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Growth‐instability frontier and industrial diversification: Evidence from European gross value added
Author(s) -
Hafner Kurt A.
Publication year - 2019
Publication title -
papers in regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.937
H-Index - 64
eISSN - 1435-5957
pISSN - 1056-8190
DOI - 10.1111/pirs.12401
Subject(s) - diversification (marketing strategy) , gross value added , economics , frontier , stochastic frontier analysis , portfolio , efficient frontier , gross output , value (mathematics) , econometrics , financial economics , macroeconomics , business , mathematics , geography , archaeology , marketing , production (economics) , statistics
The paper applies the modern portfolio theory and stochastic frontier analysis to gross value added growth rates in Europe and presents evidence of convex growth‐instability frontiers. Using their national accounts by economic activity, numerical simulations of gross value added shares show that in 2011, industry portfolios were below Markowitz's efficient frontier and that rearranging the share of economic activities lead to efficiency gains in terms of lower output instability and higher growth rates. Gross value added in EU countries in general, and core countries in particular, should be contributed by the “service provider” and “financial activities” sectors, while optimal industry portfolios of periphery countries are more diversified. Stochastic frontier analysis confirms the convex growth‐instability frontiers and finds that technical inefficiencies are explained by differences in the growth rate of labour and the degree of industrial diversification. Getting more efficient is a combination of country characteristics and sector specifics, where efficiency gains are inversely related to industrial diversification during economic development. Reported results are robust to model specifications and data restrictions.