How ‘Provincial’ is your Region? Openness and Regional Performance in Europe

This paper estimates the impact of openness on regional performance. By employing data on European NUTS regions during 1995-2000, we construct an index of openness based on the share of hotels on population in the region and the share of regional population that speaks a second language. We discuss why this index captures some dimensions of regional openness, and find that it has an impact on regional performance after controlling for technological capabilities, agglomeration economies, and other regional factors. We find direct and indirect effects of openness. In particular, we estimate that one standard deviation of the variables that compose our index of openness produce a 24% increase in regional income from its sample average. Of this, slightly more than one-third is produced by an indirect effect of openness coming through patents. This suggests that open regions tap into wider knowledge networks that then affect performance. From a policy perspective, our study shows that making a region less “provincial” can be as important as investments in local infrastructures and networks.