

Policies aimed at enhancing and upgrading a regionÕ s fundamentals

CBR Summit: Innovation and Governance 29-30 March 2006

When is regional policy not a regional policy?

‘Regional policy’ is a national policy delivered locally. Independence is nominal with all the Regional Economic Strategies adopting a similar framework Insufficient ‘evidence’ of how the drivers, and their interactions, vary between and within regions Insufficient analysis of economic history – the strong and persistent dynamics of regional divergence Insufficient analysis of economic geography – future regional growth is highly dependent on current variations in regional industrial structure The need for more evidence – and from more than one discipline