New Estimates of Returns to Scale and Spatial Spillovers for EU Regional Manufacturing, 1986—2002

Abstract

This article presents some new estimates of the degree of returns to scale for European regional manufacturing, for the period 1986—2002. To obtain these estimates, the article makes use of a Verdoorn law framework, estimating both demand- and supply-side versions of the law. Estimation is further embedded within a spatial econometric framework that allows for both ``substantive'' and ``nuisance'' sources of spatial autocorrelation. The former arises from cross-regional spillovers in the growth process, while the latter is a result of the use of the administrative NUTS1 definition of regions. Whereas the demand-side version of the Verdoorn law yields estimates of substantial increasing returns, the supply-side version is unable to refute the hypothesis of constant returns. It is argued, however, that the demand-side version is to be preferred on a priori grounds. The article also considers the static-dynamic Verdoorn law paradox and successfully confirms a recently proposed explanation of this paradox.