Industrial Embeddedness and Resilience in Europe
Economic crises have wildly varying impacts on regional economies. What determines the local capacity to resist?
In a new open-access paper, Simone, André, and I look at the role of industrial embeddedness on local economic resistance in EU regions during 2008–2011.
Since the 2008 crisis, research on the ability of sub-national economies to avoid or overcome economic shocks (aka resilience capacity of a region) has flourished. A range of factors influencing resilience has been identified from macro to micro characteristics. In our paper, we focus on the characteristics of local industrial structures.
Most of our knowledge of how these industrial structure characteristics affect resilience comes from identifying the role of reliance on specific sectors versus diversification in the first place; and the relationship between industries in the same region in the second. The latter, a more nuanced understanding of regional economic structures, typically measures the relationships among industries on the basis of being, repeatedly, located close to each other in a range of spatial settings. However, these colocation-based metrics give us little insight into how anchored (aka embedded) industries are to their local economies.
Being more embedded could be good news and bad news for an industry and an economy. On the positive side, you are part of informal institutions, and benefit from cluster externalities and reduced transaction costs. On the negative side, being more embedded means being increasingly isolated from competitive forces, knowledge, and information flows whilst you are more exposed to local shocks. We simply don’t know which force prevails, if any.
We contribute to this by using regional Input-Output (IO) tables that estimate the sales and supplies relationships between sectors at the NUTS-2 regional level in the EU (+UK). This allows us to construct measures on the level of sales and supplies embeddedness (or forward and backward linkages). In essence, it allows us to estimate how much of the business-to-business transactions are anchored in each region. Then we use these metrics of embeddedness to find its influence on the capacity of regions to resist the negative impacts of the 2008 crisis.
We have four main results:
First, we find wide variation in the level of sales and supplies embeddedness across regions (figure at the top) and across time with a sharp drop in supplies embeddedness (where businesses source their inputs from) from above to below 50% and often close to zero. Zooming into the time trends (figure below), we find this drop to coincide with the 2008 crisis, pointing to changing trade patterns (in terms of supplies) due to the recession. This is not the case for sales embeddedness, indicating that the mix of markets for products did not change.
Second, we find an inverted U-shaped relationship between sales and supplies embeddedness and regional resistance to the recession with different turning points for sales (56 percent) and supplies (64.5 percent) embeddedness.
Third, we find that the impact of embeddedness is heterogeneous along quantiles of regional resistance performance and varies between sales and supplies embeddedness. Sales embeddedness has a positive effect on the resistance of regions that perform worse than average and a negative effect on the top 10 percent of regional resistance performers. On the other hand, increasing sales embeddedness has a positive effect on the resistance of the best and worst-performing regions and limited influence on those regions in the middle of the resistance distribution.
Finally, our results on sectoral resistance point to significant variation in the importance of regional and sectoral embeddedness on the capacity of sectors to absorb the shock.
Overall, we find that industrial embeddedness (the share of business-to-business transactions that are anchored in a region) increases the ability of a region to resist the negative impacts of the 2008 crisis. This happens up to a point of embeddedness, after which we find diseconomies that reduce regional resilience. We find that these effects differ based on 1) the direction of embeddedness (sales vs supplies linkages), 2) the resistance performance of a region, and 3) the sector. These results highlight the need to better understand regional economies from a range of angles since the effectiveness of resilience factors ranges along the crisis’ impacts and the sectoral composition of local economies.
You can find the paper’s abstract below:
We study the role of local industrial embeddedness (the share of regional interindustry economic activity that is anchored to a region) on regional resistance (the difference between pre- and postcrisis employment) to the 2008 Great Recession (GR) in EU and UK NUTS-2 regions. The recession had profound effects on regional economies, which showed diverse performance based on their capacity to absorb the shock. The concept of economic resilience has been brought to the center of attention with several contributions exploring its determinants. However, the impact of the embeddedness of local economic systems in terms of sales and supplies has been largely unexplored. We use regional input–output tables to approximate the embeddedness of local economies, and we use fixed-effects and quantile regressions to test its relationship to regional resistance between 2008 and 2011. We find that during the GR, regional industries opted to change input rather than output markets. Additionally, embeddedness has a curvilinear relationship to regional resistance that varies across the distribution of regional resistance performance. Finally, at the industry level, we find regional embeddedness to be important to the resistance of manufacturing and financial and business services, and sectoral embeddedness to matter more for the resistance of construction and wholesale, retail, and information technology. Our findings highlight nuances that policymakers should be aware of in planning for resilience.
Our work on economic resilience is evolving and we are always happy to talk more about this and other papers. Get in touch! a.kitsos@aston.ac.uk
Reference:
Tasos Kitsos, Simone Maria Grabner & Andre Carrascal-Incera (2023) Industrial Embeddedness and Regional Economic Resistance in Europe, Economic Geography, DOI: 10.1080/00130095.2023.2174514
