Regional Development and Investment: Two Decades of Evidence from Southeast Europe

Talks by Aleksandar Shivarov & Georgi Marinov (Economics University of Varna) as part of the Research Seminar Series of the IOS Economics Department.

Regional convergence is a topical issue for all countries in Southeast Europe, both for EU members and those outside the Union. Disparities between capital cities and peripheries, and between more industrialised and rural areas, have posed a conundrum for policymakers in recent decades. Capital accumulation, matching labour supply and increases in productivity are seen as the main drivers of economic growth within the neoclassical growth model. Major reviews of EU regional development find a significant, but modest rate of convergence rate among European regions. The existing literature on Southeast Europe focuses primarily on the impact of foreign direct investments (FDI) on long-term economic growth and the determinants of FDI. A key question formulated by Estrin and Uvalic (2014) is “Are the Balkans different?” in terms of the determinants of FDI compared to Central and Eastern Europe and the Baltic States, which have received significantly higher levels of foreign investment. The answers to this question may have important implications for policy choices aimed at closing the gap between Southeast and Central and Eastern Europe in terms of per capita income and level of regional development, as well as between spatial units within Southeast Europe.

The study covers 13 countries, from Romania and Moldova in the north-east to Croatia and Slovenia in the west and Greece and Cyprus as the southern extent of the area. They are analysed at the level of basic regions: NUTS 2 for EU member states or corresponding spatial units for (potential) candidate countries. The time span of the study covers the period since the beginning of the century, thus including important episodes such as the financial crisis of 2007–2008 and the subsequent Great Recession, as well as the two enlargements of the European Union towards the region in 2007 and 2013. The political developments in the Western Balkans during this period, as well as the availability of data, impose certain limitations on the analysis. Given the outline of the study area and period, the methods used to examine the interaction between investment on the one hand and regional development on the other are panel data analysis and cluster analysis. They are applied to test the strength of the relationship between investment and economic development at the regional level in Southeast Europe.