Regional Cohesion in Europe 2021-2022

The pandemic ushered in a more digital world. Many firms across Europe understood this shift and took action to adapt, but those in poorer regions had more difficulty adjusting.

Firms in wealthier regions, for example, were more likely to develop new products to respond to the pandemic. But firms in cohesion regions, less-developed or transition regions whose economic output is lower than the European average, often struggled to take advantage of the opportunities created¹. At the same time, fewer firms in these regions are investing to tackle the other big threat – climate change – despite seeing the need to take action.

EU cohesion policy, which aims to correct imbalances between countries and regions, could help lagging regions to catch up. With a budget of €392 billion for 2021-2027, EU cohesion spending could drive growth and job creation. The funds could also better prepare countries and communities for the opportunities created by the European Union’s shift to a more digital and sustainable economy.

While firms’ investment fell sharply during the pandemic, it proved more resilient than expected. However, the decrease in investment comes on top of pre-existing gaps across regions. While EU investment needs are considerable, investment rates remain lower in cohesion regions.

• 79% of firms in more developed regions invested, while only 77% of firms in transition regions and 75% in less developed regions invested.

Across Europe, the pandemic has spurred digitalisation. However, firms in more developed regions are most aware of this shift and are more likely to have taken action. In contrast, firms in cohesion regions are more worried about the fallout from the pandemic. Firms in cohesion regions, for example, expect the pandemic to have a lasting impact on their supply chain. What is more, a larger share of firms expect that the digitalisation shift caused by COVID-19 will lead to permanent job cuts.

Firms in cohesion regions are less likely to invest in the kinds of intangible assets, like research and development or training, that is crucial to adapt to a more digital environment. Instead, firms in cohesion regions tend to focus their investment more on tangible assets, such as buying machinery, equipment or land.

• In less developed regions, only 28% of investment is in intangible activity, while it is 35% in transition regions and 39% in more developed regions.

Many firms in cohesion regions are lagging behind in innovation. Non-cohesion regions, where many knowledge-intensive activities cluster, have the lowest share of firms that are not actively pursuing innovation. The innovative gap between wealthier and poorer EU regions is also growing.

• 54% of firms in less-developed regions and 57% in transition regions are not actively pursuing innovation, while that number drops to 48% for wealthier regions.

Firms in more developed regions are also bigger adopters of digital technologies. Firm size accounts for part of the difference, as firms in cohesion regions tend to be smaller. Cohesion regions also are more likely to have lower quality digital infrastructure, which hampers the adoption of and investment in new technologies.

• 63% of firms in more developed regions have adopted at least one advanced digital technology, compared with only 53% of firms in transition regions and 59% of firms in less developed regions.

 

Firms in less developed regions report more obstacles to investment. This suggests that firms in these regions face a more challenging business environment. Firms in less developed regions have a harder time getting financing to grow their business. Similarly, they say that high energy costs and a weak transport infrastructure are hampering investment.

Firms across the European Union also cite a lack of skilled labour as an obstacle to investment. A large majority of firms, 79%, in both less-developed and more developed regions, say that finding skilled staff is an issue.

 

 

Across the European Union, firms rely heavily on their own cash flow to finance investments. Their dependence on external forms of finance remains relatively low. Firms in transition regions are the most likely to have tapped external finance.

• Bank loans are the most common form of external finance, across all regions. They account for 49% of financing in less developed regions, 58% in more developed regions and 69% in transition regions. The share of grants in the financing mix is highest in less-developed regions.
• Finance constraints are more prevalent in less-developed regions, particularly for small and medium-sized enterprises (SMEs).  SMEs in these regions are more than twice as likely (11%) as their peers in transition and non-cohesion regions (5% for both) to say that they face financial constraints.

Climate change is being felt across Europe, and many firms are worried about how climate events, such as extreme weather, will affect their business. Firms in less developed cohesion regions say more frequently that climate change is having a major impact on their business.

• 27% of firms in less-developed regions say that climate change is having a major impact, while 40% say the impact is minor.
• Only 19% of firms in transition regions say climate change is having a major impact, and 43% say the impact is minor.
• Firms in more-developed regions are the least worried about climate change. Only 16% see it as having a major impact, while 38% say the impact is minor.

Firms in cohesion regions are also more pessimistic about the effect the transition to a low-carbon economy will have on their business. That contrasts with more developed regions, where a greater share of firms see the transition as an opportunity.

Less-developed regions also have the lowest share of firms that have already invested to tackle climate change or to lower their carbon emissions, despite many firms saying they would like to do so (46%). The slowing economic recovery and the repercussions of the war in Ukraine are making it harder for firms to realise these investment plans.

 

 

Firms are at different stages of the digital and green transition across EU regions. Some firms are starting from farther behind, and they face a more challenging environment in which to make transformative investments. More developed regions have the highest share of firms forging ahead with the twin transition and investing in green and digital technologies.

• 31% of firms in more developed regions can be considered “green and digital,” compared with 25% in transition and 21% in less developed regions.

The twin transition poses risks to certain jobs, but it also creates new opportunities for employment. Work in a greener and more digital economy will be different, requiring new qualifications and skills.

While firms’ investment in training declined during the COVID-19 crisis, those firms undertaking transformative investments in green and digital activities were more likely to continue investing in their workforce. Across all regions, firms leading the green and digital transition invest more often in training than other firms.

Investment in human capital, including by firms, plays a key role in enabling the transformation. It is also key to closing gaps between regions and to increasing their resilience to shocks. Moreover, human capital development is essential to unlocking the employment opportunities created by the green and digital transition.

 

1. EU cohesion policy 2021-2027 distinguishes three categories of regions at NUTS2 level: 1. more developed regions, with gross domestic product (GDP) per capita greater than 100% of the EU-27 average; 2. transition regions, with GDP per capita from 75% to 100% of the EU average; less developed regions, with GDP per capita less than 75%% of the EU-27 average. In the context of this report, we refer to less developed and transition regions together as “cohesion regions” and to more developed regions as “non-cohesion regions.”