Nonlinear Effects of Human Capital and R&D on TFP: Evidence from European Regions

The aim of the paper is to study the impact of human capital and R&D on Total Factor Productivity (TFP) from a nonlinear perspective. In the spirit of the theory of innovation-driven growth and models with thresholds in human capital and low-growth equilibria, we hypothesize that the impact of human capital and R&D on TFP is nonlinear. We also make an attempt to explain complementarities between R&D expenditures and human capital, applying developments in the R&D-based growth models. We use spatial panel data models to estimate the link among R&D, human capital, and TFP across the European regions between 2009 and 2014. Empirical evidence shows that there are decreasing returns to human capital and R&D in the European regional space. Moreover, R&D and human capital turn out to be strategic complements. Finally, regional TFP is found to be positively affected by TFP of neighboring regions.