Economic Research Forum (ERF)

The geography of innovation: evidence from regions in Turkey

1028
To what extent does the concentration of new firms in a region naturally lead to innovation and growth? And when are policy actions needed to stimulate the local economy? This column reports new research on the experiences of Turkey, contrasting the innovative performance of different parts of the country – and exploring the implications for policy to promote local growth.

In a nutshell

Innovation is key for technological development and long-term growth; and understanding local differences in innovation performance are central for increasing the inclusiveness of economic progress.

Agglomeration of new firms and the existence of market-based incentives are key sources for the diffusion of externalities and innovation: in Turkey, a spatially unequal country, agglomeration and externalities explain the geographical distribution of innovation.

The impact of agglomeration-based externalities works mostly for more advanced regions; in isolated peripheral regions, there is a need for policy action that can complement the role of local market-based incentives.

Economic theory emphasises that technological advances are key for long-term economic growth. For decades, policy-makers have taken different direct and indirect actions to spur technological development. Innovation and the factors that accelerate formation of new ideas stand at the centre of this long lasting policy discussion.

In the meantime, there is a debate on the potential role of innovation and technological advances for understanding territorial cohesion in developing countries. The background is the inclusiveness and sustainability of economic policies for the developing countries that mostly struggle with substantial spatial instabilities.

We have to keep in mind that lack of territorial cohesion can stem from local differences in innovation performance. In other words, policy that targets local differences in innovation can be a key for the success of territorial policies to combat regional differences.

Among potential explanations for the links between innovation and regional development, there is a consensus that those regions that are more innovative will perform better compared with the others. In terms of developed economies, Landabaso (1997) points out that innovation is an important element for understanding regional gaps within the European Union.

Rodríguez‐Pose and Villereal (2015) revisit Mexico as an example of a developing country and confirm that innovation can also play a key role in decreasing regional gaps in developing countries. These findings signal the need for policy action to stimulate local innovation.

Among various factors, the role of public policy in the form of infrastructure investment, incentives to accumulate human capital and research and development (R&D) and local sectoral effects via specialisation are heavily discussed in economic research (see Crescenzi and Jaax, 2017, among many other).

A relatively less examined factor is the market-based externalities that can stem from urbanisation and firm-level agglomeration. The impact of agglomeration-based externalities on innovation can contain valuable information about how agglomeration spurs innovation.

As an example, the Turkish economy is characterised by sizable regional disparities. Despite rapid economic growth, local economic conditions have been getting more polarised during the 2000s (Karahasan, 2020).

In recent research, we examine the innovation performance of Turkish regions and ask two specific questions (Karahasan, 2022). First, do local externalities created by the agglomeration of new firms spur innovation? Once we are able to answer this question, our follow-up is: does this mechanism work in the same way everywhere?

One key lesson from the Turkish experience is that innovation, which is measured by patent applications, is geographically clustered around the western developed regions. This pattern almost perfectly matches with the agglomeration of new firms and contains important hints about the potential role of externalities created by newcomers.

To capture other potential factors that can spur innovation, we also consider regional differences in R&D expenditures, human capital, openness, sectoral composition of production, urbanisation and welfare differences. After controlling for these factors our findings confirm our first hypothesis. Those regions that realise higher agglomeration of new firms are witnessing higher innovation accumulation.

These preliminary results show that in addition to the usual suspects of technological development (such as human capital accumulation, infrastructure and R&D expenditures), agglomeration of new firms in a specific region can create market-based externalities that will spur the formation of new ideas and thus innovation.

Our second important finding is about the changing importance of market-based externalities for the innovation performance of the Turkish regions. To investigate this, we use the same set of variables and apply a spatial decomposition for the effects of new firms’ agglomeration on the local innovation differences.

Our findings show that market-based incentives and externalities mostly work in the already developed regions that have historically hosted more innovation. In other words, even though the formation of new firms spurs innovation, this effect works only in the already developed regions.

In contrast, for the less developed and more isolated Turkish regions, the impact of market-based externalities seems limited. In our view, this does not imply that agglomeration is not central for less developed regions. Rather, this signals the importance and need for policy action to complement market-based incentives in less developed regions.

Further reading

Crescenzi, Riccardo, and Alexander Jaax (2017) ‘Innovation in Russia: the territorial dimension’, Economic Geography 93(1): 66-88.

Karahasan, BC (2020) ‘Winners and losers of rapid growth in Turkey: Analysis of the spatial variability of convergence’, Papers in Regional Science 99(3): 603-44.

Karahasan, BC (2022) ‘Impact of new firm formation on innovation performance of Turkish regions: Evidence from micro and regional data’, research project funded by the Scientific and Research Council of Turkey (Grant no: 121K666).

Landabaso, M (1997) ‘The promotion of innovation in regional policy: proposals for a regional innovation strategy’, Entrepreneurship and Regional Development 9(1): 1-24.

Rodríguez‐Pose, A, and EM Villarreal Peralta (2015) ‘Innovation and Regional Growth in Mexico: 2000-2010’, Growth and Change 46(2): 172-95.

Tags: , , ,

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.