Francesco Androni

FIRM DYNAMICS AND REGIONAL DEVELOPMENT:

AN EMPIRICAL STUDY ON PRODUCTIVITY GROWTH FOR EU28
REGIONS

Abstract

Regions around the world are showing persistent diverging trends, where the richest and
most productive ones grow more than the others, in an inequality-enhancing mechanism. In
this context the firm takes the role of the fundamental economic agent, increasingly
important in fostering regional dynamism and in setting into place positive externalities and
productivity-enhancing processes. The aim pursued by this thesis is to describe the
relationship between the dynamics of firms and regional development by understanding
whether and how new economic activities can contribute to regional productivity growth.
For this purpose, an econometric analysis is being conducted using panel data from the
OECD Regional database, concerning 101 NUTS 2 regions belonging to 10 of the EU28
countries, from 2010 to 2015. A production function describing productivity growth as a
product of firm entrance, turbulence, and firm size, after controlling for the “classical”
determinants of regional growth is regressed using pooled OLS, fixed and random effects
estimations. Moreover, a quantile estimation is conducted to test whether firm dynamics
have different impacts along the productivity growth distribution.
The results show that firm dynamics are well linked to productivity growth, with contrasting
effects at the different levels of the productivity growth distribution. Net entry is well related
to productivity growth, yielding an even stronger relationship for negative productivity
growth, showing that the exploitation of market opportunities, captured as by new firms is
important in driving regional growth. On the other hand, a turbulent environment for firms
appears detrimental to productivity growth, with the exception of the regions highest in the
productivity growth distribution that instead benefit from this. In that environment, a process
that resembles the Schumpeterian concept of creative destruction is linked to productivity
growth.