The Performance of Manufacturing in the European Union in the Context of Agricultural Economics - The Agricultural Economics of the 21st Century - page 36

above 0.5 signify larger increasing returns to scale and values below reflect lower
scale economies.
In this context the aim of the study presented here is to analyze the performance
of manufacturing, namely its capacity to capture the economic dynamics related to
the spillover effects, the endogeneity and with the increasing returns to scale, and
other factors which can affect this evolution, through the Verdoorn law extended
(with new variables based on the Keynesian theory), over the period 1996-2008,
using data from Eurostat (European Union statistics) and for the first 27 European
Union countries. Relevance was given to the manufacture of food, beverages, and
tobacco, mainly because this sector has much potential for growth, and actually
presents interesting signs of growth in many countries, being a sector that has its
importance for the upstream sector (agriculture) and represented in production
value, in 2007, 13.54 % of the total manufacturing and 13.61 % in terms of share
of employment. We cannot forget the importance of agriculture, the food industry,
and tourism for many regions in several countries of the European Union, mainly
those which are more disadvantaged. Therefore, this original study is an important
contribution towards European Union economic understanding.
2 Literature Review
The Verdoorn law has been applied in many countries and in many different ways:
with more aggregated/disaggregated data; for the manufacturing sector/all eco-
nomic sectors; original simple equation/extended equation with other variables
(considering in some cases other theories). For example, Fase and Van Den Heuvel
( 1988 ) analyzed the Verdoorn law in the manufacturing sector. Leon-Ledesma
( 1999 ) tested this law, in 17 Spanish regions, over the period 1962-1991, for the
manufacturing sector and confirmed the presence of increasing returns to scale.
Some years later Le ´ n-Ledesma ( 2002 ) tested the Verdoorn law again for a set of
OECD countries over the period 1965-1994, considering effects from innovation
and catching up. On the other hand, Harris and Liu ( 1999 ) studied this law and the
increasing returns for 62 countries, in the period 1965-1990, based on the
co-integration approach. The results also support the hypothesis of increasing
returns to scale in the majority of countries. Later, based on this law Dall'Erba
et al. ( 2008 ) applied a model, considering spatial autocorrelation effects, on the
manufacturing sector of the 244 European Union regions, of 25 countries, from
1991 to 2003, and found four different clubs of convergence. These authors
considered a Verdoorn equation augmented with variables according to the regional
population density, the technological gap, labor productivity, the spatial autocor-
relation effects, the urbanization rate, and the geographical distance from Luxem-
bourg (the central location for Europe). In the same line, yet for the European
regions, in the period from 1991 to 2002, Angeriz et al. ( 2009 ) estimated, also, the
Verdoorn law, with spatial autocorrelation effects, for the manufacturing sector.
They considered other variables in the Verdoorn equation, such as the density of