Knowledge Spillovers and Total Factor Productivity: Evidence Using a Spatial Panel Data Model

Abstract

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