The Role of Embeddedness on Regional Economic Resilience: Evidence from the UK

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In this blog, Tasos Kitsos outlines the main findings of joint research with André Carrascal-Incera and Raquel Ortega-Argilés on the role of local industrial embeddedness and economic resilience.

A lot has been said and written on the importance of circular economies and local economic embeddedness for generating good growth and resilience. However, to date, it has been nearly impossible to have large scale, quantitative examinations.

This paper uses a newly published set of estimates on interregional-intersectoral transactions to examine how the embeddedness of local economic systems affects their resilience during a shock.

We measure embeddedness by the share of inputs a local economy is using that is coming from within that economy. Resilience is measured by measuring the effect of embeddedness on employment growth during downturn periods. We hypothesise that embeddedness has an inverted U-shaped relationship to resilience. This is because the closeness between suppliers and buyers reduces the costs of production, making local industries more resilient at times of crises. However, too much embeddedness can lock-in a place in specific production methods that could be less productive in the medium to long run, making turning the aforementioned relationship negative.

Our findings support our hypotheses and suggest that local authorities need to examine their production systems in greater detail in order to identify these thresholds and make the most of inter-industry relationships within their areas. This is particularly relevant at the moment since several localities develop their own industrial strategies.

The paper is published open access and can be downloaded by clicking here. Its abstract is given below:

“This paper examines the role of local industrial embeddedness on economic resilience in UK Nomenclature of Territorial Units for Statistics (NUTS2) regions. The 2008 financial crisis had a profound effect on the socio-economic conditions of different places. UK regions had significantly divergent experiences based on their capacity to avoid or overcome the shock. Research has shed light on some potential drivers behind this differential resilience performance such as skills, but others, such as the degree of a production system’s local embeddedness, are largely underexplored. This paper aims at filling this gap. We hypothesise that the combination of positive external economies of complexity and negative lock-in effects lead to an inverted U-shaped relationship between embeddedness and resilience. We use a novel dataset and method for approximating embeddedness and fixed-effects panel regressions for the period 2000–2010 to control for regional heterogeneity. The results support our hypothesis and suggest that embeddedness has a positive effect on resilience up to a point, after which more embeddedness leads to negative resilience effects. The results call for greater attention on the relationships among local industries, particularly with regards to the recent development of local industrial strategies.”

Tasos Kitsos has received funding for this research from the Economic and Social Research Council (Postdoctoral Fellowship ES/S011226/1).

This blog was written by Dr. Tasos Kitsos, Research Fellow, City-REDI, University of Birmingham

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The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham

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