Comparing Sectoral Investment and Employment Specialisation of EU Regions: A Spatial Econometric Analysis

EMU is accompanied by increased market integration and factor mobility ? especially of the production factor capital. Up to date, there is no clear indication concerning the specialisation tendencies to be expected due to these impacts. This paper thus investigates the driving forces of sectoral investment specialisation of EU regions. Regional investment patterns are compared to average EU patterns in order to identify the relative sectoral investment specialisation of EU regions. The econometric analyses aim at identifying the regional determinants of high relative sectoral investments, i.e. the regional investment specialisation in different sectors. The importance of a number of determinants from different theoretical approaches is tested controlling for heteroscedasticity, potential endogeneity and spatial autocorrelation. Regional factor cost or productivity differentials are supposed to matter according to traditional trade theory. Sectoral productivity differentials between regions generally contribute to the explanation of relative investment shares in the manufacturing sectors analysed. We also find evidence for the relevance of regional labour cost differentials. Relative investment specialisation in some traditional, labour intensive sectors is higher in those regions profiting from low average labour costs. Relative investment shares in a number of capital intensive or skill intensive sectors, instead, are higher in regions marked by higher average labour costs. Since investments in most manufacturing sectors are attracted by those regions in central parts of each country and not by regions far away from the core, we might be confronted with backwash effects predicted by the polarisation theory for peripheral regions. In addition, the location close to large markets seems to matter for many manufacturing sectors. Market integration, which according to the New Economic Geography (NEG) is supposed to enforce agglomerative forces, however, does not play a particular role in the different kinds of sectors. In earlier studies, we found evidence for the stronger relative regional specialisation of core as well as of peripheral regions. The results of this econometric analysis now demonstrate that the determinants of the high relative specialisation of peripheral regions differ from those of economic centres. The driving forces of investment specialisation are favourable for core regions with respect to growth-oriented market services. In addition, stronger relative investment shares of peripheral regions in non-market services as well as building & construction point to their high dependence on non-market economic activities and to their poor economic performance. Important manufacturing sectors are rather attracted by regions with higher average labour costs ? probably reflecting the need for high-skilled labour. Lowering the regional level of labour costs thus does not seem to be an adequate measure of attracting manufacturing production of growth industries.