There exist a lot of asymmetries not only across countries but also within them. Before the corona crisis, we observed high disparities in regional competitiveness across Europe as well as in other areas of the world. While probably every region will lose due to the economic implications of COVID-19, some will experience greater drawbacks than others.

Even though these economic implications are not yet predictable, following the experiences of the last years and following the financial crisis it is possible that overall disparities will remain stable or could even further increase. What to do? 

Why a look on regional competitiveness is currently more important than ever

We currently get harshly aware of the fact that today’s world is deeply interconnected. The external shock induced by COVID-19 will have long-lasting consequences as well as it will shape the thinking and decisions of economists, politicians, and business leaders. Whatever the implications of that will be, it is likely that serious changes will come fast and that some regions in Europe which are already lagging behind will get hit hard.

However, one of the most important long-term policy goals for the European Union is the convergence of living standards and therefore, the convergence of competitiveness (Madzík et al., 2015). While some “superstar” regions around the globe with industrial clusters and cutting-edge products did profit from trade and globalization, others found themselves left behind (Banerjee & Duflo, 2019). This fuels the debate on to what extent a supported harmonization in regional competitiveness across Europe can contribute to the overall resilience of European economies.

Such a discussion is the more relevant in conjunction with prevalent industrial policy approaches of the European Union and its member states as the discrete decisions which come along with it are not neutral in its effects on income and the like. Especially in light of the COVID-19 epidemic, policies have to be rethought and implemented more effectively to avoid further divergence of well-being in European regions.

The concept of (regional) competitiveness

From a business perspective production costs and product quality are relevant for the relative market position of a company and determine if they can stay in the market (Porter, 1985). Such a straightforward approach towards competitiveness is harder to find on a macro level because on that level it is a complex issue of multiple facets which cannot be analyzed by simply looking at low wages and production costs (e.g. Krugman, 1994) or by restricting the considerations to the gross domestic product.

Therefore, a branch of literature emerged within the last years which tries to consider all relevant factors that can be related to competitiveness for measuring the concept via the construction of multidimensional indices. Examples on the country level are the Global Competitiveness Index by the World Economic Forum and similar to that the Global Innovation Index by the Cornell University, INSEAD, and the World Intellectual Property Organization.

As competitiveness can exhibit high differences between countries as well as within them, it is crucial to also explore regional data. Recent research has shown, that not only differences between the European core countries and the peripheries exist, but also significant disparities between cities and rural areas (e.g. Ballas et al., 2017; Bogumił, 2009).

On the regional level, the fourth edition of the Regional Competitiveness Index (RCI) from the European Commission was published in 2019 (see Map 1) – the first three editions came out in 2010, 2013, and 2016. It provides a multidimensional framework to measure competitiveness across EU regions and defines regional competitiveness as follows:

“Regional competitiveness is the ability of a region to offer an attractive and sustainable environment for firms and residents to live and work.”

This definition goes way beyond a purely economic focus on competitiveness and extents the perspective on it by including social elements. Although the RCI provides detailed competitiveness data on the regional level (NUTS 2), there are up to date no comprehensive studies with a research scope such as the RCI that provide extensive data on a smaller level (NUTS 3 or the like).

Regional competitiveness in Europe did hardly if at all, converge during the last decade

The findings of the RCI 2019 suggest that the gaps between European regions are wide and stable. A good performance is associated with a group of high-quality factors while a deficiency in one factor leads to a broader factor or as the authors of the RCI 2019 put it by referring to Anna Karenina from Leo Tolstoy: “All happy families are alike; each unhappy family is unhappy in its own way”.

Furthermore, low regional competitiveness generally corresponds to lower income levels (see Map 2), which can lead to higher poverty rates and therefore foster not only economic but also social disparities (Schwab, 2018). Another key drawing from the RCI 2019 is also that improving the competitiveness of more-developed regions will require other priorities than for a less-developed region (Annoni & Dijkstra, 2019).

What can be done?

For their long-term success regions need to be competitive beyond narrowly focussing on costs. Efficient improvements in regional competitiveness can be facilitated from a central national or European governmental body but should also require the self-responsibility of the regions following the principle of subsidiarity:

  1. Assigning national and European funds to specific regions is a matter of political debate. Especially the European regional development fund and the cohesion fund need to be distributed more effectively to laggard regions to attract more multinational firms and therefore foster competitiveness (Basile et al., 2008). Even if these debates are influenced by strategic considerations which implications are sometimes hard to estimate, they need to be fuelled by sophisticated data-driven insights such as obtained by the RCI 2019 and other economic research. Those insights can point to specific investment needs and finetune regional development programs. Other timely and up-to-date indicators can help to act fast when required, considering the current challenges implied by the corona crisis.
  2. Regions differ compared to companies and individuals in the sense that it is as good as impossible to become successful for them from one day to another. The more important is a coherent and consistent strategy, and developing such a strategy is by no means generic – you can get some ideas of that by looking at talks to city officials on this blog.

Literature:

Annoni, P., & Dijkstra, L. (2019). The EU Regional Competitiveness Index 2019. Luxembourg: Publications Office of the European Union.

Ballas, D., Dorling, D., & Hennig, B. (2017). Analysing the Regional Geography of Poverty, Austerity and Inequality in Europe: A Human Cartographic Perspective. Regional Studies, 51 (1), 174-185.

Banerjee, A., & Duflo, E. (2019). Good Economics for Hard Times. New York, NY: Hachette, New York.

Basile, R., Castellani, D., & Zanfei, A. (2008). Location Choices of Multinational Firms in Europe: The Role of EU Cohesion Policy. Journal of International Economics, 74 (2), 328-340.

Bogumił, P. (2009). Regional disparities in Poland. ECFIN Country Focus, 6 (4), 1-7.

Krugman, P. R. (1994). Competitiveness: A Dangerous Obsession. Foreign Affairs, 73 (2), 28–44.

Madzík, P., Piteková, J., & Daňková, A. (2015). Standard of Living as a Factor of Countries’ Competitiveness. Procedia Economics and Finance, 34, 500-507.

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York, NY: Free Press and Collier Macmillan.

Schwab, K. (2018). The Global Competitiveness Report 2018. In World Economic Forum (pp. 15-17).

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