The impact of knowledge capital on regional total factor productivity

This paper explores the contribution of knowledge capital to total factor productivity
differences among regions within a regression framework. The dependent variable is total factor
productivity, defined as output (in terms of gross value added) per unit of labour and physical
capital combined, while the explanatory variable is a patent stock measure of regional
knowledge endowments. We provide an econometric derivation of the relationship, which in the
presence of unobservable knowledge capital leads to a spatial regression model relationship. This
model form is extended to account for technological dependence between regions, which allows
us to quantify disembodied knowledge spillover impacts arising from both spatial and
technological proximity. A six-year panel of 198 NUTS-2 regions spanning the period from
1997 to 2002 was used to empirically test the model, to measure both direct and indirect effects
of knowledge capital on regional total factor productivity, and to assess the relative importance
of knowledge spillovers from spatial versus technological proximity.