Increasing Returns and the Growth of Industries in the EU Regions: Paradoxes and Conundrums

Verdoorn's law is estimated in a spatial econometric framework for individual manufacturing industries using EU regional data. Estimates of encompassing returns to scale are large, but other explanatory variables, including measures of industrial specialization and diversity, tend to be insignificant. The method of normalization with either output or input growth as the regressor matters, and the use of an instrumental variable approach does not resolve this problem. As in other studies, the static-dynamic Verdoorn law paradox exists. A theoretical argument is made, however, that the dynamic Verdoorn law is the correct specification and this is confirmed empirically.