Theories of Local Economic Growth (Part 2): Model Specification and Empirical Validation

Abstract

This study is an attempt to produce a theoretically informed econometric analysis of dynamic regional economic performance. The first paper in this two-part study highlighted the problems and possibilities of translating the propositions contained in six ‘soft’ theories of local economic growth into measurable dimensions and sets of proxy variables that are hypothesized to determine local economic growth. This second paper focuses on issues of econometric-model design and empirical validation. Given the practical limitations imposed by data availability, the ‘soft’ theories of local economic growth are modeled by a simple conditional ‘gap’ convergence model in which prevailing regional unemployment relativities are determined by a common trend in unemployment and a set of regionally specific variables. The empirical validity of the competing ‘soft’ theories of local economic growth is evaluated by applying test restrictions imposed by the ‘soft’ theories to a general model specification containing eight regionally specific variables that have been identified as potential drivers of local economic growth. The econometric modeling of Australian data suggests that the processes of regional economic performance might be somewhat different from those specified in individual theoretical models. Significantly, the role of local ‘enterprise culture’ is revealed—built on specialization, technological leadership, human resources, and the local integration of firms—though significant caveats are attached to the roles of access to information, institutional support, and interregional trade as promoters of local economic growth.