REF: 2021

Impact case study

Using empirical evidence to improve the design of investment for local economic growth

 

LSE-led research has supported better-informed policy design and decision-making in local growth. It has encouraged reduced reliance on anecdotal and case study-based evidence alone, and facilitated policymakers’ greater use of quantitative data.

Professor Steve  Gibbons

Research by

Professor Steve Gibbons

Department of Geography and Environment

Professor Henry Overman

Research by

Professor Henry Overman

Department of Geography and Environment

LSE research has influenced local and national economic growth policies, by helping to develop improved governmental appraisal and impact evaluation methods. 

What was the problem? 

The differing economic performance of places – regions, cities, towns, and rural areas – is an issue of increasing policy and political concern. As cities benefit from higher productivity, some towns and less densely populated conurbations have been “left behind”, lagging in economic growth and productivity. 

To tackle this economic polarisation, governments seek to promote local economic growth by, for example, investing in infrastructure or providing investment support to local firms. However, for such interventions to be effective, good evidence is needed of what factors can improve local growth and productivity.   

In the past there has been a reliance on anecdotal and case study-based evidence, with insufficient use of quantitative data, econometric analysis and impact evaluations. This had led to concerns, expressed by academics and in government reports, about the quality and rigour of evidence used to inform public policy.  

What did we do? 

Over many years, LSE researchers based at the Centre for Economic Performance (CEP) and the What Works Centre for Local Economic Growth (WWC) have developed ways to strengthen pre-investment appraisals and post-investment evaluations of policy interventions. Research led by Professor Stephen Gibbons and Professor Henry Overman (director of WWC) has focused on understanding the causes of spatial disparities and developing appraisal and evaluation techniques that better capture the wider economic impacts of investments. Central to their approach to evaluation is using counterfactual methods, which can more clearly attribute economic outcomes to a specific policy.  

Their work has contributed to better understanding spatial disparities in three broad areas. The first concerns estimates of the extent to which skills, density, and connectivity explain differences in productivity in different areas. Their research looks at two factors in particular: individual education and skill levels and agglomeration economies – that is the productivity benefit generated by densely populated areas such as cities or industries clustered together, including the role of transport and connectivity. They also looked at how education and agglomeration effects interact with, for instance, more educated and higher-skilled workers attracted to places with good connectivity, which further increases the benefit to cities. Looking at British data, they show that as much as 90 per cent of the observed inequality in local area average wages can be attributed to this “sorting” of higher-skilled workers into certain areas. These insights were particularly important to understanding the wider economic impacts of transport improvements. Research by Gibbons with Professor Daniel Graham (Imperial College London) discusses this link and calculates the wider economic effects that arise via agglomeration, and the importance of controlling for “sorting” when calculating these.   

The second area of research focuses on post-implementation evaluations of the economic impacts of infrastructure and other local economic growth programmes. A broad body of LSE work has applied quantitative impact evaluation methodologies to polices once they have been implemented. This research emphasises the value of secondary data sources and appropriate economic methods in identifying the causal effect of policies. It particularly focuses on constructing appropriate control groups to properly assess the economic impact of interventions.  

Relevant examples include research on the economic impacts of new roads and an evaluation of the UK scheme for investment support for firms (the UK Regional Selective Assistance Scheme), a form of state aid. This showed that the additional employment triggered by the assistance scheme was most significant for smaller firms; by contrast larger firms appeared to “game” the system by taking investment subsidies without substantively changing what they did.   

Finally, through this body of research, Gibbons and Overman have worked to improve the theoretical and empirical basis for policy appraisal and evaluation across government. They have brought insights from their research to bear on specific areas of UK local and national economic policy, reviewing and analysing past practice, and developing the What Work Centre’s policy reviews

What happened? 

LSE-led research on local policy interventions has influenced international, national, and local level policymaking, especially in the areas of business support, transport investment, and the development of local economic and industrial strategies.  

Evaluation of the UK Regional Selective Assistance Scheme by Overman and CEP colleagues directly influenced changes made to regional aid eligibility rules on state aid to large firms by the European Commission Directorate-General for Competition. The Commission cites Overman and colleagues’ work to support a shift towards using regional investment aid for SMEs, as more effective. The study and advice from the What Works Centre have helped inform guidance on evaluation of both current and future state aid in the EU, as well as UK guidance on the evaluation of structural funds.  

At a national level, research by Gibbons has informed the cost-benefit analysis methodology used by the UK Department for Transport (DfT) and Transport Scotland, to account for the potential wider economic impacts of transport projects. The research therefore contributes to decisions about all publicly funded transport projects in the UK, which represents hundreds of billions of pounds’ worth of public investment. 

LSE research has influenced UK government advice on evaluation more generally. A report for the National Audit Office, written by Gibbons, Overman and Professor Sandra McNally (LSE), reviewed lessons from prior impact evaluations, identifying gaps in the evidence and how evaluation is used. It made recommendations for improving the use of impact evaluation methods across government. The WWC’s methods for policy evaluation have subsequently, for example, been signposted in guidance from the UK government to support the creation of Local Industrial Strategies.  

As Director of WWC, Overman has overseen a programme of work focused on improving evaluation methods for a wide range of policies, including advising on devolution deals. The Centre worked with Liverpool City Region Combined Authority (CA) on analysing its devolution deal, advising it to focus on in-depth evaluation of specific parts of the deal. Here, WWC’s work helps to support better decisions on feasible and proportionate evaluation. This approach has been endorsed by the UK government for evaluating further devolution deals. 

The research led by Gibbons and Overman has therefore had a direct influence on policy design and decision-making and delivered important knock-on impacts on the value for money of public expenditure. This has shaped specific policies and had a wider influence on the selection and implementation of evaluation and appraisal methodologies guiding public expenditure decisions. 

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