Productivity spillovers and human capital: A semiparametric varying coefficient approach

This paper examines whether there are productivity spillover effects among clustered firms and, if so, whether a firm’s human capital affects its absorption of spillovers. To analyze these questions, we use a semiparametric spatial autoregressive production function in which the coefficients are smooth unknown functions of firms’ human capital. The varying coefficients not only allow flexible interactions between human capital and other inputs, but also permit heterogeneous spatial dependence and spillover effects among firms. Although the commonly used spatial matrix captures the possible learning opportunities among firms, we hypothesize that a firm with more human capital is better at seizing these opportunities. We address the simultaneity issue arising from the endogeneity of inputs by using the proxy variable method. Finally, we apply the model to analyze the productivity spillovers and the human capital effect of China’s computer and peripheral equipment industry from 1998 to 2007.