Business Environment and Firm Performance in European Lagging Regions

European Union (EU) financial support channeled to sub-national regions classified as ’lagging’ economically, takes various forms, including investments in physical infrastructure, addressing education and skills gaps, and institutional capacity building, as well as direct financing to promote innovation and small and medium enterprises (SMEs). EU support is designed to instigate a supply-side response. In this paper, we explore the relationship between the regional business environment, lagging regions, and firm performance in four countries, namely Italy, Poland, Romania and Spain. We control for the two types of lagging regions as defined by the European Commission – DG REGIO, i.e., wealth and economic growth based (Italy and Spain) and wealth based only (Romania and Poland). We find that firms located in lagging regions perform worse than those in non-lagging regions in Italy and Spain, but this is not the case in Poland and Romania. Besides, firms located in regions with higher business environments display better performance, in terms of employment and sales growth, as well as profitability. The business environment to various degrees further penalize firms located in lagging regions.

FAROLE Thomas;  HALLAK Issam;  HARASZTOSI Peter;  TAN Shawn W.; 

2018-01-11

World Bank

JRC109524