In many countries, poorer regions are growing faster than richer regions, and provinces are converging over time. In other countries, however, regional economic differences have persisted over many years and income gaps are widening. It is important to understand why enduring regional socio-economic disparities exist within countries, what factors drive them, and what can be done to reconcile these differences. Recently, a policy community in Europe, Asia and the United States has become more interested in finding answers to these complex questions.
This research examines divergent economic paths between regions in several countries. Based on the case studies of China, Italy, and the United States, I find that regional economic differences are common, even as countries have unlike history, culture, and socio-economic systems. Regional disparities are primarily attributed to local geography, human and social capital, institutional quality, infrastructure, public policies, and clustering of economic activities. Across all case studies, the most prosperous regions are also those with the largest international capital inflows.
Because prosperous localities amass thriving businesses, next I focus on the role of foreign capital in regional economies. Using Ukraine as a case, I analyze data on its local socio-economic indicators and international capital inflows of various types between 2001 and 2013 and find not only substantial regional differences, but also a systematic, simultaneous, positive relationship between regional economic growth and international capital flows. This nexus is particularly distinct for Ukraine's West where, if compared to other regions, any small increase in international capital, either public or private, would create a more than twice larger positive effect on local economic development. Based on my analysis, I recommend specific steps for Ukraine's regional and overall economic policy.