Thus, the Structural Funds interventions are designed to improve the regional
aggregate stock of public infrastructure and human capital, as well as the private
capital stock. Providing more and better infrastructure, increasing the quality of the
labour force, or providing investment aid to firms, are the mechanisms through which
the Structural Funds improve the output, productivity and cost competitiveness of the
economy. These policies create conditions where private firms enjoy the use of
additional productive factors at no cost to themselves. Alternatively, they may help to
make the current private sector inputs that firms are already using available to them at
a lower cost, or the general conditions under which firms operate are improved as a
consequence. In all these ways, positive externalities may arise out of the Structural
Funds interventions.
Recent advances in growth theory have addressed the role of spillovers or
externalities which arise from public investments, for example in human capital or
infrastructure. Furthermore this literature has investigated how technical progress can
be affected directly through investment in research and development (R&D). Here
too externalities arise when innovations in one firm are adopted elsewhere, i.e., when
such innovations have public good qualities. These externalities have an important
implication for the long-run impact of the Structural Funds and thus, to properly
assess the impact of the Funds these must be incorporated into the modelling
framework that is chosen.
Two types of beneficial externalities are likely to enhance the mainly demand-side (or
neo-Keynesian) impacts of well-designed investment, training and aid policy
initiatives. The first type of externality is likely to be associated with the role of
improved infrastructure and training in boosting output directly. This works through
mechanisms such as attracting productive activities through foreign direct investment,
and enhancing the ability of indigenous industries to compete in the international
market place. This is referred to as an output externality since it is well known that
the range of products manufactured in developing countries changes during the
process of development, and becomes more complex and technologically advanced.
The second type of externality arises through the increased total or embodied factor
productivity likely to be associated with improved infrastructure or a higher level of
10