This chapter concentrates on what we know and, more importantly, on what is still needed in terms of further work, with regards to issues of investment in determining (total factor and labour) productivity. Thus, inter alia, it covers the importance of inward (and outward) foreign direct investment (FDI), in terms of its impact on UK productivity; as well as exports and imports in driving productivity; and access to finance, including firm investment in physical and intangible capital. FDI and trade allow firms to update production techniques and introduce new and better products, while access to finance and new investments in physical and intangible capital facilitate the incorporation of more ‘knowledge’ and ‘dynamic capabilities’ into the firm. This chapter also covers the particular and important role that geography has in understanding productivity issues, both from the perspective that different areas have different ‘mixes’ of firms with different productivity distributions, affecting average productivity levels in those areas, and that spatial location itself matters because of the potential for agglomeration effects and knowledge ‘spillovers’.
This chapter presents an overview of various models of regional growth that have appeared in the literature in the last 40 years. It considers the past, and therefore supply-side models such as the standard neoclassical, juxtaposed against essentially demand-side approaches such as the export-base and cumulative causation models (as integrated into the Kaldorian approach); before moving on to the present and more recent versions of the neoclassical model involving spatial weights and ‘convergence clubs’, as well as New Economic Geography core_periphery models, and the ‘innovation systems’ approach. A key feature of the more recent literature is an attempt to explicitly include spatial factors into the model, and thus there is a renewed emphasis on agglomeration economies and spillovers. The discussion of ‘present’ and ‘future’ approaches to regional growth overlaps with the current emphasis in the literature on the importance of more intangible factors such as the role of knowledge and its influence on growth. Lastly, there is a discussion of the greater emphasis that needs to be placed at the micro level when considering what drives growth, and thus factors such as inter alia firm heterogeneity, entrepreneurship and absorptive capacity. Recent micro-level evidence is also presented and related to the earlier discussion of the various models of regional growth.