Summary Chapter 5

Economic Impact of the Marine Sector on the Regions

A Location Quotient Approach
I. INTRODUCTION
The marine sector's economic importance in industrialized countries is typically low,
between 1-10% of GDP. However, a case study by Morrissey and O'Donoghue (2012) found
the marine economy is significant at the regional level. Subsectors like fisheries and shipping
can significantly impact regional and coastal economies. The marine sector is evolving from a
traditional natural resource-based mode of production to high-tech, service-based firms,
making them more responsive to supply and demand-based shocks.

The structure of the marine sector is changing, impacting regions and coastal areas that
once relied on traditional activities. The decline in industries could negatively affect economic
security and social well-being. To build resilience, targeted governance and policy responses
are needed, requiring sophisticated tools to address complex dynamics.

The IO methodology is useful for examining the direct and indirect impacts of a sector at
the national level. However, the original Leontieff structure envisioned a closed economy with
industries responsible for single commodities. Local use tables are required to understand the
impact of activities, but the absence of regional import and export statistics restricts the
capacity to construct sound regional economic models.

The lack of regional data has led to modelers compromising on regions and sectors,
potentially acting like macro models without compositional detail. As regional economies
develop, indirect methods of estimating interregional trade flow patterns have reemerged, such
as employment-based location quotients.The chapter concludes with recommendations for
developing strategies for national and supra-national marine sectors.

II. LOCATION QUOTIENTS

To construct a regional input-output table, a well-designed survey is the best method, but
surveys are resource-intensive and often outside the budget of individual research projects. To
compile regional economic models, indirect methods of estimation have been developed, such
as applying employment-based Longitudinal Variables (LQs) to estimate trading coefficients.
LQs demonstrate how strongly an industry is represented in a region, and smaller areas are
generally less self-sufficient than larger ones. However, if there is a development in an area
with a cluster of suppliers, the multiplier may be larger than the norm.

This is particularly relevant in the marine sector, where marine activities organically cluster
in specific areas. For example, in Finland, the fishing industry's socio-economic impact was
found to be concentrated in two regions, while in Norway, significant economies of scale were
found across nine marine industries. Research in Norway and Ireland indicates that regional
agglomeration in salmon aquaculture and maritime transport clusters can positively impact
productivity. Therefore, a regionalized IO table is needed to identify clusters of activities with
higher returns to the region, based on the IO methodology.

III. METHODOLOGY
The standard mathematical representation of an IO table is:

where matrix X represents the transaction flows between sectors of activities and is the sum of
gross outputs, matrix I is an identity matrix, vector x is the sum of gross outputs, vector f
represents the part of gross output sold to final demand, and A is a matrix of input coefficients
defined as;

Where, zij is intermediate demand for inputs between sector i and the supply sector j and xj is
the final output for sector i. (I – A)–1 (eq. 5.1) is known as Leontief’s inverse matrix and
represents the total direct and indirect outputs in sector i per unit of exogenous final demand,
d for sector j. One of the most important uses of IO models has been the use of the Leontief
inverse matrix in the structural analysis of an economy . One can compute the regional input
coefficients, rij, by the corresponding national coefficients, aij, using the formula :

where rij is the regional coefficient; t ij is the trading coefficient estimated using LQ; and aij is
the national coefficient. Therefore:

As noted above, if regional data on imports and exports exist, IO models can be used to study
the economic impacts of investments in regions and also the economic structures and
interdependency of regions. However, as this data is usually not available, LQ have been
devised.

Location Quotients
Popularized by Regional Scientists, a simple location quotients (SLQ) may be defined as:

The SLQi (Sectoral Input Quality Index) measures the representation of a sector in the regional
economy. A SLQi < 1 indicates underrepresentation, allowing imports from other regions.
Conversely, a SLQi ≥ 1 indicates the sector can fulfill all regional purchasing sector
requirements, without adjustment to the national input coefficient.

The use of Standard Deviation (SLQ) to adjust national coefficients can lead to misleading
results. For instance, a SLQ of 0.80 may lead to a presumption that the discrepancy between
national and regional coefficients is the same, regardless of downstream sectors. This
assumption is unsustainable as it doesn't consider the sector size or specialized needs.
Cross-industry locution quotients (CILQs) go some way towards overcoming the shortcomings
of SLQs. An employment-based CILQ for sectors i and j may be defined as

The Central Industrial Input-Output (CILQ) and Central Industrial Input-Output (CILQ) are
trading coefficients used to determine the relative size of a region's supplying and purchasing
sectors. The CILQ is used when the supplying sector is smaller than the purchasing sector,
requiring imports to meet the required inputs. The SLQ and CILQ are used to adjust the national
coefficient, but their performance has been criticized. Round (1978) proposed three criteria for
an LQ to ensure accurate results: the relative size of the sector, the size of the purchasing sector,
and the size of the region. The CILQ and SLQ do not meet these criteria, leading to
overstatement of regional multipliers and understatement of regional import capacities.

Flegg et al. (1995) argue that regional propensities to import are higher than national
propensities. They propose the CILQ method of adjustment to produce regional input
coefficients more representative of local conditions. The logic behind CILQ adjustment is that
when the supply sector is smaller regionally compared to the purchasing sector, some inputs
will have to be met by imports from outside the region.

The FLQ adjustment formula considers the relative size of the regional purchasing and
supplying sectors when determining the adjustment for interregional trade. It allows for both
regional size and the relative size of the purchasing and supplying sectors, and overcomes the
tendency of other LQs to overstate regional multipliers. Tohmo (2004) examined the relative
performance of the FLQ, SLQ, and CILQ in Finland, finding that the FLQ was a more accurate
method of regionalizing the Finland IO table compared to other LQ methods.

The higher the location quotient (LQ) the more likely it is that an industry has a competitive
advantage. An LQ greater than 1 indicates that a region has proportionately more workers or
output than the larger comparison area employed in a specific industry sector. However, there
are no commonly agreed or theoretical LQ cut-off values for defining what a high LQ value is
or what LQ value defines a cluster. Recent research suggests that regions with sectors with an
LQ value of 1.25 and above might indicate that a region is specialized in that industrial activity.

IV. CASE STUDY: IRELAND

Morrissey's (2016) study examines the economic impact of the marine sector in Ireland
using the LQ methodology and the Irish IO table. The FLQ was found to be the best performing
LQ for the Irish regions. The study found that production multipliers were higher in the BMW
region for fishing, aquaculture, oil and gas extraction, seafood processing, boat building, and
water construction. In the SE region, production multipliers were higher for marine retail,
maritime transport services, auxiliary transport services, and marine engineering. These
backward linkages serve as indicators for the sector's performance in the regional economy.
 The BMW region's marine sectors, including fishing, aquaculture, seafood processing,
and oil and gas extraction, have high backward linkages, making expansion beneficial. The
seafood industry, for example, has an average backward linkage of 128, indicating a strong
self-reliant production-oriented sector. The SEMRU marine company database shows that 23%
of seafood-based enterprises, 46% of seafood-based gross value added, and 24% of
employment are based in county Donegal, indicating a strong regional economy.

The service-based marine sectors in the Southeast (SE) region, including maritime
transportation, services to maritime transportation, and marine retail, have high backward
linkages, suggesting that expanding these sectors would be beneficial. For every €1 produced
within these sectors, €0.77 and €0.35 are backward linked to their upstream suppliers. The
marine sector in the BMW region has an average backward linkage of 121, indicating a strong,
self-reliant, production-oriented sector. The marine sector is slightly more important in the
production process of the BMW region compared to the SE region, confirming Morrissey and
O'Donoghue's (2012) study that the marine sector is of greater importance to the North West
region of Ireland.

Discussion of the Irish Case Study

The marine sector plays a significant role in the production process of the Border Region of
Ireland (BMW) compared to the Southeast region of Ireland. The seafood industry is an
important industrial sector within the BMW region. The maritime transportation sector has
high production effects in the SE region. Cluster theory, which focuses on specialized clusters
of indigenous, "home-based" industries, has become a focal point for new industrial policy
initiatives. However, little research has been done to assess the potential for developing clusters
within the marine-based economy, except for the maritime transportation sector.

This paper explores the potential of marine-based clusters, focusing on the seafood sector.
Despite being traditionally viewed as a sector with poor agglomeration economies, the analysis
reveals strong backward linkages within the Bay Area (Bay Area) economy. The study suggests
that investment in the seafood sector could positively affect upstream industries in the less
prosperous region, particularly in County Donegal. This data can inform future marine
planning and investment decisions for Irish regions at both national and EU levels.

V. CONCLUSIONS
This book aims to enhance the use of tools and data for policy formulation in the marine
economy. It discusses the use of Long-Quality (LQ) to regionalize an IO table, a method that
has been found to be effective in examining the impact of the marine sector on regional
economies. The case study on the Irish marine sector demonstrated that the FLQ method was
superior to traditional SLQ and CILQ methods. This approach provides policymakers with
insights into potential regional gains or losses, enabling them to strategically locate new
investment in specific sectors.