The Role of Knowledge Absorption and Innovation Capability in the Technological Change and Economic Growth of EU Regions

The framework of the endogenous growth models and empirical evidence argue that two dimensions determine a region's ability to narrow its technological gap and improve its productivity growth. The first is its absorptive capacity, e.g. its ability to imitate foreign advanced technologies. The second is its innovative capability, namely the extent to which it is able to produce new, advanced knowledge. Thus, the narrowing knowledge absorption and innovation gaps between regions improve a region's productivity level and move it up the value chain towards specialization in knowledge-intensive and high value-added activities. The following paper attempts to contribute to the existing empirical findings and theoretical discussion on the inter-linkages between knowledge absorption, innovation capability, determined technological change, and economic growth of EU regions. The author's results show that despite the fact that the EU has a long tradition in education and new knowledge generation, there is a very modest ability to make EU regions more productive and grow them. The important role of productivity and knowledge-based sectors in improving EU regional prosperity suggests to carefully examine which knowledge activities drive productivity and the catching-up process of the EU regions. Overall, prospects for catching up will depend largely on how regions balance higher education and R&D priorities and place emphasis on the above activities. These results may be regarded as supportive of recent EU regional policy based on the Lisbon and Europe 2020 Strategies of Smart Growth.