By Lynn Roberson
In today’s virtual world, it’s easy to downplay the significance of place. Yet, when it comes to regional prosperity, geography matters. Income and job growth are not random; they spill over from one region to another. Being next to a prosperous region will make one’s own economy more vibrant.
While intuitive, it has been hard to prove this statistically until recently. Using new models that factor in location and blending microeconomic ideas with macro ones, researchers at the Edward Lowe Foundation’s Institute for Exceptional Growth Companies (IEGC), UNC Charlotte and Northern Illinois University (NIU) have advanced the longstanding theory of regional income convergence — and revealed new insights about the geographic dynamics of the U.S. economy.
According to Harrison Campbell, UNC Charlotte associate professor of geography and public policy and principal investigator of the study, although income convergence is a geographic process, most studies have ignored geographic relationships. “Some have looked at industry composition, and a few have looked at how neighboring regions affect each other, but none have looked at how individual companies affect convergence.”
Using data from IEGC, Campbell and fellow researchers Ryan James and Gary Kunkle studied 177 regions during a 20-year period (1990-2010). They used a traditional model and one with spatially explicit tools, which yielded two sets of results to compare. Key findings include:
· - Convergence is happening, but at a slower rate than previous studies have indicated — about one-third slower (or 1.3 percent per year as opposed to 2 percent per year)
· - The economic health of one region has a definite spillover effect on neighboring regions
· - Particular kinds of establishments, known as sustained growth companies, accelerate the convergence process through their ability to create jobs
· - The presence of these sustained growth companies has a bigger impact in rural areas than non-rural areas.
“Sustained growth companies are the hidden allocators of new jobs in the economy,” stated Kunkle, an IECG research fellow. “This paper shows that they also play a significant role in allocating income growth as well — and help determine which regions experience faster income growth than others. Thus, income growth is not limited just to owners and employees of sustained growth companies, but extends throughout their neighboring communities.”
The fact that sustained growth companies have a larger impact in rural areas was a surprise, Campbell noted. “Previous literature suggests that these firms will perform better if they cluster in urban areas. Yet our results reveal the opposite — they had a negligible or slightly negative effect on income growth and convergence in metro areas.”
The researchers’ findings provide statistical evidence that spatial relationships are extremely significant to regional prosperity. “So there’s basis, at least for certain projects, for regions to start to think beyond their own borders and work more cooperatively,” said Campbell.
Connecting the dots between sustained growth companies and regional prosperity is equally important. “This study begs a whole new set of questions about how firms manage themselves,” Campbell stated. “If we can understand what makes the sustained growth companies tick, we may be able to reorient our approach to economic development and introduce policies that positively impact these important firms.”
Other policy implications revolve around regional income convergence. “For example, many Southern states are right-to-work states — states that were poor and are now starting to catch up. A question arises about how policies such as right-to-work status might impact a state or region’s ability to grow its economy,” explained Campbell.
The researchers’ paper “Firm Growth and Regional Income Convergence: Is There a Connection?” can be read on the Web.