Infrastructure and EU Regional Convergence: What Policy Implications Does Non-Linearity Bring?

One of the priority areas of the EU is infrastructure development. Over 2021-2027, it is planned to allocate more than 116 billion EUR of support from EU structural funds to transport and ICT infrastructure. For investments to promote the growth of lagging regions and reduce regional disparities, investments must be efficiently allocated. Considering limitations of previous studies, this study aims to provide recommendations for policymakers regarding infrastructure investment allocation after assessing the non-linear relationships between transport and ICT infrastructure development and convergence of EU MS NUTS2 regions. The general specification for estimations is based on the neoclassical conditional beta-convergence model. Additionally, a non-linear specification with interactions is developed to estimate the effect of infrastructure development on convergence. We used Generalized Methods of Movement estimator for the robustness check to reduce possible endogeneity bias. Estimations indicated that a non-linear relationship between infrastructure development and convergence is present. We have found strong evidence of the diminishing marginal effect of infrastructure development on convergence and have identified a tipping point after which infrastructure development slows down convergence, i.e., convergence is still present but at a slower rate. The study results made it possible to present several essential recommendations to policymakers that would increase the effectiveness of investments in infrastructure. Investments should be distributed according to smaller regional units, i.e., NUTS 2 level. The optimal level of infrastructure development that ensures convergence of regions for each type of infrastructure has to be established to ensure that the investments are not too intense and to generate the maximum potential outcomes.