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Recent Research: Regionalism enhances productivity and innovation

January 30, 2025
By: Jerry Coughter

Regional cooperation economic development is believed to stimulate growth in various ways, including increased trade, enhanced movement of technologies from lab to market, and improved resource allocation. Federal support for innovation-driven growth has increasingly forced applicants to take integrated regional approaches. However, empirical evidence on the specific impacts of such cooperation is scant. New research from the IZA Institute of Labor Economics seeks to address this gap by investigating the interplay between regional cooperation and integration (RCI) and two key economic outcomes: labor productivity and firm-level innovation. 

In Regionalism, Productivity, and Innovation, authors Rolando Avendano, Massimiliano Tani, and Lovely C. Tolin analyze data from 170 national economies, including the United States, and 60,000 firms, covering 2010-2021. In doing so, they make extensive use of the Asian Development Bank's Asia-Pacific Regional Cooperation and Integration Index (ARCII). This index provides a framework for assessing RCI across eight key areas, including trade, investment, finance, infrastructure, and population mobility. The study uses a combination of econometric techniques to examine the relationship between RCI and economic outcomes: they examine labor productivity at the national level and innovation activity at the firm level.

The authors find that transportation, broadband, and energy investments in regional infrastructure and advancements in technology within a region demonstrate a strong positive correlation with labor productivity and firm innovation. Also, they find that firms benefit from being integrated within regional value chains. This finding suggests that increased specialization and knowledge sharing within regional production networks enhance productivity and drive innovation, while improved connectivity facilitates the movement of goods, services, and people, reducing costs and boosting efficiency.

Interestingly, the study finds little evidence of productivity benefits from traditional trade and investment agreements. The authors speculate this could be attributed to the complexity of these agreements and the potential for trade diversion. They also found no evidence that monetary integration results in increased productivity.

The findings illuminate various actions state policymakers could take to leverage regional integration for economic growth and development.

  • Prioritize Infrastructure & Technology: Prioritize investments in upgrading regional infrastructure (transportation, broadband, energy) and promote technological advancements within the region.
  • Foster Value Chain Integration: Support the development of industry clusters within the state, where businesses within a particular sector are geographically concentrated, and encourage collaboration among those businesses.
  • Invest in R&D: Increase funding for R&D activities within the state, supporting both university research and private sector innovation and facilitating the transfer of technology from universities and research institutions to businesses within the state.
regionalism, innovation