Functional specialization and upgrading in European regions: new insights from FDI data

The geographic dispersion of production activities has led regions to increasingly specialize in specific value chain functions, giving rise to a finer spatial division of labour. In this work, we use georeferenced FDI data to investigate the geography of functions and the interdependencies between functional and sectoral specialization of European regions. We show that the most intangible-intensive functions at the upper ends of value chains are concentrated in few advanced regions, while lower-income ones are largely and persistently specialized in production operations. Moreover, we find that regions locked-into low value-adding functions are the least likely to upgrade towards more knowledge-intensive industries. By contrast, only the few regions which experienced functional upgrading trajectories have been able to diversify towards more innovative industries. Accordingly, regional policies should aim at favouring functional upgrading of laggard regions as a key vehicle for economic and spatial convergence in Europe.