Location matters: A spatial econometric analysis of regional resilience in the European Union

The aim of this study is to empirically examine regional resilience by assessing economic growth patterns in two distinct groups of regions across the European Union in the aftermath of the 2008 economic and financial crisis. In an effort to consider the regions as interconnected economic areas and account for spillover effects, the model incorporates complex spatial effects that consider both spatial heterogeneity and spatial dependence. The analysis follows a step-wise approach. First, spatial heterogeneity is assessed by employing Exploratory Spatial Data Analysis, which identifies two distinct spatial regimes, a core and a periphery, based on their initial level of economic development. A Spatial Durbin Model is then employed to estimate the determinants of regional resilience and growth in both regimes, including potential spillover effects. Results indicate that while both spatial regimes experience processes of economic convergence, recent determinants of growth, as well as spillover dynamics, differ across the two. In the core regime, better institutions, higher shares of investment, and an economy specialized in higher value-added sectors significantly spur domestic growth, with investment also inducing positive spillover effects to neighbouring regions. In the peripheral regime, low shares of lower-secondary educational attainment and high shares of tertiary educational attainment have a significant positive effect on domestic growth, with higher shares of tertiary educational attainment also inducing positive spillover effects. Moreover, technological readiness is also identified as an important factor in the peripheral regime with positive spillover effects. Upon the bedrock of these findings, initial policy proposals are offered.