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Empirical Modelling in Regional Science pp 273–302Cite as

Speed Up or Slow Down? The Effects of Capital Investment Grants on German Regional Growth

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Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 657))

Abstract

The promotion of investment subsidies through the “Joint Task for the Improvement of Regional Economic Structures” (GRW) is a key instrument of regional policy in Germany to foster economic development in lagging regions. In this paper, we analyze the effects of the funding scheme on labor productivity growth for 225 German labor market regions between 1994 and 2006. Using a neoclassical growth-model framework, we test for the policy impact on the speed of convergence to long-run steady state income. Our results reveal a significant positive direct effect of the regional policy instrument on labor productivity growth, with the speed of convergence being almost doubled for supported regions half way below their steady state compared to the case of not being supported. In order to check for the robustness of the results we also augment the standard regression approach by spatial econometric tools. Including spatial lags of the left- and right-hand-side regressors in the convergence equation shows that besides the positive direct effect, there is a negative policy related spillover effect on neighboring regions at work. The latter effect may be explained by the increased attractiveness of the supported region, which is able to poach capital investments and other input factors from neighboring regions. Though the indirect effect, on average, yields to a slowdown in the speed of adjustment to the steady-state income, the net effect of GRW support to lagging regions is still positive.

This chapter extends an earlier article published in German as “Regionale Wachstumseffekte der GRW-Förderung? Eine räumlich-ökonometrische Analyse auf Basis deutscher Arbeitsmarktregionen”, in: Dreger, C.; Kosfeld, R.; Türck, M. (Eds.): “Empirische Regionalforschung heute”, Wiesbaden: Gabler, pp. 51–86.

Jointly with Björn Alecke and Gerhard Untiedt. Björn Alecke, Gesellschaft für Finanz- und Regionalanalysen (GEFRA), e-mail: Alecke@gefra-muenster.de; Gerhard Untiedt, GEFRA & Technical University Clausthal, e-mail: Untiedt@gefra-muenster.de.

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Notes

  1. 1.

    This result also mirrors conflicting empirical evidence for the success of regional policies at the European level (see, e.g., Ederveen et al. 2006; Dall’erba and Le Gallo 2008, for an overview).

  2. 2.

    See, e.g., Bölting (1976), Franz and Schalk (1982, 1995), Klemmer (1986, 1995), Asmacher et al. (1987), Deitmer (1993), Lammers and Niebuhr (2002).

  3. 3.

    In the literature, this concept of convergence is also known as β-convergence. The latter is a necessary (although not sufficient) condition for the reduction of income disparities, known as σ-convergence.

  4. 4.

    Using logarithmic values for each variable x, which allows us to directly interpret the obtained regression coefficients as elasticities.

  5. 5.

    We also tested for significance of the remaining interaction terms in the full regime switching model. However, the obtained results did not provide strong empirical support for the latter. Moreover, the stability of the convergence parameter β was unaffected, so that we work with the nested model specification in the following.

  6. 6.

    As alternative outcome variable, we also used per capita GDP. Since the results turned out to be very similar, the latter results are not reported here but can be obtained from the authors upon request. The main difference between labor productivity and per capita GDP is the consideration of the labor participation or unemployment rate, which is typically not the focus of empirical growth analysis.

  7. 7.

    For simplicity, we assume that funded labor markets converge to the same steady-state level. Here, we simulated different scenarios, either taking the 100 or 80 percent income percentile for non-funded West German regions as benchmark level. The latter assumes that even in the in long-run, German regions do not fully converge to a common income level, e.g., due to differences in the technological efficiency of regions (see, e.g., Schalk et al. 1995). We report results for the first scenario in Fig. 9.5, further results can be obtained upon request.

  8. 8.

    For the computation of confidence intervals in interaction models see Bambor et al. (2005).

  9. 9.

    We also tried alternative specification including only those employees as share of total employment with tertiary education. However, the results did not change much.

  10. 10.

    Moreover, though typically restricted first-order neighborhood, higher ranks are also possible, implying that cross-sections are seen as neighbors of order N if they share a common border with other cross-sections of rank order N.

  11. 11.

    Detailed regression tables for the latter can be obtained from the authors upon request.

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  1. Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen, Germany

    Dr. Timo Mitze

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Mitze, T. (2012). Speed Up or Slow Down? The Effects of Capital Investment Grants on German Regional Growth. In: Empirical Modelling in Regional Science. Lecture Notes in Economics and Mathematical Systems, vol 657. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-22901-5_9

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