Theories on innovative and sustainable regions
Four main topics:
1. Innovate – economic growth
2. Respond to shock – resilience of regions to shocks (covid), different responds
3. Socially inclusive – inequality of regions and countries, social inclusion, tackling social
inequality
4. Environmental sustainable – green transition
Why it is important to have theories? Essential for how we look at the world and scientific
importance; concepts, explanations, methods, types and policy recommendations. They differ in
perspective and ideas. Therefore understanding policy making.
1. Neoclassical theories
2. Evolutionary theories
3. Institutional theories
Lecture 1 – convergence/divergence
Convergence/divergence – why are there differences between rich/poor regions. Divergence = bigger
differences between regions, convergence = smaller differences between regions. Regional inequality
is a very high topic on governmental agendas. It is about regional income inequality, capability of
tackling this topic. It is also about inequalities within regions and between regions (relative position
of regions over time).
Silicon valley – global hub of technology AND a place of highest income inequality of America.
Difference between people left behind who do not get the full share and the richer. In the US the
inequality is on the rise, but most especially in the richer regions such as Silicon Valley. Silicon Valley
could be this successful, because many spin-offs were created out of Fairchild Industry. The big giants
are now located here.
Know the rise and development of Silicon Valley: Animated timeline shows how Silicon Valley became
a $2.8 trillion neighborhood - YouTube .
Bulgaria is the most inequal within Europa, Scandinavian and the Netherlands are scoring well on the
inequality.
GDP – gross domestic product (+ income above the average of Europe, - below the average).
Countries with the lowest GPD have had the highest growth and outperformed the richer countries.
Is there a convergence process taking place? Italy for example have a bad GPD and not growing
economically. This is a national problem. The lowest income regions also have the lowest GPD, this is
divergence taking place.
Inequality has improved if you compare countries, but between regions at sub-national scale is has
increased. So convergence and divergence are both taking place.
- Conventional neo-classical theory predict convergence; the market will solve income
inequality over time.
- Evolutionary theory predict divergence across regions; the rich will become richer and the
poor will become poorer.
, - Institutional theory predict divergence; good ((in)formal) institutions in rich regions, it is
hard to change these institutions, so that’s why the gap between regions will not change.
Neo-classical growth theory
- Homo economicus; everybody has the same information available and people make the
optimal choice
- Unbounded rationality; micro foundation of this theory. All people and firms are fully
informed to make economic decisions
- Complete focus on market prices; the money will go, market prices decide all our decisions,
optimal decision making by people and firms
- Constant returns to scale; the relationship between additional inputs to the production and
the resulting extra output.
- Technology is public good; technology is everywhere and everybody is fully informed,
everybody can understand and competent to make the right decisions. Technology is
available for everybody (non-rival and non-excludable)
- Free market
- No state intervention
- Convergence will eventually happen between regions
The income of a regions depends on 3 factors:
1. Capital; investments and net capital flows; high capital flow will increase in rich regions
2. Labor; population growth and migration are factors that determine how much people you
have
3. Technology;
*Y = regional growth depends of K = capital, L = labor and T = technology. They explain why income of
regions will grow or not.
, *Declining marginal productivity of capital: capital accumulation brings diminishing returns. This leads
to regional convergence.
Neoclassical growth theory predict convergence; income level of regions will become the same. The
gap will disappear. This is because:
1. Capital
Declining marginal productivity of capital; the more capital stock you invest, the lower the rent will
be. In the beginning their income will be very high (more investing in capital, the more rent you will
receive). For very rich countries, their capital will increase relatively less. Capital return is much
higher in poor countries than in rich countries. Rich countries have to make a lot of effort, for less
returning in their advantage (investments in technology and human capital). Less returns of income,
therefore poor countries will grow more (convergence).
2. Labor
Labor and capital flows in opposite directions. Labor stock will stock in poor regions, because wages
are much higher in rich countries. The labor will flow to rich regions, best people move out (stock of
labor will go down, poor countries will less grow). Capital will flow from rich to poor regions, more
profitable to invest in poor countries (less costs). Labor from poor to rich, capital will go from rich to
poor. Therefore convergence is taking place. Relative wages in rich regions will increase, and vice
versa. So there will be no migration anymore.
Capital is not scarce anymore in poor areas, capital returns will go up and in rich regions decrease;
perfect balance.
3. Technology
Technology is fully available and accessible to everybody. Everybody knows the same. The poor can
easily access the good technology and knowledge from the rich. Flows from rich to poor. This will
increase level of technology in poor regions, so convergence is taking place. No regions have superior
knowledge/technology than other regions. Technology is exogenous factor: not explained in theories.
The free market is everything according to this theory. The market system explains that there are no
differences between regions and people. This can occur by not intervening in the market system, the
market knows best, resulting in perfect income inequality between regions. No restrictions to
migration, because this would be an obstacle. All obstacles should be removed. In this case there can
be policy intervention to remove obstacles to secure incentives for new knowledge creation through
the patent system, or providing Research Development subsidies. If governments will not do so, there
will be no investing in new technologies and this would be bad for national economies as a whole.
Evolutionary growth theory
- Homo psychologicus/heuristic
- Bounded rationality
- Access to limited information
- Limited absorptive capacity to understand and process information; no absorbing capacity to
understand it all if you have no background or interest in the theme.
- No ‘optimizing’ but ‘satisficing’ behavior: actors try to optimize as much as they can, but they
are limited
