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Dynamic regions in a knowledge-driven global economy: lessons and policy implications for the EU

Final Report Summary - DYNREG (Dynamic regions in a knowledge-driven global economy: lessons and policy implications for the EU)

The objective of the DYNREG project was to identify factors underlying the growth performance of emerging dynamic regions and the role of these regions in a knowledge-driven world economy so as to draw lessons and policy implications for the EU. In particular, this project provided:
- a theoretical and methodological research framework on the role of knowledge and innovation in fostering growth, competitive advantages and competitiveness and the role of public policy in fostering innovation and growth;
- a comparative analysis of the factors underlying the growth performance of dynamic regions and the role of knowledge and innovation in fostering growth at firm, industry, region and country levels;
- assessing the role of shifting comparative advantages in new growth regions and the impact of current trends in dynamic regions on patterns of world growth, development, competitiveness, inequalities and convergence;
- an analysis of public policies in shaping the dynamic economic performance of firms, industries, regions and countries with the aim to draw lessons and policy implications for the EU.

The following individual objectives were set in order to achieve the overall goal:
- comprehensive theoretical and methodological research framework;
- understanding the growth performance of dynamic regions;
- assessment of the impact of globalisation on economic growth and competitiveness;
- analysis of public policies in fostering innovation and growth.

The work performed during the project yielded several interesting findings. Regarding the factors underlying growth performance at the global, national and sub-national levels, the project findings can be summarised as follows:
- The areas with the greatest economic dynamism in the near future are China and India, followed by the EU New Member States. The EU should consider to differentiate between policies targeting the north European - developed - countries and those applied to the lagging EU South.
- Economic growth and world convergence are non-linear. Gross Domestic Product (GDP) per capita in Europe exhibits a non-linear pattern of regional growth and suggest that after some threshold level of development regional convergence trends vanish and regional divergence trends dominate.
- Human capital is an important factor driving the output growth in Information and Communication Technology (ICT) industries.
- In today's science and research industry, successful careers strongly depend on international experience and integration within the particular community.
- Policy-makers should pay more attention to within-region educational inequalities than to between-region and between-country inequalities, because within-region inequalities are far more prominent than the other components. The analysis also showed that educational policies should account for the spill-over effects with adjoining regions, as externalities spread out the barriers of regional economies.
- The increase in telecommunication infrastructure over the past three decades enhanced Research and Development (R&D) investments but did not affect the accumulation of physical or human capital. The findings highlighted the role of infrastructure investments in the transition to a knowledge-based economy which applies to most EU Member States.
- Infrastructure investment can induce tremendous growth effects in transition countries if they trigger the convergence of the economy to a higher balanced growth path.
- Social capital may contribute significantly to economic growth.

Regarding globalisation, economic growth and competitiveness, the following findings could be summarised:
- Further openness to trade with emerging economies as China, is on average positively related to the performance of European manufacturing firms.
- There is a strong relation between the increasing availability of foreign intermediates on global markets for European countries and the value added that can be exported by the same members of EU.
- Foreign direct investment (FDI) promotion policies and incentives to foreign firms should be carefully planned in order to obtain the expected benefits for indigenous firms. FDI induced spillovers are not automatic.
- Immigration and trade are complements, but the degree of their complementarity is dependent upon both the size of the existing immigrant community and where these immigrants come from. A significant trend, at least in developed countries, is the increase in the proportion of the population that is made up by migrants.
- Involvement in international markets substantially boosts the likelihood of becoming a successful innovator. Firm productivity and export decisions are closely related to innovation activity.

Regarding the role of public policies in fostering innovation and growth, the following findings could be drawn:
- Public policies enhancing R&D investment and promoting innovation activities are key for a dynamic economic growth and restructuring.
- The location choice of multinationals in the ICT sector increases with the size of demand (market potential), agglomeration economies (positive spillover effects from existing firms in the ICT sector), technological development (R&D expenditure), flexibility of labour markets, and information technology infrastructure.
- Foreign acquisitions have a positive and significant effect on labour productivity.
- Inflation and long-run productivity growth are negatively related. Inflation generates long-run real effects due to a link from the short-run interplay between nominal and financial frictions to a firm's qualitative investment portfolio.
- If governments wish to avoid 'capital flight' they should strive for 'political stability' and a 'healthy economic environment', to include healthy demand conditions. Such policies may also be conducive to attracting inward investment.
- Sustainability requires both internal and external controls, to include the market, but also hierarchy (firm and state), as well as institutional and global controls.
- Small developing countries need to explicitly account for any liabilities of smallness when devising and implementing strategies for competitiveness and catching-up.
- Innovation performance is different per culture, per level of development which in turn can be economic, political, institutional, etc. per sector and basically per country (especially if country size, for example, is not accounted for).
- Size differentials are a major determinant for the choice on internal versus external innovation for value capture of different-sized firms, in the context of multilevel bargaining in hand.
- Receiving human resources (HR) support boosts significantly the contribution of R&D investment on value added.
- The view that the best manager is someone that is a top expert and therefore foremost must delegate, control and correct will be less and less applicable in modern, more specialised environments is of key importance to innovation policies.

A large number of working papers (56) were composed, all of which are available for download from the project website at: http://www.esri.ie/dynreg.