Location, industry structure and (the lack of) locally specific knowledge: On the diverging development of rural areas in Germany's East and West

Anne Margarian () and Christian Hundt
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Anne Margarian: Thuenen Institute of Rural Studies, Braunschweig

No 2019-04, Working Papers on Innovation and Space from Philipps University Marburg, Department of Geography

Abstract: Some rural regions in Western Germany have experienced a very positive economic development in terms of employment and incomes in the past decade. This development, however, is in sharp contrast to the the enduring economic lag of many rural regions in Eastern Germany. This paper seeks to find out, to what extent these differences in employment development can be explained by sectoral patterns and region-specific capacities and capabilities. We employ an extended shift-share regression model that explains the employment development in German districts between 2007 and 2016. The model differentiates between Western and Eastern German regions as well as between urban and rural regions by means of spatial location effects. This specification helps us to capture both: the historically evolved differences inherent in the socialist and capitalist past of Eastern and Western Germany and the varying economic environments in urban and rural areas. The extended shift-share regression confirms that simple industry effects, i.e. linear effects of industry shares, only explain a small part of the differences in employment development between rural regions. Most deviations are instead captured in the competitive share effects (CSE) that represents how employment development in a region systematically deviates from the average development of its industries at national level. Further analyses of the CSE reveal that the manufacturing sector, despite its general loss in employment shares, is of crucial importance for rural prosperity. In this regard, the apparent disadvantage of rural districts in Germany’s East can be explained by a lack of locally specific, complementary immobile production capacities and capabilities for manufacturing. These locally specific skills develop endogenously. Urban districts in the East, in contrast, do not have to rely on endogenous factors alone but may overcome their historical disadvantage if they manage to exploit their agglomeration advantages in order to attract knowledge intensive industries and high-skilled workers.

Keywords: rural regions; urban regions; East Germany; West Germany; employment development; structural change; industry structure; spatial externalities; shift share regression (search for similar items in EconPapers)
JEL-codes: O14 O18 R11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2019-09
New Economics Papers: this item is included in nep-geo, nep-lma, nep-sbm and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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