Knowledge spillovers and total factor productivity. using a spatial panel data model

This paper investigates the impact of knowledge capital stocks on total productivity through the lens of the knowledge capital model proposed by (1979), augmented with a spatially discounted cross-region knowledge pool variable. The objective is to shift attention from firms and to regions and to estimate the impact of cross-region knowledge on total factor productivity (TFP) in Europe. The dependent variable is region-level TFP, measured in terms of the superlative TFP index suggested Caves, Christensen and Diewert (1982). This index describes how efficiently region transforms physical capital and labour into output. The explanatory are internal and out-of-region stocks of knowledge, the latter capturing contribution of cross-region knowledge spillovers. We construct patent stocks proxy regional knowledge capital stocks for N=203 regions over the 1997- 2002 time period. In estimating the effects we implement a spatial panel data that controls for the spatial autocorrelation due to neighbouring regions the individual heterogeneity across regions. The findings provide a fairly confirmation of the role of knowledge capital contributing to differences among regions, and add an important spatial dimension the discussion, by showing that productivity effects of knowledge spillovers with geographic proximity.