The dynamics of knowledge production in European regions

Utilizing a novel econometric approach, routed around the identification and estimation of spatial panel VAR model, the paper provides new estimates of the dynamic effects of private and public R&D expenditure on innovative activity within European regions. The positive long run response of regional patent applications to private R&D investment is confirmed, while the localized returns to non business research activity are found out to be positive but not statistically significant. Some robust evidence of positive spillover effects across regions is also documented, confirming the previous findings of a sharp decline of external effects as the geographical distance between regions increases. The empirical estimates show a heterogeneous pattern of responses between core and peripheral regions, the latter displaying higher returns to localized R&D activity. Business and non business R&D appear to be complements in non core regions, while they are estimated to be substitutes in more advanced areas.