Figure 1: Comparison of average firm performance in lagging versus non‐lagging regions <!-- Start of picture text --> Difference in average firm performance (percentage point):<br>lagging regions relative to non‐lagging regions<br> 1.5 ‐<br> 1.0<br> (5.0)<br> 0.5<br> ‐ (10.0)<br> (0.5)<br> (15.0)<br> (1.0)<br> (1.5) (20.0)<br>Spain Italy Poland Romania<br>sales growth (%) employment growth (%) ROA (%)<br>Productivity growth Investment rate (rhs)<br><!-- End of picture text --> _Note: This table reports the difference by country in the average of each firms’ performance indicators, between lagging and non‐lagging regions. Sales growth, employment growth, and ROA uses the left‐hand scale; Investment rate uses the right‐hand scale. Authors calculations based on data from Orbis. Notice that differences in productivity growth are close to zero across all countries_ Second, there is a stark underperformance of lagging regions across all countries in the investment rate of firms: 9.3 percentage points lower in Spain; 11.6 percentage points in Poland; 12.0 in Romania; and 18 percentage points lower in Italy. This may well be explained in part by differences in sectoral structure, whereby the enterprise environment of lagging regions is comprised more of smaller, less asset‐intensive firms. In fact, the Orbis data indicate that this is exactly the case. Data from the sample indicate that the total asset value of firms in non‐lagging regions in Spain is 68 percent larger than firms in lagging regions; in Italy, 82 percent larger; and in Romania, 124 percent larger; while in Poland, it is only 38 percent larger.

Table 4 presents the results of a regression on firm performance variables comparing firms located in lagging regions versus those in non‐lagging regions. Given the findings from Figure 1 on the significant differences between ‘low growth’ and ‘low income’ regions, we split the sample to show results for the two types of regions separately. The regression uses observations that take the latest 3‐year average (2011‐13) across all dependent variables to smooth annual fluctuations. Control variables are lagged by 3 years – these include regional, sector (NACE Rev. 2 – 2‐digit), and firm controls. The results can be read as follows (taking the example of sales growth in Italy and Spain from Table 4): sales growth in lagging regions in Italy and Spain was 1.255 percentage points lower than average across all regions in those countries.

Table 4: Regression results of firm performance in lagging regions (2013 observation, 3‐year average)

||Sales Growth|Employment<br>Growth|Investment Rate|ROA|Productivity<br>Growth|
|---|---|---|---|---|---|
|Italy and Spain|‐1.255***|‐0.600***|‐13.764***|‐0.689***|‐0.012***|
||[‐6.377]|[‐5.372]|[‐10.415]|[‐7.226]|[‐4.215]|
|Poland and Romania|0.229|0.216|‐4.369**|0.562**|0.00042|
||[0.621]|[1.231]|[‐2.092]|[1.970]|[0.088]|

_Note: This table reports the estimates of the firm performance model. We report the impact of the firm being located in a lagging region only. All models include fixed effects for: country, region, sector; firm controls include: (log) age, (log) size, (log) total assets, assets per employee; and financial leverage. For homogeneity purposes, we run estimates on two separate samples: Italy and Spain on the one hand; Poland and Romania on the other hand._ 10