Impartiality in the public sector and the growth of private sector firms: A regional level analysis within the EU.

Why are certain European regions most attractive for investors than others? We build on the recent research that has demonstrated both theoretically and empirically the benefits of an impartial, ‘Weberian-style’ public bureaucracy – including social trust, economic development and greater levels of government satisfaction. Yet most research has been conducted at the national level of analysis and little is known about regional differences within countries themselves. Using newly developed regional level data on ‘quality of government (‘QoG’) for 172 EU regions by Charron, Lapuente and Rothstein (2010), we begin with the assumption that firms seek reliable, de-politicized and stable regions to invest their capital in, ceteris paribus. We develop a straight-forward theory based on this assumption and test the hypothesis that EU regions that are perceived to be more impartial – that is less politicized and less likely to discriminate positively or negative for or against certain groups – will be more attractive for entrepreneurs to start a company in the private sector. Even when controlling for socio-economic factors such as GDP per capita, unemployment and level of education, we find that an impartial public sector is a significant factor in attracting private investment in the form of new private firms – both within and across EU countries.