Do wage pressure and government R&D stimulate business R&D? Regional level evidence from Europe

The European Union seeks to reduce wage–productivity and technological disparities between more developed and less developed European countries through a range of policy initiatives, including Horizon Europe. Despite these efforts, regional-level evidence on the relationship between wage pressure and business R&D expenditure remains limited and inconclusive. This study contributes to the literature by examining the relationship between wage pressure and business R&D expenditure across 214 NUTS-2 regions in 28 Member States. The empirical results indicate an inverted U-shaped (nonlinear) relationship between wage pressure and business R&D expenditure, particularly in laggard regions. In particular, moderate wage pressure stimulates business R&D investment, whereas excessive wage pressure has a negative effect in laggard regions. In contrast, in high-productivity regions, higher wage pressure is associated with increased business R&D expenditure. Further, public R&D investment undertaken by government and higher-education institutions complements the private-sector innovation, as reflected in higher levels of business R&D expenditure. To identify long-run effects, this study employs a system GMM estimator with lagged dependent variables alongside a dynamic common correlated effects estimator, using an unbalanced panel dataset spanning the period 2000–2016. From a policy perspective, moderate (high) wage pressure may serve as a useful mechanism to stimulate technological innovation in laggard (advanced) regions.