Regional policy design in a knowledge based economy: An analysis of delocation, efficiency and equity

Are enhanced regional inequalities the flip side of the industrial restructuring following economic integration and technological progress? Both theory and empirical evidence may point in this direction (see e.g. Behrens, Gaigné, Ottaviano and Thisse, 2003, Boldrin and Canova, 2002, Braunerhjelm et al, 2002, and Martin, 1998 and 1999) The focus on regional policy in Europe is accordingly both justified and valid. However, while there may be a strong case for intervention, theoretical and empirical studies make one doubts the success of current and recent regional policy initiatives. EU spend around one third of its budget on regional objectives. Nevertheless, despite the substantial regional expenditures at both national and Community level, European regional policies do not appear to deliver — at least not in line with what one might would have expected given the vast sums they absorb: over the last two decades regional inequalities within member states have not narrowed, and by some measures have even widened (see e.g. Braunerhjelm et al, 2000, and Puga, 2002). At the same time we observe that manufacturing activity is more concentrated across regions than across states, and has become even more so over the last two decades (see Midelfart-Knarvik and Overman, 2002). Martin (1999) raise the question of whether European policy makers may have asked too much from regional policies: to decrease inequalities between regions, to increase efficiency at the national and European levels and to decrease inequalities between countries. He argues that positive localized spillovers imply that policies necessarily face a trade-off between equity and efficiency with