Institutions and Uneven Regional Economic Development

Robert Huggins and Piers Thompson outline the mechanisms underlying regional economic growth and competitiveness, in particular the role of institutions within these processes.

An article in the Financial Times (‘Northern powerhouse workers less productive than before crisis’, 7^th January 2017) recently stated that sluggish productivity growth in the northern parts of the UK since the financial crisis remains difficult to explain. To an extent, this is the case. However, perhaps more is known than is often readily acknowledged. Differences in industrial structure between the ‘north’ and ‘south’ are clearly a key contributory factor. For example, London and the south east of England continue to have denser concentrations of the types of businesses (such as high-technology and advanced service sector companies) that produce the highest levels of value added. This is an outcome of a competitiveness chain that has allowed cities and regions in the south to remain relatively more resilient than their counterparts in the north.

Regional competitiveness divides across the UK are nothing new.

Productivity growth is fuelled by innovation in the shape of the introduction of new products, services and ways of doing business. Underpinning innovation is the requirement for firms to be able to access finance, skills, knowledge and high quality infrastructure. It is the enduring difference in the distribution of these resources that is at the heart of productivity growth gaps. Such gaps appear to become accentuated during times of crisis, with highly skilled workers and entrepreneurs becoming more likely to locate in cities and regions with better access to opportunities and resources.

Until this vicious cycle of economic division is seriously addressed, we can expect gaps in productivity growth to widen further. Therefore, it is of paramount importance to consider how policy can address the unevenness of regional development and competitiveness. Recent work has pointed to the role institutions in shaping regional economic futures. Such institutions constitute both the formal and informal incentives and constraints that moderate economic (and broader societal) behaviour and subsequent economic development outcomes.

From a policy perspective, it is interesting to note that the UK Government’s recent industrial policy green paper (HM Government (2017) Building our Industrial Strategy) makes many references to the role of institutions, suggesting an acknowledgement within senior policy circles of the need for more efficient and effective institutions as a means of promoting economic growth, especially in lagging parts of the nation. This is heartening given that in more academic circles the role of economic and political institutions – both formal and informal – in promoting economic development is now widely accepted.

Key institutions and institutional arrangements that are considered to impact on development include the nature of market and corporate governance, industrial policy and industrial relations; education and training systems; innovation transfer; and macroeconomic regimes. At the urban and regional level, it is important to consider which institutions may be best placed to promote such development, with the following suggesting the need for a focus on institutions relating to learning, innovation, entrepreneurship, networks and capital ownership.

Learning institutions such as intra-regional and inter-regional labour markets create incentives and constraints to the type of human capital formed in a particular region, as well as the conventions in relation to workforce development and regional education systems. Institutions in the form of labour markets enable human capital, in form of skilled and talented individuals, to take advantage of the benefits of specialisation, encouraging economic growth.

Innovation institutions are incentives and constraints to creating and/or embracing new technology, as well as conventions in relation to the financing of innovation and norms regarding the ‘restriction’ or ‘freedom’ of ideas. For example, where innovative opportunity exploitation is encouraged through greater rewards (lower effective tax rates) or at the very least are not discouraged (as might be the case where high administrative burdens are present), the marginal latent innovator is more likely to pursue innovation opportunities. Although conventions in relation to the financing of innovation, both R&D and ‘softer’ innovation, and incentives and constraints with regard to undertaking differing forms of innovation – e.g. radical, incremental, technological, or social – are likely to stem from national and supra-national level institutions, more localised formal and informal institutions also play a role.

Entrepreneurial institutions come in the form of the incentives and constraints to engaging in entrepreneurial activity. Institutions may direct individuals or organisations towards the adoption of similar entrepreneurial practices and structures to those currently prevailing in a locality, ensuring they gain support and legitimacy for their actions. A growing school of research has identified the particular role of localised and regional institutions in shaping and perpetuating entrepreneurial capital along with the subsequent market orientation of firms. Regions with entrepreneurially conducive institutions may increase their competitive advantage by attracting investment, skills and talent. In the UK, the spatial unevenness of financial institutions across regions has been recognised as potentially a key impediment to economically weaker cities and regions being able to improve either their entrepreneurial or growth prospects.

Alongside markets, recent research on agglomeration economies has identified the role of network institutions as an important factor that sits alongside externalities pertaining from human capital. Knowledge networks and the ‘easy flow of ideas’ have been argued to be one of the key explanatory factors underlying the reasons why regions and cities often grow and flourish, despite a range of counter negative externalities often being in play. An institutional perspective on these networks and flows suggests that firms are incentivised to engage in networked activity through the availability of formal associational institutions, such as chambers of commerce, business and trade associations, as well more informal institutions in the form of the geographic clustering of firms within which networked cooperation and collaboration is fostered through embedded institutional norms and customs.

Institutions of ownership relate to organisational arrangements concerning the rights of regional assets, in particular physical capital. In general, there is a growing recognition that institutions impacting upon the ownership of capital play an increasingly important role in determining economic outcomes. Although a plethora of factors are highlighted in the emerging literature, those with relevance to the regional context include: the public or private ownership of land and infrastructure; the provision of public services and the provenance of public and private business and home ownership. It has been argued that over many years a failure in the structure of national institutions concerning the ownership of both public and private sector assets, in particular a lack of diversity in ownership and the location of ownership, has led to contemporary patterns of uneven development.

In this context, contemporary low growth regions are likely to have suffered from past economic and political institutions that were innately ‘extractive’, with the power underlying the prosperity generated by their economies lying in the hands of a small, and often spatially external, elite. These same institutions have often led to government policies that are aspatial in nature, resulting in quite different effects across and within regions. In conclusion, therefore, there is a clear role for public policy in addressing these and other spatial imbalances in the nature and efficiency of key institutions as a mechanism for generating more even patterns of economic development.

Robert Huggins is Professor of Economic Geography and Director of the Centre for Economic Geography at the School of Geography and Planning, Cardiff University, UK.

Piers Thompson is a Reader in Small Business and Local Economics at Nottingham Trent University, UK.

Handbook of Regions and Competitiveness edited by Robert Huggins and Piers Thompson is available now.

Read Chapter 1, Introducing Regional Competitiveness and Development: Contemporary Theories and Perspectives free on Elgaronline.