The limited transferability of knowledge, patent costs and total factor productivity: European evidence

The limited transferability of knowledge is pivotal to the shaping and defining of the positive effects on total factor productivity of the limited appropriability of knowledge. Access to and use of knowledge spillovers entail relevant absorption costs and exhibit substantial variance across firms, regions, industries, and countries and thus, have a significant influence on actual knowledge cost levels. The analysis in this paper overcomes the limits of current growth theory and highlights the significant variance in levels of pecuniary knowledge externalities which has strong implications for total factor productivity growth. The benefits of knowledge spillovers become evident only if we account for the absorption costs related to the limited transferability of knowledge. A reduction in these costs translates into greater total factor productivity increases. Building on the hypothesis that European integration has led to a reduction in appropriability levels while simultaneously favoring knowledge transfer, we test whether the associated decline in knowledge costs has had a direct effect on levels and growth of total factor productivity. The empirical analysis uses panel ordinary least squares and an original instrumental variables strategy and is applied to a sample of 12 large European countries and 20 industries over the years 1997 through 2018. It confirms that lower costs and faster reductions in the costs of knowledge result in higher levels and higher rates of growth of total factor productivity.