Knowledge spillovers and intangible complementarities: Empirical case of European countries

Most studies on knowledge diffusion and productivity focus on either R&D, foreign direct investment or patent citation flows, and rarely consider complementary, intangible investments such as business process redesign, the co-invention of new products and business models, and investments in human capital. Although the effects of complementary investments and their spillovers are often mentioned in the literature, there is a lack of in-depth research. This study aims to fill this gap, taking into account knowledge diffusion and complementarities between different intangible assets, and evaluating their effects on productivity. We propose new measures of knowledge, which consider these complementarities, by using principal component analysis (PCA) to aggregate intangibles, and the Niche overlap index to ease interpretation. The analysis is conducted on an unbalanced country-industry panel dataset of 13 European countries, constructed from a combination of sources such as INTAN-Invest, WIOD, World Bank and EU-KLEMS. We develop total factor productivity proxies, and estimate the effects of knowledge diffusion on productivity by means of GMM panel regressions. Results confirm the importance of considering complementarities for detecting knowledge spillover effects, especially in the case of domestic spillovers, while foreign spillovers are shown to be less effective, supporting the view of knowledge spillovers as a prevalently localised phenomenon.