New estimates of returns to scale and spatial spillovers for EU regional manufacturing, 1986-2002

This article presents some new estimates of the degree of returns to scale for European regional manufacturing, for the period 1986-2002. To obtain these estimates, the article makes use of a Verdoorn lam, framework, estimating both demand- and supply-side versions of the law. Estimation is further embedded within a spatial econometric framework that allows for both "substantive" and "nuisance" sources of spatial autocorrelation. The former arises from cross-regional spillovers in the growth process, while the latter is a result of the use of the administrative NUTSI definition of regions. Whereas the demand-side version of the Verdoorn law yields estimates of substantial increasing returns, the supply-side version is unable to refute the hypothesis of constant returns. It is argued, however, that the demand-side version is to be preferred on a priori grounds. The article also considers the static-dynamic Verdoorn law paradox and successfully confirms a recently proposed explanation of this paradox.