Explaining Spatial Variation in Business Performance in Great Britain

Labour productivity rates are known to vary across UK regions. Although some empirical studies seek to explain the source of these differences using aggregate, regional data we argue that this may be inappropriate because labour productivity rates are firm-specific. This paper employs cross-sectional regression analysis and British, firm-level data to identify empirically whether firm-level labour productivity rates are affected by factors that vary spatially. It focuses in particular on a measure of "economic potential" based on a gravity-type model of economic potential. Initial estimates suggest that economic potential is important but its impact diminishes with the introduction of further explanatory variables. Nevertheless, even once interaction terms are included the effect of economic potential remains important. It suggests the clear need to take account of space in firm-level regressions.