Knowledge flows and innovation: a pseudo-panel approach

This study investigates whether the effect of vertical and horizontal knowledge sources affect technological innovation for a sample of firms in 10 European countries. The empirical analysis is based on a unique dataset extracted from the Community Innovation Survey for the period 2002 to 2012. Results, using a pseudo-panel approach at country-industry level, reveal that vertical knowledge from suppliers strongly affects both product and process innovation, while knowledge flows from clients influence in particular product innovation. Finally, horizontal knowledge flows from competitors appear to have an effect on process innovation. These findings are validated with an instrumental variable approach using Lewbel's technique to internally generate reliable instruments, when external ones are not suitable. Overall, results seem to suggest the need for ad-hoc policies to foster knowledge flows among firms in different phases of the production process to boost their innovative capacity both for products and processes.