Speed Up or Slow Down? The Effects of Capital Investment Grants on German Regional Growth

Timo Mitze

Chapter Chapter 9 in Empirical Modelling in Regional Science, 2012, pp 273-302 from Springer

Abstract: Abstract The promotion of investment subsidies through the “Joint Task for the Improvement of Regional Economic Structures” (GRW) is a key instrument of regional policy in Germany to foster economic development in lagging regions. In this paper, we analyze the effects of the funding scheme on labor productivity growth for 225 German labor market regions between 1994 and 2006. Using a neoclassical growth-model framework, we test for the policy impact on the speed of convergence to long-run steady state income. Our results reveal a significant positive direct effect of the regional policy instrument on labor productivity growth, with the speed of convergence being almost doubled for supported regions half way below their steady state compared to the case of not being supported. In order to check for the robustness of the results we also augment the standard regression approach by spatial econometric tools. Including spatial lags of the left- and right-hand-side regressors in the convergence equation shows that besides the positive direct effect, there is a negative policy related spillover effect on neighboring regions at work. The latter effect may be explained by the increased attractiveness of the supported region, which is able to poach capital investments and other input factors from neighboring regions. Though the indirect effect, on average, yields to a slowdown in the speed of adjustment to the steady-state income, the net effect of GRW support to lagging regions is still positive.

Keywords: Labor Productivity Growth; Spatial Spillover; Neoclassical Growth Model; Spatial Durbin Model; German Labor Market (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/978-3-642-22901-5_9

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