The Role of Regional Conditions for Newly Emerging KIBS Industries in the Face of Radical Institutional Change

Abstract

This paper is devoted to analysing the effect of regional conditions on start-up activities in the knowledge-intensive business service (KIBS) industries. The region under analysis is the former German Democratic Republic (GDR), which experienced a “shock transition” of the institutional framework in the course of its reunification with the Federal Republic of Germany in 1990. KIBS industries did not exist in the former GDR. The results show that KIBS start-up activity emerged in densely populated areas and in regions with a large market size. The regional stock of knowledge has a significant positive effect on start-up activity as well. Altogether, the findings show that regional conditions matter even if the economic system that shaped these conditions followed completely different guiding principles from a market economy.

Acknowledgements

I am indebted to Michael Fritsch and participants of the workshop “Which regions benefit from emerging new industries? Evidence from photovoltaic and other high-tech industries” organized by the Institute for Economic Research in Halle (30 September to 1 October 2010), who commented on an earlier version. Funding by the German Science Foundation (DFG) is gratefully acknowledged.

Notes

1. However, the restructuring of post-socialist urbanized areas (cities) that have been especially shaped by socialist planning (e.g. Andrusz et al., 1996; Häussermann, 1996; Ott, 2001) might offset or reduce the presence of such externalities.

2. Empirically, it is difficult to account for the presence of the necessity to start a firm in the case of a socialist economy, since the most suited regional determinant of necessity entrepreneurship, namely regional unemployment, has been absent officially in the GDR.

3. A special thanks to Dr. Rupert Kawka for providing these adjusted data. The data for East Berlin have not been used, because the current data do not distinguish between East and West Berlin.

4. The workforce in 1990 may bias the results, since it does not take into account the potential outmigration in the course of the transition in 1989/90. The workforce in 1989 was faced with the decision to stay and not start a firm, stay and start a firm, or leave.

5. The correlation matrix shows that population density and the share of highly skilled employees are highly positively correlated. Therefore, it might be the case that multicollinearity between these two variables is at play. However, excluding one of these two variables from the analysis does not lead to changes in significance and sign of coefficients. Results can be obtained upon request.

6. The presence of the construction sector seems also to have a slight effect on start-up activity in the P-KIBS sector. The coefficient of population density is mediated when controlling for the employment share of construction, but remains significant.