The Importance of Integrating Supply‐Side Factors in Economic Base Models

Abstract

Economic base (or export‐base) theory (EBT) is often presented as a Keynesian‐inspired theory that only accounts for demand‐side factors. However, the recent integration of supply‐side factors into economic base models (EBMs) can contribute to renewing applications of this type of model in regional economics. This paper proposes a literature review focused on new EBMs that explicitly take into account supply effects and includes both North American and European studies. It first explains why integrating supply‐side factors is relevant for EBMs. Second, the paper shows how to integrate these supply‐side factors into the various types of models, focusing on two production factors: land and its amenities and labor. Third, the paper discusses the conditions for integrating such supply‐side factors into EBMs.

Domestic or export: What is basic at the NUTS 2 regional level? A spatial endogenous regional growth model applied in the EU

“…The basic sector consists of agriculture, industry, and financial and business service activities, while the domestic sector consists of construction, wholesale, retail, transport, accommodation and food services, information and communication (WRTAFIC), and nonmarket services. This assignment method is far from perfect (Vollet et al., 2018). For example, some accommodation and food service activities whose sector is classified as domestic could be considered base‐oriented when provided by international companies such as Novotel or Starbucks.…”

“…This theoretical point is also stressed by Isard (1975) and Porter (1998)'s vision of a regional basic industry that is likely to attract customers and providers who substitute some domestic activities to import. In this context, the configuration of regional places concerning local amenities or skilled labour (Vollet et al., 2018) is likely to foster the import substitution effect and a sectoral dynamic (Rutland & O’Hagan, 2007; Tiebout, 1956).…”

“…Until the 2008 financial crisis, this issue generated a constellation of theories that have been reported by Beckes (2015) and Glaeser and Gottlieb (2009), highlighting that beyond the sectoral productivity that has been identified as a key growth factor (Gardiner et al., 2004; Krugman, 1994; Martin et al., 2016; Porter, 1998; Tsiapa et al., 2018), there are several other key determinants that can be used as control variables: population size, interregional migration pattern, capital investment, transport, education, agglomeration and dispersion pattern, skill composition, and R&D spending. Many other structural factors have been identified in the growing literature, such as sectoral composition (Fingleton et al., 2012; Martin et al., 2016), specialization and competitive advantage (Porter, 2001; Storper, 2013; Storper et al., 2015), institutional governance arrangements and supply‐side factors (Bristow & Healey, 2015; Kilkenny & Partridge, 2009; Martin et al., 2016; Porter, 1998; Vollet et al., 2018), and human and territorial capital (Bristow & Healey, 2015; Bristow & Wells, 2005; Fratesi & Perucca, 2018; Rizzi et al., 2018).…”

“…The chaos of the 2008 financial crisis, the increasing threat of climate effects (Rose, 2017) and disruptions generated by the COVID‐19 pandemic have substituted the resilience issue for the competitiveness issue. Resilience theory is very different from competitiveness theory in the sense that the domestic sector is clearly associated with functionality in dampening a shock and finding new growth paths (Cortright, 2002; Rutland & O’Hagan, 2007; Vollet et al., 2018). The resilience concept is still under debate (Christopherson & Michie, 2010) but can be understood as “ the capacity of a system to absorb disturbances and reorganize while undergoing change ” (Bristow & Healey, 2015; Simmie & Martin, 2010).…”