Regional Convergence in the European Union: Do the Business Services Make the Difference?

• Thesis title in Czech: Regionální konvergence v EU: ; Jakou roli hraje sektor Business Services?
• Thesis title in English: Regional Convergence in the European Union: ; Do the Business Services Make the Difference?
• Key words: regionální konvergence, Evropská unie, log t test, logistická regrese
• English key words: Club convergence, European regions, log t test, Logistic regression
• Academic year of topic announcement: 2015/2016
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 20.05.2016
• Date of assignment: 20.05.2016
• Date and time of defence: 31.01.2018 08:30
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 02.01.2018
• Date of proceeded defence: 31.01.2018
• Opponents: Mgr. Vědunka Kopečná, Ph.D.

References

Arbia, Giuseppe, Julie Le Gallo, and Gianfranco Piras. ”Does Evidence on Regional Economic Convergence Depend on the Estimation Strategy? Outcomes from Analysis of a Set of NUTS2 EU Regions.” Spatial Economic Analysis 3.2 (2008): 209-24.

Phillips, Peter C. B., Donggyu Sul. ”Transition Modeling and Econometric Convergence Tests.” Econometrica 75.6 (2007): 1771–1855.

Phillips, Peter C. B., Donggyu Sul. ”Economic Transition and Growth.” Journal of Applied Econometrics 24.7 (2009): 1153-1185.

Borsi, Mihály Tamás, and Norbert Metiu. ”The Evolution of Economic Convergence in the European Union.” Empirical Economics 48.2 (2015): 657–681.

Bartkowska, Monika, and Aleksandra Riedl. ”Regional Convergence Clubs in Europe: Identification and Conditioning Factors.” Economic Modelling 29.1 (2012): 22-31.

Eckey, Hans-Friedrich, and Türck Matthias. ”Convergence of EU-Regions. A literature report.” Investigaciones regionales 10 (2007): 5–32.

Meliciani, V., and M. Savona. "The Determinants of Regional Specialisation in Business Services: Agglomeration Economies, Vertical Linkages and Innovation." Journal of Economic Geography 15.2 (2014): 387–416.

Preliminary scope of work in English

Motivation:
Economic convergence was undeniably one of the most important reasons for entering the EU for most of its new members from so-called CEE countries. On the other hand, even more than ten years after the new countries became members, we can still see a gap between them and the older EU countries. Moreover, if we simply look at the GDP growth figures, we do not have to see convergence at all in some periods. Question of actual convergence therefore does not seem straightforward and remains to be of the highest economic as well as political interest.
There has been many works trying to estimate and verify existence of convergence using various approaches. The main source of methodology for this work will be Phillips and Sul’s (2007) framework which was since then adopted by many empirical research papers to estimate the convergence clubs on the regional as well as country level. Example of the latter can be Borsi and Metiu (2015) whose results are most importantly suggesting that CEE countries do not experience growth sufficient to catch up with the old EU members. Regional convergence is then examined by Bartkowska and Riedl (2012) who note several interesting findings about regional convergence – namely tendency of converging regions to be spatially clustered or finding that metropolitan areas tend to belong to clusters with higher GDP. Among other aims of this thesis will therefore be to verify these findings while including post-crisis data to the analysis.
Another aspect of economic convergence is that whether a country is converging or not can be changing over time and especially the state after the 2008 crisis is of great interest. This work aims to combine the techniques for finding and describing the convergence clubs with theory describing sectoral specialization of different regions and thus answer the question whether the convergence exists as well as whether it is driven by long term structural factors or whether much more volatile business cycle factors play a role as well. To achieve this goal, work of Meliciani and Savona (2014) will be used. The authors investigate NUTS2 level concentration of so-called business services. Concentration on this type of services should be strongly growth promoting. This work will therefore attempt to find the link between different levels of regional specialization in business services and presence the respective regions in different clusters.

Hypotheses:
Hypothesis #1: The CEEC NUTS2 regions converge to the EU 15 average.
Hypothesis #2: The main agglomerations areas form a distinct convergence club.
Hypothesis #3: The regions with higher Business service concentration converge to higher equilibria than old manufacturing or agriculture areas.
Hypothesis #4: Areas with similar BS concentration converge to the same equilibrium in the old and new EU countries

Methodology:
The aim of this diploma thesis is to examine regional economic convergence of the per capita income in the CEE countries. The main goals of this thesis are to verify existence of regional converge between the old and new EU countries on NUTS 2 level and to test the hypothesis that the regional convergence clubs are created along different levels of specialization in so called business services (BS). The test used to detect the convergence clusters is based mainly on a variation of the neoclassical growth model and was described by Phillips and Sul (2007). This thesis will apply their methodology to the CEE countries in order to test multiple hypotheses about income convergence. Subsequently, some of the alternative methods for finding the convergence clubs (Markov chains, Kernel analysis, Clustering and Bayesian methods) will be used in order to compare the club composition and thus check robustness of the results. The primary result will be the convergence clubs themselves – which allows us to test where and which regions are converging to the EU or EU 15 average. Secondly, the thesis aims to test whether we can find similar convergence dynamics within the CEE regions as was found by previous papers for the western European countries. Furthermore, the thesis will attempt to verify a connection between the economic convergence and specialization in one of the most productive sector of services – the business services as described by Meliciani and Savona (2014). These services tend to concentrate in more densely populated regions with strong functional specialization and also should provide stronger economic growth. To achieve this, logistic regression will be applied on the resulting clubs using the specialisation in Business services as one of explanatory variables and membership in the clubs as dependent variable. The approach taken here will be similar to Bartkowska and Riedl’s, however testing directly Business services contribution and using different dataset in terms of both time period and the regions included. In this thesis the Meliciani and Savona’s empirical findings about the BS concentration will be compared to the convergence clustering results.

Expected Contribution:
This work aims to bring light into the convergence process in the European Union. It should, at first place, be able to decide whether the convergence is present in the post-crisis situation and if yes, for which regions do we observe it and how the convergence pattern changed in comparison to previous years. Furthermore, it aims to connect sectoral specialization in different regions with relative convergence of the regions and to check robustness of convergence clubs composition by combining several methodologies for detecting them. Findings of such analysis are supposed to contribute to understanding of drivers of convergence in context of developed countries and could indicate ideal policy for achieving high convergence of the CEEC to the old EU countries. This work will therefore contribute to the literature dealing with regional convergence by analyzing convergence using the most recent dataset available and recently developed technique for detecting the clubs.
Secondly, this work will contribute to the stream of literature seeking to find factors of economic growth. Above all to the New Economic Geography (NEG) and the New Growth Theory (NGT) that focuses on endogenous factors that drive the regional development. Last but not least, it will supplement literature dealing directly with the Business services by analyzing their contribution to the economic growth empirically using recent econometric methods.