Functional specialization and upgrading along global value chains in European regions: new insights from FDI data

Abstract The geographic dispersion of production activities has led regions to increasingly specialize in distinct value chain functions, giving rise to a finer spatial division of labour. Using georeferenced FDI data on cross-border investments distinguished by value chain function, we provide the first systematic mapping of functional specialization across European NUTS-2 regions over the period 2003–2018. We show that the most intangible-intensive functions at the upper ends of value chains are concentrated in a small number of advanced regions, while lower-income ones are largely and persistently engaged in production operations. We document the strong spatial persistence of functional specialization before and after the 2008 crisis and find that regions trapped in production functions are the least likely to upgrade towards more knowledge-intensive industries. By contrast, only the few regions which experienced functional upgrading trajectories have been able to diversify towards more innovative industries, revealing a close interdependence between functional and inter-sectoral upgrading. Accordingly, regional policies should aim at favouring functional upgrading of laggard regions as a key vehicle for economic and spatial convergence in Europe.