Abstract
This paper uses firm level data to analyze the regional competitiveness of two federal Euro area countries, Belgium and Germany. Competitiveness is defined as the labor cost per unit of output and hence takes into account productivity differences. Analyzing regional competitiveness is important because of the regional concentration in economic activity, the unequal spatial development of regions within countries and the increased importance of regional policy both at the EU as at the national level. This paper makes first a methodological contribution. Rather than simply comparing labor costs and productivity across regions we propose an approach that takes into account differences across regions in terms of average firm size and sectoral composition. So any remaining difference in competitiveness can be attributed to other factors, such as the institutional setting related to product and labor market regulation, the impact of agglomeration economies, labor market tightness, etc. We analyze regional competitiveness of the 16 German Lander and the 3 Belgian regions, defined at the NUTS 1 level. In doing so, we use as a benchmark Flanders. We chose Flanders as a benchmark region as the regional innovation score board of the European Commission has ranked Flanders among the top innovators in Europe.
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