Capabilities, institutions and regional economic development: a proposed synthesis

Abstract The capability framework in evolutionary economic geography views regional economic development as a process of related diversification through the acquisition of capabilities that render a regional economy more complex. Using this framework, we synthesize seven theoretical notions that hitherto remained rather disconnected: relatedness, complementarity, variety, complexity, diversification, agents of structural change and related variety. We formulate a constructive critique of the capability framework, relaxing the overly restrictive assumption that the presence of capabilities in a region is both necessary and sufficient for complex products to be produced in a region. Instead, we argue that the complexity of a regional economy depends primarily on the institutions that support firms to coordinate production in complex value chains within and across regions. The augmented framework allows for closer integration of evolutionary and relational approaches in economic geography, providing new links between the literature on clusters, innovation systems and global production networks.