Acta Oeconomica, Vol. 54 (3) pp.

323–342 (2004)

THE PYRAMID MODEL:

ENHANCING REGIONAL COMPETITIVENESS
IN HUNGARY*

I. LENGYEL

(Received: 19 December 2002; revision received: 13 August 2003;

accepted: 20 March 2004)

The notion of competitiveness figures nowadays frequently and centrally both in economic policy
and in regional development. Current economic development programmes, in short, have been di-
rectly responsible for the increasing attention devoted to analyses of regional competitiveness. At
the same time, there is a growing consensus that a single notion of competitiveness can be found to
describe processes of the globalising economy for companies (microlevel), industrial sectors and re-
gions (mesolevel) as well as for national economies (macrolevel). The standard (common) concept
of competitiveness has been partly developed in order to serve as a widely accepted theoretical defi-
nition, which can be measured and also be used by economic development policies. Competitive-
ness is intimately bound up with successful economic development.
This study reviews the conceptual background and some special aspects of competitiveness and
also looks more closely at one of the basic models of enhancing regional competitiveness. First,
some aspects of the standard notion of competitiveness are discussed. Then some key indicators of
the competitiveness of Hungarian regions will be investigated. I shall end by introducing the
so-called pyramid model, which has been designed to measure and improve regional competitive-
ness.

Keywords: regional competitiveness, regional policy, regional economic programming

JEL classification index: P2, R10, R15

INTRODUCTION

Competitiveness has become one of the key concepts in economics and economic
policy over the last two or three decades. It is a fashionable term the use of which
seems nowadays to be nearly obligatory. In Iain Begg’s apt formulation: “im-

* This paper was supported by the Hungarian National Research and Development Program (Pro-
ject No. 5/074/2001).

Correspondence: I. Lengyel, Department of Regional and Applied Economics, Faculty of Econom-

ics and Business Administration, University of Szeged, H-6722 Szeged, Honvéd tér 6, Hungary.
E-mail: [email protected]

0001-6373/$20.00 © 2004 Akadémiai Kiadó, Budapest

324 I. LENGYEL

proved competitiveness, as we all know, is the path to economic nirvana” (Begg

1999, p. 795). Meanwhile, competitiveness is a collective economic term that is
hard to define. Generally speaking, it indicates the capability or tendency to com-
pete under market conditions. In particular, it denotes the ability to gain and main-
tain economic positions in market competition as shown by an increase in busi-
ness success, market shares and profitability (Török 1999a).
The last decade has also brought the attention to the crucial impact of geo-
graphical location of economic activities on corporate competitiveness. Distance
and location have started to play a different role than before. One of the most con-
spicuous tendencies in economies shaped by the globalisation processes is the
strengthening of localisation (and regionalisation). This development is especially
palpable in developed countries with knowledge-based economies (Dicken 1998;
Malecki 1997). Economic theory has also reacted to these economic develop-
ments. Both theoretical research and business management have increasingly
adopted an approach that focuses primarily on geographical clusters.
The significance of geographical location has been stressed most prominently
by a line of theoretical economic thought closely associated with the work of Paul
Krugman. The “new economic geography”, regarded by many as the mainstream
approach nowadays, emphasises the characteristics of the geographical concen-
tration of most economic activities (Krugman 1999; 2000).
In the area of applied economics Michael Porter, one of the leading experts in
strategic planning, has analysed the competitive strategies and advantages of
global companies and found the role of location and that of regions to be excep-
tionally important (Porter 1990; 1998). The competitiveness of nations, regions
and various economic regions are also assessed in terms of high productivity rates
and a high growth of productivity: “the only meaningful concept of competitive-
ness at the national level is national productivity” (Porter 1990, p. 6). Porter has
argued that regional clusters are capable of improving competitiveness and pro-
posed, therefore, a cluster-based approach to regional economic development
(Porter 2000).
In the age of globalisation the previous, one-sided approach was no longer con-
sidered reliable in explaining what factors are responsible for success in interna-
tional competition. Economic output (GDP/inhabitant), the rate of economic
growth, export market shares and the balance of trade do not show how competi-
tive a given country or region might be. In many cases, due to the transfer of goods
among multinational companies, capital and profit transfer (withdrawal) or eco-
nomic output no longer depends on the countries and regions themselves but
rather on external factors (Dicken 1998; Hatzichronoglou 1996). An innovative
approach and the development of new indicators became necessary in order to re-

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 325

liably indicate the competitiveness of individual countries and regions under the
conditions of global competition.
When trying to understand regional competitiveness, it is important to take into
account that the regional level forms an intermediate, aggregate level between the
macro- and the micro-levels. Hence it makes sense to define the term “regional
competitiveness” either by using macro-level concepts of competitiveness
(disaggregation) or, starting from the micro level, by adding up the competitive
advantages of companies active in the given region (aggregation). Different meth-
ods have been developed to interpret competitiveness on a global scale (EC
2001b; 2002; Hall et al. 2001; Kitson and Mithchie 2000; Kresl and Singh 1999;
Malecki 1997; 1999; Maskell et al. 1998; OECD 1997; Török 1999b; Wren 2001).
There are several well-known surveys of national competitiveness – three of
these are of particular interest. First, the Yearbook of the Institute for Management
Development (IMD 2001) containing a yearly competitiveness ranking of coun-
tries since 1987. Second, the Global Competitiveness Report of the World Eco-
nomic Forum (WEF 2001) published annually since 1996. Third, the set of indica-
tors on national competitiveness issued by the World Bank (WB 1999). All of
these authoritative empirical surveys include both ex ante and ex post indicators of
competitiveness.
In recent years, the European Union (EU) has firmly identified the improve-
ment of regional competitiveness to be the primary objective of regional policy
(Enyedi 2000; Hall et al. 2001). This is regarded as the most important means to
promote balanced development and cohesion. Competitiveness figured as the cen-
tral theme both in the Sixth (and last) Periodical Report of the European Commis-
sion published in February 1999, and in the second cohesion report issued in 2001
(EC 1999a; 2001a). The guidelines on the use of Structural and Cohesion Funds
also set the improvement of regional competitiveness as their principal aim in or-
der to reduce the backwardness of regions in the first target category (EC 1999b).
This shows quite clearly that in reaction to the processes of globalisation econ-
omists are more and more preoccupied with two topics in particular. First, there
has been a marked increase of interest in the geographical concentration of eco-
nomic activities as well as in the weight attributed to regional and urban econo-
mies. Second, improved competitiveness has become a key issue for regional and
economic policies seeking to meet the challenges of the global competition. The
two topics form an organic whole setting the task for economists to provide a more
precise definition of regional competitiveness and to suggest means of economic
development for its potential improvement. Therefore, in regional policy, propos-
als for improving competitiveness have also started to rely on the standard notion
of competitiveness.

Acta Oeconomica 54 (2004)

326 I. LENGYEL

At the same time, there is growing consensus that the term “competitiveness”
can be used to describe processes of the global economy for companies (micro
level), sectors and regions (meso level) as well as for national economies (macro
level). The standard (common) concept of competitiveness has been partly devel-
oped in order to serve as a widely accepted theoretical definition that can be mea-
sured and also be used by economic development policies. Competitiveness is in-
timately connected to successful economic development. There are different ideas
and strategies as to what may constitute economic success. This is why a suffi-
ciently general notion of competitiveness is necessary. The standard concept of
competitiveness tries to meet precisely this new requirement.
This study will review the conceptual background and some special aspects of
the standard concept of competitiveness and will also look more closely at one of
the basic models of enhancing regional competitiveness. First, I shall briefly dis-
cuss some aspects of the standard concept of competitiveness. Then I analyse key
indicators of competitiveness in Hungarian regions. Finally I introduce the
so-called pyramid model, which has been designed to measure and improve re-
gional competitiveness.

THE STANDARD DEFINITION

OF REGIONAL COMPETITIVENESS

There were a number of attempts to define the idea of standard and extended com-
petitiveness in the mid-1990s. Particularly important examples include the pro-
posals put forward by the US Competitiveness Council, the OECD and the Euro-
pean Union (Begg 1999; Edmonds 2000; Myant 1999). I shall also rely on these
suggestions when defining and developing a suitable model of competitiveness
below. On the basis of various documents published by the OECD (1997), the
Sixth Regional Periodic Report (EC 1999a) and the Second Cohesion Report of
the EU (EC 2001a), the standard definition of competitiveness is as follows (EC
1999a, p. 75):
“the ability of companies, industries, regions, nations and supra-national regions to gen-
erate, while being exposed to international competition, relatively high income and em-
ployment levels.”

Similarly in the European Competitiveness Report (EC 2001b, p. 9):

“Competitiveness … is understood to mean a sustained rise in the standards of living of
a nation and as low a level of involuntary unemployment as possible.”

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 327

In the report of Regional Competitiveness Indicators of the UK (DTI 2002, p. 3):

“Regional competitiveness describes the ability of regions to generate income and main-
tain employment levels in the face of domestic and international competition.”

The standard definition of competitiveness appears to be quite flexible and can

be used for a number of different purposes. The following points will help form a
correct understanding of this definition:

– it presents competitiveness as a complex notion which can apply to all basic

economic units (company, sector, region, nation, macro region);
– it focuses on two measurable economic categories: income and employment;
– it assumes participation in international competition and an open economy – in
other words, it is only concerned with products and services marketable in the
global competition;
– it presupposes a relatively high income level, but contains no specifications for
how the income is to be distributed among capital owners and employees;
– it assumes a high rate of employment, partly in connection with the aims of so-
cial policy, but does not reflect the structure of employment (the qualification
of the workforce).

Since regions, towns and countries display different income and employment
characteristics, one can continue to distinguish microeconomic (based on the
competitiveness of products) and macroeconomic approaches (based on produc-
tivity). Consequently, this wider and more complex notion of competitiveness be-
comes more specific (Edmonds 2000):

– Companies and sectors are competitive if their products and services are mar-
ketable internationally, and if they are capable of realising high income (added
value) without reducing the number of their employees, i.e. if they do not have
to cut their workforce because they introduce new technologies or increase
their productivity.
– Regions, towns and countries are competitive, if their economies are open,
their per capita income is steadily high and increasing, and if they are capable
of sustaining a high rate of employment, i.e. if large segments of the population
can expect to benefit from the income realised.

How to measure income is a fundamental question: In practice, calculations of

regional GDP are based on the regional GDP, that is to say, the share of the GDP
generated in the region including all primary income (wages, capital interest, divi-
dends, land lease, company profits, amortisation) as realised by the local popula-

Acta Oeconomica 54 (2004)

328 I. LENGYEL

tion and companies with headquarters or branch-plants in the region. In NUTS II

level regions, the European Union measures the volume of income generated in a
region using per capita GDP. Of course, regional income and regional GDP are
not the same, but in practice we cannot measure interregional income transfers.
The definition refers to “a relatively high income”. This can be measured by
means of the per capita GDP and the GDP growth rate. A high employment level
is in turn indicated by the rate of employment. These two indicators can be mea-
sured independently from one another, but as is well known, the per capita GDP
can also be expressed as follows (EC 1999a, p. 75):

GDP GDP employment working − age pop.

= × ×
total population employment working − age pop. total population

The first fraction on the right-hand side of the formula is approximately equal
to labour productivity and the second to the rate of employment. The third frac-
tion, the age distribution of the population changes slowly. It can nevertheless
play an important role in some regions with smaller populations.
The three fractions on the right-hand side are of different importance as far as
measuring competitiveness:

(1) The GDP per employee, i.e., the GDP divided by the number of those actively
participating in generating it, which is approximately equal to labour produc-
tivity (output per hour worked), usually forms the basis of empirical assess-
ments of regional competitiveness.
(2) The employment rate measures whether there is a sufficient supply of jobs
available for the working-age population of the region. Clearly, how precisely
this component can represent employment in the region will also depend on
the number of people commuting between regions.
(3) The share of the working-age population from the total population remains
more or less constant, or changes slowly over longer periods of time. Conse-
quently, analyses of competitiveness usually do not extend to this figure.

These remarks suggest that measuring regional competitiveness can be traced

back to three economic categories, among which a trivial correlation holds (Hall
et al. 2001, p. 8):

Regional income @ Labour productivity × Employment rate

Acta Oeconomica 54 (2004)

THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 329

Given the standard definition of competitiveness, no unique indicator of re-

gional competitiveness can be found. It is interpreted rather as a combination of
closely connected, well-measurable and unambiguous economic categories:

– per capita GDP of the region (otherwise regional growth);

– labour productivity of the region;
– employment rate of the region;
– economic openness of the region (exports and imports).

Therefore the notion of regional competitiveness means: the per capita income
in the region, which income is generated by both a high level of labour productiv-
ity and a high level of employment. In other words, competitiveness is economic
growth driven by high productivity and a high employment rate. The growth rates
of all four categories are as important as the absolute levels reached.
A closer look at the definition of competitiveness and the four associated indi-
cators will clearly show that the traditional concept of economic growth has been
refined and adjusted to the conditions of globalisation to develop this definition
(Armstrong and Taylor 2000; Malecki 1997). I would particularly like to highlight
the requirement concerning a relatively high employment rate included in the
standard definition of competitiveness. On the one hand, seeking an optimal and
maximally efficient use of the available workforce is an economic objective, one
of the basic “quantitative” factors of economic output. But it is also an objective of
social policy, a characteristic feature of the so-called “European model”.

ON THE COMPETITIVENESS OF HUNGARIAN REGIONS

The basic categories can be used to measure regional competitiveness: GDP per
capita, labour productivity, employment and openness. There are seven NUTS II
regions in Hungary (Figure 1). Regional GDP at purchasing power parity (PPS)
has been recorded since 1996 in Hungary (Lengyel 1998; 2002; Rechnitzer 2000).
Hungary’s economic growth reached 20.3% between 1996 and 2000, which
corresponds to an annual (geometric) average of 4.7%. The regional distribution
of GDP per capita has been strongly unequal. Three regions (Central Hungary,
Central Transdanubia and Western Transdanubia) actually began catching up to
their Western European counterparts with a dynamic annual growth of approxi-
mately 6% in the period mentioned (Table 1 and Figure 2). The economic growth
of the other four regions remained at a yearly 2–3%, which is more or less around
the EU average or falling slightly below. In other words, Hungary’s impressive
economic development has been realised by three developed regions with two

Acta Oeconomica 54 (2004)

330 I. LENGYEL

Notes: Közép-Magyarország = Central Hungary, Közép-Dunántúl = Central Transdanubia, Nyugat-

Dunántúl = Western Transdanubia, Dél-Dunántúl = Southern Transdanubia, Észak-Magyarország =
Northern Hungary, Észak-Alföld = Northern Great Plain, Dél-Alföld = Southern Great Plain.
Figure 1. Regions in Hungary

Table 1
The purchasing-power- (PPS-)adjusted GDP per capita relative to the EU-average (15 countries),
1995–2000 (%)

Region 1995 1996 1997 1998 1999 2000 Difference

between 2000
and 1995
Central Hungary 66.4 68.4 70.9 71.6 75.1 78.1 +11.7
Central Transdanubia 41.6 42.8 45.6 47.5 46.6 51.5 +9.9
Western Transdanubia 47.4 48.9 50.0 53.5 57.1 58.4 +11.0
Southern Transdanubia 37.6 37.3 36.9 37.4 38.6 38.4 +0.8
Northern Hungary 33.5 32.2 32.0 32.9 33.0 33.1 –0.4
Northern Great Plain 32.8 32.8 32.9 32.8 31.9 32.5 –0.3
Southern Great Plain 38.3 37.9 37.0 37.0 37.0 36.8 –1.5
Hungary 46.0 46.6 47.5 48.4 49.7 51.3 +5.3
Source: HCSO (1999; 2001)

other regions (Southern Transdanubia, Northern Hungary) somewhat decelerat-

ing and the two remaining regions (Northern and Southern Great Plain, those lo-
cated at the east and south part of Hungary) actually “hindering” economic pros-
perity.
Regional growth depends on a combination of labour productivity and the em-
ployment rate. Hungary has been characterised by unequal regional development

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 331

8
Average growth in GDP per capita (%),

7 CT
WT
6

5 CH
1996-2000

H
4

3 NH

2 NA

1 SA

0
0 20 40 60 80 100
GDP per capita in 2000 (%, EU15=100)

Notes: H = Hungary, CH = Central Hungary, CT = Central Transdanubia, WT = Western Trans-

danubia, ST = Southern Transdanubia, NH = Northern Hungary, NA = Northern Great Plain, SA =
Southern Great Plain.
Source: Own calculation based on HCSO (1999; 2001).
Figure 2. Regional growth and development in Hungary

Table 2
Labour productivity (GDP per employment) and employment rates of regions

Regions Labour productivity Employment rate

(thousand PPS) (%)
1996 2000 Growth (%) 1996 2000 Difference
between 2000
and 1996
Central Hungary 32.1 42.0 31 57.6 61.3 +3.7
Central Transdanubia 21.6 28.2 31 54.1 60.0 +5.9
Western Transdanubia 22.4 30.3 35 59.8 63.7 +3.9
Southern Transdanubia 19.9 23.8 20 50.8 53.5 +2.7
Northern Hungary 19.3 22.5 17 46.1 49.5 +3.4
Northern Great Plain 19.7 22.3 13 46.6 49.7 +3.1
Southern Great Plain 19.7 22.2 13 53.0 55.7 +2.7
Hungary 24.0 30.1 25 53.1 56.7 +3.6
Note: For population aged 15–74.
Source: HCSO (1999; 2001).

Acta Oeconomica 54 (2004)

332 I. LENGYEL

3500

3000

2500

2000
Labour productivity
Employment
1500

1000

500

0
CH CT WT ST NH NA SA H

Note: For abbreviations see Figure 2.

Source: Own calculation.
Figure 3. Sources of the growth of GDP per capita (from 1996 to 2000, PPS)

in this respect as well: three regions can boast exceptional figures for these two in-
dicators, both in absolute terms and in terms of the rate of change between 1996
and 2000 (Table 2). The two other pairs of regions have been found to be much
less competitive: growing employment has generated increasing economic out-
put. Table 2 also shows that, to a varying extent, growing labour productivity and
employment have been responsible for the improved competitiveness of all the re-
gions.
The essential question to be asked with regards to regional competitiveness is
whether improving labour productivity or rather improving employment is re-
sponsible for economic growth? It is safe to say that economic growth has been
driven by both increasing employment rates and improved labour productivity, al-
though not to the same extent (Figure 3). About 60–70% of the economic growth
of the three developed regions and of Hungary overall can be traced back to im-
proved labour productivity and 30–40% to increasing employment. Labour pro-
ductivity was responsible for 55% of economic growth in Southern Transdanubia,
35% in Northern Hungary, 15% in the Northern Great Plain and as little as 10% in
the Southern Great Plain. Thus in the less developed regions GDP growth is, to an
overwhelming extent, attributed to the fact that more people are at work, while
traces indicating technological development or a more effective organisation of
the workforce are scarcely evident.
The available data clearly suggest that the growing competitiveness of the Cen-
tral Hungarian, Western Transdanubian and Central Transdanubian regions can

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 333

8000

7000

6000

5000
Export
4000
Import
3000

2000

1000

0
CH CT WT ST NH NA SA

Note: For abbreviations see Figure 2.

Source: Ministry of Economy and Transport.
Figure 4. Per capita export and import of the Hungarian regions (USD, 2000)

be explained by improved labour productivity. Employment is high, but its growth

has slowed down. The competitiveness of the remaining four regions has im-
proved only slightly. Both employment and labour productivity have improved
approximately to the same extent.
Competitiveness is closely connected to economic performance in the interna-
tional (global) competition. The “openness” of regions is best expressed in terms
of export and import figures, indicating the extent to which companies situated in
the region have been able to produce globally marketable goods and services (Fig-
ure 4). Exports, which have greatly contributed to the rapid growth of the Hungar-
ian economy, have been produced almost exclusively in three developed regions:
Western Transdanubia, Central Transdanubia and Central Hungary. These three
regions generated 76% of all Hungarian exports in 2000. In short, these three re-
gions are well “embedded” in the global economy, while the other four regions ca-
ter mainly for domestic demand.
In sum, there are significant differences in the competitiveness of Hungarian
regions: three regions have demonstrated improving competitiveness, whereas the
economies of the other four have stagnated. Both the absolute value and the
growth rate of employment and labour productivity have contributed to leverag-
ing the competitiveness of the three rapidly developing regions. They have al-
ready become an integral part of international trade, while the other four continue
to export at relatively low levels. The region of Central Hungary has already ex-
ceeded 75% of the EU-average. It cannot, therefore, expect subsidies from the

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334 I. LENGYEL

Structural Funds, at least not if current regulations continue to stay in place. The
other six regions, however, are likely to benefit from cohesion-oriented policies in
the long-term.

THE PYRAMID MODEL: FACTORS UNDERLYING REGIONAL

COMPETITIVENESS

Measuring regional competitiveness has been traced back to four related eco-
nomic categories: income generated in the region, labour productivity, employ-
ment rate and openness. Competitiveness in this meaning cannot be used, how-
ever, to identify factors responsible for regional competitiveness or areas which
are to be strengthened or developed by regional development policies and
programmes for improved competitiveness. The pyramid model of regional com-
petitiveness seeks to provide a systematic account of these means and to describe
the basic aspects of improved competitiveness. The regional economic develop-
ment strategy of the Southern Great Plain region was based on this model
(Lengyel 2000).
The standard definition and the resulting economic indicators enable us to mea-
sure competitiveness fairly precisely. However, when it comes to regional policy
and economic development it is not enough to establish how competitive a given
region might be, it is also important to suggest ways to improve regional competi-
tiveness. Since the notion of competitiveness can be seen as refining that of eco-
nomic growth, it can often be observed that proposals for improved competitive-
ness combine traditional means of economic development with methods based on
endogenous development (Malecki 1997). In any case, two important ideas moti-
vate the objectives identified: the creation of employment opportunities (employ-
ment rate, and closely related, SMEs and human capital) and efficiency (labour
productivity, and closely related, R&D and incentives for foreign direct invest-
ment).
The development of a region in Europe will only be stable, balanced and sus-
tainable in the long run as long as no sharp social tensions emerge (EC 2001a).
This implies that wide segments of the population must enjoy a high living stan-
dard which in turn assumes a high employment rate and the lack of excessive in-
equalities of income. This target of social and economic policy constitutes an ex-
tremely important consideration for regional policymaking, the representation of
local interests and the drawing up of development priorities for improved compet-
itiveness.
The standard of living and prosperity in any region depends on its competitive-
ness (Begg 1999; Maskell et al. 1998; Porter 2001). Factors influencing regional

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 335

competitiveness can be divided into two groups of direct and indirect compo-
nents. Of particular importance are programming factors with a direct and
short-term influence on economic output, profitability, labour productivity and
employment rates. But social, economic, environmental and cultural processes
and parameters, the so-called “success determinants”, with an indirect, long-term
impact on competitiveness are also of key importance (Jensen and Butler 1996).
Three levels can be distinguished with regard to the objectives of regional de-
velopment programming and the various characteristics and factors influencing
competitiveness (Figure 5):

Target

Basic categories

Development factors

Success determinants

Figure 5. The structure of the pyramid model of regional competitiveness

– Basic categories of regional competitiveness (ex post indicators; measuring

competitiveness): these categories measure competitiveness and include in-
come, labour productivity, employment and openness.
– Development (programming) factors of regional competitiveness (ex ante fac-
tors; improving competitiveness): factors with an immediate impact on basic
categories. These can be used to improve regional competitiveness with the
help of institutions in short-term programming periods.
– Success determinants of regional competitiveness (social and environmental
conditions; explaining competitiveness): determinants with an indirect impact
on basic categories and development factors. These determinants take shape
over a longer period of time and their significance reaches beyond economic
policymaking.

When characteristics determining competitiveness are placed on a figure, one

obtains the “pyramid model” of regional competitiveness: the components of
long-term success are at the bottom, the middle layer consists of development
(programming) factors, the basic categories included in the standard definition of
competitiveness are located one level higher, while the standard of living and wel-
fare of the region’s population (the ultimate objective) forms the peak of the pyra-
mid.

Acta Oeconomica 54 (2004)

 336
Target Quality of life
Standard of living

Acta Oeconomica 54 (2004)

Regional performance
Gross Regional Product

Basic categories
Labour productivity Employment rate

Development Research and Infrastructure and Foreign direct Small and Institutions and
technological human capital investment medium-sized social capital
factors development enterprises

Economic Innovative Regional Skills of

Success structure activity accessibility workforce
determinants
Social structure Decision centres Environment Regional identity

Source: Own construction.

Figure 6. The pyramid model of regional competitiveness
I. LENGYEL
THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 337

Competitiveness depends on a wide range of factors and conditions. The five

programming factors underlying competitiveness included in the Sixth Periodic
Regional Report of the EU (EC 1999a) are, however, exceptionally significant
(Figure 6). These development factors shape, to varying extent, economic output,
labour productivity and employment. (Broken lines mark only the closest connec-
tions in the figure.) Improving individual programming factors is the goal of re-
gional policies. They are likely to improve the competitiveness of regions directly
and in the short run through regional partners and local institutions. Programming
factors include:

– Research and technological development (RTD): the fast introduction of inno-

vations and new technologies creates competitive advantages. Innovation may
come from outside the region (e.g. technological transfer), but the competitive-
ness of the region is most effectively advanced by successful R&D activities,
innovations and their fast and wide-ranging distribution. The development of
research, innovation, education and training is crucial to improving competi-
tiveness. This can produce a spillover of scientific and technological advan-
tages in the region.
– Small- and medium-sized enterprises (SME): SMEs are flexible and can quick-
ly adapt to market changes. They are principally responsible for generating em-
ployment in the region. More recently, innovative SMEs acting as independent
global players (using information technology and networks) have also ap-
peared.
– Foreign direct investment (FDI): foreign direct investment usually creates new
sectors, markets, new technologies and new jobs. It also improves labour pro-
ductivity and can encourage technological transfer as well.
– Infrastructure and human capital: technological infrastructure as well as edu-
cational and training institutions and their successful functioning are crucially
important for improved competitiveness. Advanced transport, telecommunica-
tions and information networks play a particularly significant role. In addition,
much depends on the efficient use of available educational and training sys-
tems. Infrastructure should not be developed for its own sake; it needs to serve
the region’s competitiveness by catering for the needs of local sectors and clus-
ters.
– Institutions and social capital: economic prosperity also assumes efficient co-
operation among existing institutions. Successful companies also depend on
the level of administrative services and public institutions. Social capital is par-
ticularly important: trust, reliability, readiness to cooperate, etc.

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338 I. LENGYEL

Success components with an indirect, often spontaneous, long-term impact on

regional competitiveness cover a wide range of variables. At the same time, there
is agreement with regard to the success determinants. Enyedi (1996, pp. 62–64)
lists ten important determinants underlying regional success. Begg (1999, pp.
802–804) highlights four determinants and the Sixth Periodic Regional Report of
the EU (EC 1999a, p. 80) mentions four determinants as well. Surveys on regional
success are characteristically based on an analysis of a considerable amount of sta-
tistical data (usually factor analysis). They use these figures to determine the con-
nection between certain indicators and economic performance (generally ex-
pressed as GDP per capita). Success determinants include:

– Economic structure: the workforce of successful regions typically concentrates

in economic services and/or the processing industry. Both productivity and
employment are usually higher in services sectors generating high added value
(information technology, financial services, telecommunications and high-tech
industries), while sectors of the processing industry are characterised by high
and increasing productivity in combination with falling employment figures.
– Innovative activity: an appropriately innovative environment (innovation
background) can ensure the region’s ability to respond to any kind of techno-
logical, business, environmental or other challenge with the right adaptive
strategy. Such strategies can help turn innovational challenges to the advantage
of the region. Innovational capacities cover not only institutional research and
development capacities but also companies’ capacities with quickly reacting
and innovative SMEs in the new sectors of the market and prosperous lines of
business.
– Regional accessibility: the accessibility, transport networks and geographical
location of successful regions are more advantageous than those of other re-
gions. Geographical location limits the range of opportunities, influences
travel costs and time as well as how much time it takes to get products on the
market. Transportation (airports, trains, motorways, ports, etc.) and communi-
cations (traditional media, internet, data transfer, etc.) infrastructure can help
reduce the effects of geographical limitations.
– Skills of the workforce: the share of educated and skilled labour in the total pop-
ulation is relatively high in successful regions. Education is effective in the
sense that it can flexibly adjust to changing demands on the labour market, can
prepare younger generations and retrain existing workforce to pursue creative
and innovative activities (the requirements of informational society), and busi-
ness services.
– Social structure: knowledge-intensive economic activities and the growth of
economic services strengthen the middle-classes in successful regions.

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THE PYRAMID MODEL OF REGIONAL COMPETITIVENESS 339

Typically, the blue collar working class becomes smaller and only few activi-
ties offer opportunities for unskilled labour (local construction industry, some
public services, etc.).
– Decision centres: the presence of company headquarters is important and so is
the location of strategic units pursuing core competencies. The central depart-
ments of companies generate demand for highly qualified employees on the la-
bour market, provide incentives for better training locally, strengthen the
knowledge base and enhance the business environment. The spillover of their
know-how and “patterns” as well as the possible establishment of start-up com-
panies by some of their more enterprising experts can give further stimuli to
SME activities and create additional competitive advantages.
– Environment: a qualified, culturally demanding and growing middle-class of
successful regions welcomes a more developed environment (public safety,
quality public services, attractive urban architecture, high-standard housing,
good local public transport, etc.) as well as a healthy and safe natural environ-
ment. The population not only presents its demands, but is also prepared to as-
sume an active role in protecting the environment (waste collection and recy-
cling, protecting green areas, spending time outdoors, etc.).
– Regional identity: every region and town has to face conflicts all the time. Suc-
cessful ones are able to handle problems caused by structural changes of the
economy, rapid growth (leading to massive immigration) as well as discrepan-
cies in space or among various settlements (fast urban growth accompanied by
growing rural backwardness). It is important to foster the regional identity of
the population, to promote localism which in turn may provide incentives for a
more active population and non-governmental organisations.

Needless to say, the above success determinants are interdependent on one an-
other but can partly overlap as well. It is important to emphasise that the two bot-
tom levels of the model are built on one another: economic structure depends on
the social constitution of the region, the innovative activity will be shaped by com-
pany and institutional headquarters, better regional accessibility will tend to have
negative effects on the environment, and the regional identity will have an impact
on the qualifications and motivation of the workforce.
In its complexity, the pyramid model can help assess the sustainable develop-
ment of regions relying on what is known about successful regions. It aims to ac-
commodate ex ante indicators with ex post ones on the basis of the standard notion
of competitiveness. The ex post indicators constitute the basic categories (income,
labour productivity, employment rate), while the ex ante indicators cover the pro-
gramming factors and the success determinants. Ex post indicators as economic

Acta Oeconomica 54 (2004)

340 I. LENGYEL

categories serve to measure and evaluate competitiveness, whereas ex ante indica-

tors, which also include several non-economic considerations, are useful for re-
gional policies and the elaboration of economic development strategies.

CONCLUSION

This study has reviewed the standard definition of competitiveness which is

well-suited to measure and improve the competitiveness of regions. The standard
definition can be widely used and is applicable to all basic economic units, for in-
stance to regions. It is in essence a means to assess economic growth and develop-
ment, while it also constitutes the main objective of economic policy under the
new and changing circumstances.
The article analysed the competitiveness of Hungarian regions based on the
standard definition. The most important findings have been that the economies of
three Hungarian regions have developed faster than the EU-average. These re-
gions have been found to be catching up more and more with their Western coun-
terparts (especially the region of Central Hungary). The economies of the other re-
gions have stagnated. Consequently, statistical findings on Hungarian regions
make it clear that the high economic growth of the Hungarian economy has been
generated exclusively by the improving economic performance of three regions.
Only these regions can be called competitive with a per capita GDP growth above
the EU-average and labour productivity and employment rates exceeding the na-
tional average. The remaining four regions cannot be considered competitive
given their economic stagnation, insignificant growth rates, low levels of employ-
ment and labour productivity.
By combining various concepts of competitiveness one can obtain the
so-called pyramid model. This includes not only indicators to measure competi-
tiveness, but also factors underlying improved competitiveness. The latter factors
can be divided into two groups: those having a short-term impact (for regional
programming), and success factors.

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