Theoretical frameworks of

regional development process

Regional development theories
 introduction
• the models and theories of regional development are rooted in a
combination of both economies and diseconomies of agglomeration.

• Agglomeration economies refer to the economic benefits of size and

diversity – either decrease in production costs, increase in production
efficiency, or increase in productivity – brought about by the spatial
concentration of economic activity and population.

• On the other hand, the spatial concentration of people and economic

activity can bring about diseconomies of agglomeration – e.g., price
increase of less mobile and scarcer factors such as land and labor and
congestion problems such as noise, air pollution, crime, social malaise –
pushing for dispersion and de-concentration of economic activity,
employment, and population to less congested places
• It is possible to identify nine main theoretical frameworks,
each one giving rise to different theories and models of
regional development:
• (1) firm location theory;
• (2) traditional neoclassical theories;
• (3) Keynesian theories;
• (4) core-periphery theories;
• (5) functional development theory;
• (6) stage theory;
• (7) disequilibrium theories;
• (8) endogenous growth theory; and
• (9) new economic geography theory.
 Firm Location Theory
• Most of the regional development models, inspired by location theory and developed prior to 1960,
adopted a transportation cost minimization framework .
• pioneer works of Alfred Weber in the 1910s, Andreas Predohl in the 1920s, and August Losch in the
1940s
• regional development is largely dependent upon the existence of firms in the region.
• regional development is +a function of the factors firms consider when choosing where to locate.

• firm’s location decision problem is modeled as a simple transportation costs minimization problem.
Therefore, the distance to customers, the distance to inputs, and transportation costs are central
elements of a firm’s decision location model. The firm’s location, then, is the place where total
transportation costs are minimized.

• In regional economics location theory evolved from simple transportation cost minimization models
to more realistic location decision models incorporating additional factors such as spatial variations
in market size, production cost differentials, availability (and cost) of labor, technical competence of
the labor force, technological capabilities, regional amenities and quality of life, regional business
climate, and local taxes.
 Traditional Neoclassical Theories
• key determinants of regional development are factors endowment and productivity because these
are the determinants of long-run growth of the supply capacity.

• These models also assume free trade among regions, perfect competition, perfect information,
technological progress exogenously determined, and an equilibrium growth path leading to a
convergence of growth rates among regions .

• Among the theories of regional development emerging from this framework are (1) the Borts and
Stein model and (2) the factor price equalization theory.

Borts and Stein Model

The model of regional development developed by George Borts and Jerome Stein in the 1960s is a
simple adaptation of Solow’s (1956) neoclassical growth model to a regional context by allowing for
production factors mobility. According to this model regional development is determined by the long-
run growth rate of the supply capacity which, in turn, is determined by the combined growth of the
capital stock, labor supply, and productivity which depends on technical progress. Technical progress is
considered exogenous to the development process and determined largely by non-economic forces. The
production factors labor and capital are mobile among regions. Therefore, investment from outside and
migration are the only inducing factors that can stimulate regional development since technical
progress, the source of productivity growth, is determined by exogenous factors
• Factor Price Equalization Theory
The regional development theory of factor price equalization derived
from the works of Eli Heckscher (in the 1910s), Bertil Ohlin (in the
1930s), and Bela Balassa (in the 1960s) suggests that regional
development occurs as a process of factor prices equalization among
regions.

According to this theory, investment tends to flow from leading to

lagging regions where the lower prices of production factors (e.g.,
labor, land, or energy) allow greater returns on investment. As
investment in lagging regions increases, so does the competition for
production factors, which results in increasing factor prices and
decreasing returns on investments. Over time, factor prices and return
on investments tend to equalize over regions .
 Keynesian Theories
• By contrast to the neoclassical view, which puts the
emphasis on factors affecting supply capacity as the
major determinants of regional development,
Keynesian theories assume that regional
development is largely demand driven. Two main
regional development theories fall into this
framework: (1) export-base theory and (2) input-
output theory.
 Export-Base Theory
• developed by John Alexander, Douglass North, and Charles Tiebout in the 1950s, assumes that regional economic
activity can be divided between activities producing goods and services for export to other regions (basic activities
or export base) and activities producing goods and services for local consumption (non-basic activities).

• The key feature of this theory is that it considers exports the major driver of regional development because
exports have a regional multiplying effect.

• The expansion of the regional export base means that funds flow into the regional economy from the sale of
locally produced goods and services to customers outside the region. These externally generated funds boost local
demand for local-oriented (non-basic) activities. The initial and subsequent rounds of spending (indirect and
induced effects) derived from the initial expansion in the export base have a multiplier effect on the non-basic
activities thereby creating economic development (iklas 1992, Tiebo 1956, iso et al. 2006).

• Therefore, according to this theory the economic development of a region depends on the region’s ability to
develop and sustain an export base capable of producing goods and services in demand outside the region. Non-
basic activities are largely dependent on export activities and thereby play a minor role in regional development

• The major strength of the economic-base theory is the emphasis given to regional competitive advantages as the
ultimate fundamental source of regional development. The profit opportunities offered by the region’s
competitive advantages in activities capable of producing goods and services in demand outside the region attract
capital and labor into the region from outside which, in turn, boost the economic development of the region
(North 1956).
 Input-Output Theory
• The demand-driven input-output theory, developed by Wassily Leontief in the 1940s, differs from
the export-base theory by assuming that different activities have different multiplier effects in the
local economy. This implies that not all export-oriented activities have the same effect on regional
development. The distinct local multiplier effects depend, according to the input-output theory, on
the local industrial mix and on the local inter-industry linkages.

• Therefore, regional economic development depends on the region’s ability to develop and sustain
(1) export activities with dense local inter-industry linkages, and/or (2) import substitution activities
that limit the income leakage to other regions and simultaneously strengthen the local inter
industry-linkages, and/or (3) intermediate activities with backward and forward linkages to both
export-oriented and local-oriented activities (oove 1975, iso et al. 2006).

• The input-output theory has the major advantage of highlighting that regional development can be
enhanced if, in parallel with developing an export base, the regional economy is able to develop
local intermediate suppliers which may or may not be export-oriented per se. This will generate
stronger and more complex backward and forward intra-industry linkages thereby expanding the
local multiplier effect of exports. Like the export-base theory, the major drawback of the input-
output theory is that it is not concerned with the supply-side conditions a region must have in place
to be able to develop and sustain a dense network of local activities that includes export-oriented
activities, local-oriented activities, and intermediate suppliers to both exports and local activities.
 Core-Periphery Theories
• The core-periphery theories of regional development depart from
the assumption that there are advanced (leading) regions and
underdeveloped (lagging) regions. In a clear contrast with
traditional neoclassical approach which assumes that regions tend
to converge to similar long-run growth rates, core-periphery
theories see regional development as inherently uneven. The
several core-periphery theories differ in the assumptions they make
with respect to the linkages between leading and lagging regions
• The core-periphery model explains how economic and
political power is unevenly spread across regions. It divides
the world into core, semi-periphery, and periphery areas
based on development and global influence. This model helps
us understand why some places thrive while others struggle.
• It is possible to identify three major theories within this approach:

(1) theory of cumulative causation,

(2) growth pole/growth center theory, and
(3) central place theory.

Theory of Cumulative Causation

by Gunnar Myrdal in the 1950s, emphasizes the polarizing effects of leading regions over lagging regions. Some places
(leading regions) possess initial comparative advantages due to, for example, location, infrastructure, and size.

Agglomeration economies reinforce these comparative advantages and pull in capital, skills and expertise, with
backward effects preventing the lagging regions from developing the internal capacity to compete and prosper. Skilled
workers, educated people, business leaders, and capital that may emerge in lagging regions will flow to leading regions
where the returns are higher. Little investment moves from leading regions to lagging regions. Investment that occurs is
controlled by leading region elites to assure economic dominance. In addition, goods and services produced in the
leading regions are sold to the lagging regions at such low prices that local industries cannot compete. This theory also
concedes that leading regions can spread out into lagging regions that have some comparative advantage. Lagging
regions can have some comparative advantage, e.g., natural resources or a large labor pool, which can cause a positive
investment flow into the region.

The lagging region will develop when the spread effects become stronger than the polarizing effects (Myal 1957, Nelso
1993, iso et al. 2006). The theory of cumulative causation has the merit of offering one possible explanation why
regional convergence is far from being a natural long run outcome of the development process. As the theory suggests,
agglomeration economies can reinforce the competitive advantages of leading regions and the polarizing effects can
inhibit the development of lagging regions. One of the shortcomings of this theory is the limited role given to the
spillover effects of leading regions into lagging regions. They seem to occur just through investments seeking to exploit
a comparative advantage the lagging region might have.
 Growth Pole/Growth Center Theory

• The growth pole theory, first introduced in regional economics by Perroux in the 1950s, argues that
by concentrating its efforts on a specific sector or a limited number of sectors with high potential
for growth, the growth pole, a region can initiate propulsive development.

• As the “pole” expands, the local inter-industry linkages are intensified through import substitution
thereby causing regional economic development. Usually, the selected growth pole is a region’s
leading export industry because it has larger spillover and multiplier effects on other industries.
Largely as a result of the works of Albert Hirschman also in the 1950s, the growth pole theory has
also been applied to urban nodes, which is termed in the literature as growth center theory. In this
context, the theory argues that regional development efforts should be concentrated in a few urban
nodes, those with greater growth potential. As these urban nodes expand, economic growth spills
over to adjacent regions through a process of de-concentration of economic activity and/or
population from the growth center to the peripheries (Dawe 1969, ase 1975, Rihaso 1979).

• The growth pole/growth center theory has the merit of highlighting that scarce resources have the
potential of generating greater returns in terms of economic development if concentrated in
sectors/urban nodes that have greater growth potential. Like the theory of cumulative causation,
the growth pole/growth center theory assumes that growth and development can be unbalanced,
either over region or over sectors. By targeting particular poles (sectors or urban centers) this
theory is assuming that the benefits accrue initially to that pole enhanced by polarizing effects. The
trickling-down benefits come later to the other sectors or parts of the region. Although the theory
assumes that the trickling-down effects will occur later and eventually will surpass the polarizing
effects, in practice nothing guarantees that this is the case. Polarizing effects can be stronger than
the trickling-down effects over time and, as a result, the initial unbalanced growth can become the
norm or be even aggravated.
 Central Place Theory
• The central place theory, developed by Walter Christaller and August
Losch in the 1930s and 1940s, argues that the development efforts and
investments should be concentrated in a limited number of growth points
organized in a hierarchical and functionally integrated way.

• In this view, regional development occurs in a matrix of growth points

which are the building blocks around which the regional economic base
will cluster. In identifying a hierarchical system of growth points three
things are necessary.
• One is to define the minimum population size an urban region must have
to qualify as a candidate for a growth point. The second is to select as
major growth points those candidates having the greatest potential for
future economic growth. The third is to establish a hierarchy among the
selected growth points based on their different sizes and thereby
different areas of influence.
• Higher-order growth points should be assigned a higher number and order of
critical service functions and thereby higher developmental efforts and
investments on the basis of estimated population-service ratios. Critical services
may include: (1) secondary schools, (2) vocational training schools, (3) technical
research facilities, (4) health facilities, (5) housing, (6) utilities (e.g., sewerage and
water supply system, energy system, and telecommunications system), and (7)
information and communication services, and (8) recreational and cultural
facilities.

• The several hierarchical levels of growth points must be connected by a

transportation network to provide for the maximum access of population to the
different growth point levels and thereby different levels of critical services (Getis
and Getis 1970, King 1984).

• The central place theory shares with the growth pole/growth center theory the
principle that some urban agglomerations are the engine of development and this
development impacts surrounding lagging regions through a combination of
trickling-down and polarizing effects. It adds to the growth pole/growth center
theory the important notion that not all growth points are equally important in
promoting regional development. Regional development is maximized if the
developmental efforts, functions, and services provided by the growth points are
hierarchically organized.
 Functional Development Theory
• The functional development theory suggested by
John Friedmann, Clyde Weaver in the 1970s
departs from the assumption that regional
development can be achieved by harnessing
selected regional resources to create generative
growth.

• This theory assumes that it is possible to move a

region to higher stages of development by
organizing it around a principal function closely
related with its resource endowment
• For that, the lagging region relies on investments funds originated in leading regions. In addition,
several efforts should be made to reduce imports of goods and services and to reinvest locally the
regionally created savings. This theory envisages the existence of a decentralized regional
administrative organization to coordinate such efforts. This organization should be supported by
local and state governments and by local business groups.

• One of the strongest points of this theory is the idea that regions themselves must play an
important role in influencing the character of their own development.

• The functional development theory assumes that regional development should fit regional
character. For that, regional communities must be involved in both defining social and economic
goals and objectives and tailoring the development patterns.

• One of its weaknesses is that it is just applicable in regions that have at least one resource
endowment economically relevant enough to become the engine of local development. Such a
resource can be (1) a natural resource (e.g., land, water, oil, or wood), (2) a strategic geographic
location, (3) climate, (4) a pool of cheap labor, (5) a pool of skilled labor, (6) a knowledge pool (e.g.,
a pool of universities and research facilities), or (7) a pool of specialized skills and expertise on a
particular industry that can be leveraged to higher value added activities (for example, expertise in
the clock industry can be leveraged to high-precision surgical instruments).
 Stage Theory
• The stage theory developed by Walter Rostow in the 1960s
assumes that regional development occurs through stages of
growth.
• According to this theory, there are five stages of regional
development: (1) traditional, (2) preconditions for takeoff, (3)
takeoff, (4) maturity, and (5) mass consumption.

• A region develops by evolving from lower stages to higher stages of

development. The progression from one stage to another is not
automatic. It may be delayed or rendered unachievable for a variety
of reasons. A region in the traditional stage of development is one
in which there is limited availability of technology relative to other
regions and probably a rigid and hierarchical social structure
• The region enters the second stage of development when investments flow
into the region for the purpose of exploiting its natural resources. Industrial
investments are accompanied by investments in basic physical infrastructure
such as transportation and communication. In addition, managers and skilled
labor are transferred to the region to lead the new industrial investments. As a
result, the region’s economic and social structure begins to change and a new
social and political elite emerges.

• Takeoff occurs when an external stimulus, such as a development program or

a major private investment, brings investment into the region and the new
local social and political order is able to sustain that investment.
• A region enters the maturity stage when it achieves a diversified economic
base and complex local inter-industry linkages. As a result, the region is able to
produce locally many formerly imported goods and services.
• Finally, the mass consumption stage occurs when a region exports many goods
and services that it formerly imported. In this stage the local economic base
has to be both diversified and sophisticated enough in order to produce goods
and services that can compete in the external markets
 Disequilibrium Theories
• The disequilibrium theories of regional development depart from the assumption that regional
development is boosted by disequilibrating forces.
• Three major theories of regional development fit within this approach: (1) Schumpeterian dynamic
disequilibrium, (2) regional life cycle theory, and (3) product life-cycle theory.

• Schumpeterian Dynamic Disequilibrium Theory The Schumpeterian dynamic disequilibrium theory

of regional development builds upon Joseph Schumpeter’s view of the market system as a process
of “creative destruction” where old systems are destroyed and replaced by new ones.

• This theory, set forth in the 1930s and 1940s, assumes that regional development is the result of
dynamic disequilibrating forces that render obsolete the productive structure of leading regions
and favor the competitive advantages of lagging regions.
• Market dynamics cause obsolete products and processes to be replaced by more timely and
efficient ones.
• Technological developments may render the existing infrastructure of leading regions obsolete. On
the other hand, investment in new industries may be more profitable in lagging regions. In
addition, building new infrastructures may be more efficient in the lagging regions relative to
tearing down and rebuilding new ones in leading regions. This dynamic process of “creative
destruction” explains the development of regions over time
• Regional Life-Cycle Theory Following a rather similar perspective, the regional life-cycle theory offered by Bernard Weinstein, Harold Gross and John
Rees in the 1980s assumes that the development of any region evolves in waves of boom and bust in a way resembling Nikolai Kondratieff’s long
waves of development

• New enterprises emerge in lagging regions because leading regions are strapped with obsolete and unprofitable infrastructure and productive
structure. Over time, newly developed regions will themselves decline and by that time bypassed regions will have reemerged

Product Life-Cycle Theory The product life-cycle theory introduced in the 1960s by Raymond Vernon and Seev Hirsch assumes that the
different patterns of development among regions can be explained by the different stages of the product life-cycle in which they are
specialized.

• According to the product life-cycle, a concept borrowed from marketing and international trade literature, a typical product evolves
through three distinct stages in its life cycle: innovation, growth, and standardization. During the innovation stage the new product is
both developed and manufactured in its home region since incremental innovations in the characteristics of the product are frequent
and the production processes have not yet been standardized.

• The growth stage is characterized by significant growth in sales, the use of larger production facilities, and the occurrence of some
incremental process innovations.

• The standardized stage is when the production process becomes standardized, no innovations take place either in the product or in the
production process, and the sales either stabilize or start to decline. At this stage the production can be shifted to lower cost locations.

• Using the product life-cycle framework regions can be designated as innovation-phase, growth-phase, or standardized-product regions
corresponding to their tendency toward a particular phase in the product cycle. The innovation stage needs a high input of R&D and
specialized skills. It is usually carried out in large urban areas of developed countries. The standardized production phase of the product
life cycle can be transferred to low cost locations abroad or down the urban hierarchy to rural areas.

• According to the product life-cycle theory of regional development, regions can change their roles over time. As production
concentrates in lagging regions, human capital accumulation through learning by doing, personnel mobility, the development of local
linkages and other external economies can build up there. As the region expands, regional demand
• can increase to a critical threshold where an industrial seed
bed effect can develop rapidly with the spin-off of small
firms or through the immigration of entrepreneurs. This will
cause lagging regions to develop and eventually to become
an innovation-stage region

• These three disequilibrium theories of regional

development aim at explaining why regions prosper and
decline over time. In contrast with other theories of
regional development, which implicitly or explicitly assume
that leading regions will either develop or stagnate, e.g. the
stage theory, the disequilibrium theories set forth the idea
that over time lagging regions can bypass leading regions.
 Neoclassical Endogenous Growth
Theories
• In the late 1980s and early 1990s a large body of theoretical developments emerged in the
literature as an attempt to introduce more realism in the traditional neoclassical theories. Many
theorists have contributed to these developments, termed in the literature as “endogenous
growth,” namely Paul Romer, Gene Grossman, Elhanan Helpman, Robert Barro, and Robert Lucas.

• The neoclassical endogenous growth theories of regional development modify the traditional
neoclassical theories by making technical progress (and thereby productivity growth) endogenous
to the economic process.

• Endogenous growth theory holds that economic growth is primarily the result of endogenous and
not external forces. Endogenous growth theory holds that investment in human capital, innovation,
and knowledge are significant contributors to economic growth. The theory also focuses on positive
externalities and spillover effects of a knowledge-based economy which will lead to economic
development. The endogenous growth theory primarily holds that the long run growth rate of an
economy depends on policy measures. For example, subsidies for research and
development or education increase the growth rate in some endogenous growth models by
increasing the incentive for innovation.
• In short, the endogenous growth theories of regional development see
long-term regional growth as a result of accumulation of capital and
labor (traditional neoclassical view) but also as a result of the regional
characteristics in terms of human capital, R&D, innovation, knowledge,
and some sort of knowledge and technological spillover effects

• One of the major contributions of these theories to regional development

is the emphasis given to human capital, knowledge, and innovation as
important drivers of long-term growth and development. A second
important contribution is the acknowledgement that technology and
knowledge generate spillover effects which, in turn, are important
determinants of regional development by themselves.
New Economic Geography Theories
• The new economic geography theories of regional development
originated in the 1990s with the works of Paul Krugman and
Anthony Venables integrate within a formal (mathematical)
neoclassical framework the concepts of cumulative causation and
agglomeration economies developed by the core-peripheries
theories in the 1950s

• the new economic geography theories of regional development

change the traditional neoclassical model by assuming increasing
returns to scale and imperfect competition in a context of
interregional trade
• The new economic geography approach focuses upon the balance
between centripetal (agglomerating) and centrifugal (dispersing)
forces in determining the extent and form of regional concentration
of economic activities.
• Centripetal (agglomerating) forces, which tend toward spatial concentration, include, according to these theories,
(1) market size, (2) transportation costs, (3) cooperative and functional linkages between firms, (4) dense labor
markets with a diversity of skills, and (5) external economies of scale such as knowledge spillover.

• Centrifugal (spillover) forces, those that tend toward spatial de-concentration, include (1) labor immobility, (2)
lower land costs, (3) and external diseconomies of various sorts such as congestion

• According to these theories, the tendency for spatial clustering of economic activities is positively correlated with
agglomeration economies and negatively correlated with transport costs. In this view, growing regional divergence
and a coreperiphery pattern of economic development is a result of agglomeration.

• Cumulative growth in “core” regions occurs because firms benefit from cost savings and/or revenue increases
there as a result of mutual interaction and interdependencies which leads to increased efficiency and comparative
advantages. More sophisticated models alter the traditional neoclassical framework by including more complex
agglomerating (centripetal) forces such as labor market pooling, technological spillovers, intermediate goods
supply and demand linkages, and market size. As centrifugal (dispersing) forces they consider product-market and
factor-market competition.

• Recent variants of the new economic geography models incorporate elements of the endogenous growth theory
into the neoclassical model with increasing returns to scale. In so doing, they focus either on interregional
transfers of human capital or localized technological progress as the mechanisms underlying the agglomeration of
economic activity and the unequal development among cores and peripheries

• Though many of the concepts introduced by the new economic geography theories are not entirely new in the
regional development realm, this approach has the advantage of refocusing the attention of mainstream
neoclassical economics to a different (and more realistic) set of determinants of regional development. Instead of
relying exclusively
• on the accumulation of production factors capital
and labor and exogenously-determined
productivity growth (traditional neoclassical
view), this approach emphasizes the importance
of agglomeration and cumulative causation for
regional economic development. As a result, it
contributes to an explanation, under a formal
neoclassical framework, of why regions have
different patterns of development over time
instead of converging to similar long-term growth
rates as predicted by the traditional neoclassical
theories of regional development.
 The Missing Variables in Mainstream
Regional Development Theories
• Both recent empirical evidence and the lessons learned from major past
regional development programs suggest that several factors playing a
crucial role in regional development have been ignored by mainstream
theories of regional development. Among them are

• institutional framework, local innovative milieu and technological

competitiveness, and local entrepreneurial capacity. Such factors are
particularly important when businesses have to choose among locations in
higher stages of economic development that already possess dense and
sophisticated inter-industrial linkages, a relatively skilled labor force, and a
good level of physical and social overhead capital.
• In addition, such locational factors are of particular relevance for the
locational decisions of high-value, sophisticated, and knowledgeintensive
services and industrial activities– those with higher productivity levels
able to sustain high and increasing standards of living for their
populations.
• Some regional development researchers have claimed that a business-
friendly institutional framework play a determinant role in explaining
different development patterns among regions. In their view, successful
regions are those that possess: (1) stable, predictable, and transparent
laws and regulations, (2) political stability, and (3) a favorable business
climate

• Gertler 2010, Hudson 2009, Pack 2004, Stimson Empirical studies

highlighting the importance of an innovative milieu and local technological
capacity have stressed the relevance of factors such as: (1) untraded
interdependencies (2) management capacity, (3) organizational ability, (4)
pro-market oriented technological and innovative capacity, (5) knowledge
and technology absorptive capacity, and (6) some sort of “social capital”
that creates rich patterns of supportive social relationships beyond the
workplace and the boundaries of the company that facilitate informal
exchange of both codified and tacit knowledge