Reconciling Practice with Theory in the Micro‐Evaluation of Regional Policy

Abstract

This paper seeks to reconcile evaluative practice with theory, focusing on the micro‐evaluation of UK regional industrial policy. Two issues are examined: the measurement of the pecuniary external effects, including displacement and linkages; and the concept of ‘additionality’, which is central to the industrial survey approach. It argues that current evaluative practice is at odds with theory, but while cost–benefit analysis simplifies the measurement of the external effects, it has other features that may limit its appeal. On ‘additionality’, the paper traces its evolution, and shows that it is a multi‐dimensional concept. It argues that in practice the use of ‘additionality’ is deficient as it ignores the firm’s private funds and all forms of deadweight transfer.

Key Words:

• Evaluation
• regional policy
• external effects
• cost–benefit analysis (CBA)
• ‘additionality’

Acknowledgement

The author is grateful to two anonymous referees, whose comments have improved the paper. The paper draws on recent work carried out for the OECD (2007) and for Scottish Enterprise (Wren, 2005a).

Notes

1. This is not to say that all evaluation is atheoretical, as some macro‐based approaches rely heavily on theory, but not the literature on economic appraisal.

2. This approach has biases, on which there is little evidence (Smith, 2004), but which are not our focus. Lenihan (1999) tackles the issue of strategic bias, but in addition there are sampling, hypothetical, starting‐point and information bias (Wren, 2005a).

3. The outcomes are sometimes referred to as the results, while the UK HM Treasury (1997, updated in 2003a) ‘Green Book’ conflates outputs and outcomes, referring to these as outputs and to the impacts as outcomes. Even at the World Bank, QAG notes confusion over outputs and outcomes (QAG, 2003, p. 12).

4. These are pecuniary external effects, which differ from the technological external effects, or externalities, which alter the conditions under which goods and services are consumed or produced. Externalities are outside the paper’s scope, but are relevant to regional policy interventions (e.g. improvements in infrastructure).

5. It can be illustrated in the case of regional policy in England. The global objective of regional policy is to ‘make sustainable improvements in the economic performance of all English regions and over the long term reduce the persistent gap in growth rates between the regions’ (HM Treasury, 2003b). The specific objective of the grants is to ‘encourage sound projects, which would improve employment opportunities in the Assisted Areas’ (House of Commons, 2005).

6. The terms ‘displacement’ and ‘linkage’ effects are best reserved for these.

7. If firms engage in non‐price competition (e.g. product quality or branding) then this requires a generalisation of the analysis. Where interventions are small there are no price effects and CBA coincides with current evaluative practice. Preferences are quasi‐linear, so that Hicksian and Marshallian demands coincide.

8. Holden & Swales (1995) give the only other known analysis of displacement.

9. In fact, it is smaller than this, as the displaced output is at the old and higher price.

10. The first reveals by how much the demand price falls in response to the shift in the supply curve, and the second by how much existing suppliers will respond to this.

11. For example, King (1990) makes an adjustment for the job displacement effect of regional policy of 27% based on the displacement of output, but ignoring the effect in the labour market that occurs through a wage effect.

12. Space constraints prevent a formal analysis, but which can be found in chapter 10 of Sugden & Williams (1978), or in chapter 4 of Schofield (1987).

13. In the language of social choice theory it views the government as a dictator. Thus, a ‘wholly non‐additional’ subsidy payment to a firm, which does not change the firm behaviour, is viewed as a deadweight welfare loss, but in fact it is a transfer, as while the government is worse‐off, the firm is better‐off, on which more is said below.

14. It paid a fixed weekly lump sum amount in respect of each employee for a period of up to 6 months and operated for nine months up to the end of March 1978. The evaluation involved just 110 respondent firms.

15. Allen et al. (1986) refer to ‘additional investment’, hinting at the origin of the term, but it was not until the mid 1980s that ‘additionality’ was coined.

16. Of those firms carrying out formal investment appraisal, Allen et al. (1986) find that about 80 per cent included automatic incentives, but which was only 40 per cent for discretionary grants. In general, around two‐thirds of firms carried out appraisal.

17. An exception is the evaluation of the Small Firms Loan Guarantee Scheme (KPMG, 1999), where three kinds of ‘finance additionality’ are distinguished: those firms who had no other source of funds and those who could have either fully‐ or part‐funded it from elsewhere. For the 13.4% of projects that would have gone ahead unchanged in column (2) of Table 2, Robinson et al. (1987) find that virtually all of these projects would have used external rather than internal finance.

18. Wren & Jones (2007) consider the issue of grants and industrial location.

19. This is taken from Wren (1996c), where further explanation can be found.

20. Contrary to this, Lenihan & Hart (2004) report attempts to regress ‘wholly non‐additional’ projects on various firm characteristics for Irish assistance schemes.

21. Notable exceptions are the International Finance Corporation (IFC) of the World Bank and the Development Assistance Committee (DAC) of the OECD, which have sophisticated procedures for evaluation.

Additional information

Notes on contributors

Colin Wren

The paper was presented to the EUNIP conference, University of Limerick, 20–22 June 2006.