Quality of Government, stocks of innovation skills and level of economic activity in European regions

Abstract

This paper investigates the relationship between quality of government, R&D and innovation capacity and economic activity in European regions. We employ regional data (NUTS 1 and NUTS2) describing quality of government by European Quality Government Index (EQI) and regional human resources in science and technology (HRST) data as a proxy for stock of innovation skills in the economy. We find an overall linear positive and significant relation between levels of GDP per capita on the one hand, and HRST and quality of governance (EQI) on the other. We also identified three groups of European regions . There is no difference in GDP levels between the group of Northern European regions and the group of the Southern European regions given the levels of EQI and HRST. Conversely, the group of regions in new member states (NMS) is an important explanatory variable of GDP per capita in European regions, with significantly lower levels of GDP p.c. than the other two regions. We interpret these results by drawing from seminal contributions in the literature of economic growth. We particularly reflect upon how differently the relationship between democratic institutions, trust and corruption (Rothstein, 2011, Mauro, 2004, Acemoglu et al., 2001 and Acemoglu et al., 2002) on the one hand, and the role of stocks of skills for innovation and research on the other, may play out in these three regional clusters.