The Impact of Spatial Organization on Regional Productivity in Europe

Within urban economics, findings related to the impact of external economies of urban size on productivity are increasingly complemented by external economies of spatial structure by the inclusion of dimensions such as polycentricity. It is then argued that hierarchically distributed cities within polycentric urban regions can mutually 'borrow' size and share the associated external economies in a regional context. Similarly, polycentricity has been gaining popularity among policy makers as it is assumed to benefit both intraregional cohesion as well as interregional competition. However, empirical evidence for the impact of polycentricity till date remains ambiguous due to diverging methodologies and conceptualizations. The aim of this paper is twofold, as it strives to harmonize its findings on the impact of spatial organization on productivity for European TL2 regions with the existing knowledge base - which is mainly US-based - while also introducing several measurement and estimation improvements. We predict regional total factor productivity with both ordinary least squares and two-stage least-squares models, and find that significant causal effects exist for both urban size and structure. While confirming the general finding within literature that a larger urban size positively affects productivity, we also find that an interaction between size and polycentricity has a negative effect, which suggests an inability of regions consisting of polycentric city networks to substitute for the urbanization externalities associated with a single large city.