Similarity of R&D activities, physical proximity, and R&D spillovers

The diffusion of knowledge generates positive externalities if knowledge flows increase the productivity of R&D by the recipients of these flows. We investigate the extent to which these spillovers depend on the similarity of research activities by the originator and recipient of the knowledge, and at what rate the spillovers diminish with physical distance. We find, using regional patent and R&D expenditure data from the European Union, that similarity between R&D activities is not only statistically significant, but salient: regions with completely dissimilar R&D activities exhibit essentially no spillovers at all. An increase in the distance between the originating and recipient region by 500km reduces spillovers by 55–70%.