Increasing returns and economic growth: some evidence for manufacturing from the European Union regions

This paper examines the role of increasing returns to scale in empirically explaining economic growth rate disparities. It presents estimates for the Verdoorn law using data for 178 European Union regions over 1979-89. The law includes a spatially lagged productivity variable and is estimated by maximum likelihood methods. We estimate the contribution of the spatial diffusion of technical change and also investigate the relationship between the static and dynamic law. The results, suggesting large increasing returns to scale, are compared with the estimates of a Barro-Sala-i-Martin neoclassical convergence model, indicating significant unconditional convergence. We discuss the conflicting results of these two approaches.