In an intruiging article on VoxEU, David Audretsch, Oliver Falck, Maryann Feldman, and Stephan Heblich synthesize existing economic geography models to offer a theory of "regional lifecycles." I don't question their theory of regional lifecycles, but I do question the policy implication they draw from it. First, though, here are the four phases of the regional lifecycle they identify:
The initial entrepreneurial phase, during which Jacobs externalities and inter-industry startups prevail. ... The routinised phase, during which innovation takes place within top-performing incumbents. Once a dominant product is established, production becomes more specialised and shifts to industrial agglomerations where R&D effort becomes much more focused. ... A second entrepreneurial phase, which is characterised by Marshall-Arrow-Romer (MAR) externalities [i.e., intra-industry spillovers], leading to intra-industry startups in niche markets. An increasing routinisation eventually opens the door for niche producers providing custom-tailored sophisticated products and solutions. ... A second routinisation phase, which is a time of structural change during which no further innovation takes place. Existing knowledge is exploited in these regions but they lack a large enough or appropriate stock of regional knowledge that could act as the basis for a new, competitive industry.Here's the main policy implication the authors draw from this:
For practitioners, these findings reinforce the need for differentiated regional policies and suggest each region needs policy tailored to its unique characteristics and its position along the regional lifecycle. It follows that such a policy can only be designed by those intimately acquainted with the region – in other words, at the regional level by regional politicians rather than instituted top-down by supra-national institutions. Regional policymakers need to act as entrepreneurial designers of their own regional policy.I see one major problem with this conclusion. The success of each of the four types of regions will differ, sometimes dramatically. The fourth type of region ("the second routinsation phase"), for example, will undoubtedly be less successful economically than the first two regions, and will probably also be less successful than the third region. Regional politicians in the fourth region will not be content with their region's lagging economic success. They will adopt policies aimed at changing their region's classification, not at improving their region's efficiency within its existing classification. If the first type of region is the most economically successful region, then regional politicians in the fourth region will want emulate the first region. They won't adopt policies aimed at making the region a better fourth-region, because not only will that fail to lead to large welfare gains, it's also bad politics). So if we give control to regional politicians, the result will be perpetually inefficient fourth-regions. The authors assume that regional politicians will be satisfied with their region's place in the regional lifecycle, but that's a very pollyannaish view of regional politicians.