Regions, technological interdependence and growth in Europe

This paper presents a theoretical neoclassical growth model with two kinds of capital, and technological interdependence among regions. Technological interdependence is assumed to operate through disembodied knowledge diffusion between technologically similar regions. The transition from theory to econometrics yields a reduced-form empirical model that in spatial econometrics literature is known as spatial Durbin model. Technological dependence between regions is formulated by a connectivity matrix that measures closeness of regions in a technological space spanned by 120 distinct technological fields. We use a system of 158 regions across 14 European countries over the period from 1995 to 2004 to empirically test the model. The paper illustrates the importance of an impact-based model interpretation, in terms of the LeSage and Pace (2009) approach, to correctly quantify the magnitude of spillover effects, in order to avoid incorrect inferences about the presence or absence of significant capital externalities and the role technological interdependence plays in regional growth processes in Europe.