Cross region knowledge spillovers and total factor productivity. European evidence using a spatial panel data model

This paper concentrates on the central link between productivity and
knowledge capital, and shifts attention from firms and industries to regions. The
objective is to measure knowledge elasticity effects within a regional Cobb-
Douglas production function framework, with an emphasis on knowledge
spillovers. The analysis uses a panel of 203 European regions to estimate the
effects over the period 1997-2002. The dependent variable is total factor
productivity (TFP). We use a region-level relative TFP index as an
approximation to the true TFP measure. This index describes how efficiently
each region transforms physical capital and labour into outputs. The explanatory
variables are internal and out-of-region stocks of knowledge, the latter capturing
the contribution of interregional knowledge spillovers. We use patents to
measure knowledge capital. Patent stocks are constructed such that patents
applied at the European Patent Office in one year add to the stock in the
following and then depreciate throughout the patents effective life according to a
rate of knowledge obsolescence. A random effects panel data spatial error model
is advocated and implemented for analyzing the productivity effects. The
findings provide a fairly remarkable confirmation of the role of knowledge
capital contributing to productivity differences among regions, and adding an
important dimension to the discussion, showing that knowledge spillover effects
increase with geographic proximity.