Regional knowledge base and firm efficiency: Evidence from start-ups and fast-growing medium-sized firms

This study evaluates the production efficiency of start-ups and fast-growing medium-sized firms in advanced technology (AT) sectors and examines how the regional knowledge base contributes to reducing inefficiency. Using micro-level data for the period 2009–2016, we examine production efficiency across European regions (NUTS2), sectors (two-digit NACE) and firm-size groups by applying stochastic frontier analysis. Our findings suggest that firms' fixed assets significantly affect production efficiency across firm types. Consequently, direct investments in these firms significantly shift the production possibility frontier of AT sectors throughout European regions. Among regional conditions, we included an indicator of the local knowledge base using the relatedness density measure on a sector-by-sector basis. This helped us evaluate how the combinatorial potential of regional technological capabilities influences firm performance. Our research reveals that regional conditions are particularly important for the performance of fast-growing medium-sized firms. This suggests that such firms may constitute a "missing middle" in regional innovation strategies, offering greater territorial returns than policies focusing solely on start-ups or large R&D firms. While start-ups can be efficient even in fragmented knowledge environments, medium-sized firms' growth potential is constrained without access to a broader knowledge base. This indicates a structural challenge for place-based policy, enabling knowledge flows and institutional capacity in regions to support the production efficiency of fast-growing medium-sized firms.