The Two Faces of R&D and Human Capital: Evidence from Western European Regions

This paper investigates two channels through which research and development (R&D) and human capital may affect regional total factor productivity growth in the manufacturing sector, using panel data on 159 EU-15 regions from 1992 to 2005. Based on the endogenous growth model of Griffith, Redding and Van Reenen (2003), we allow R&D and human capital to influence productivity growth both directly, reflecting own innovation, and indirectly, reflecting imitation of frontier technology. Further, the model allows for conditional convergence to a long-run level of TFP relative to the frontier. We also develop an extension that captures geographically localised technology spillovers. Our preferred system-GMM estimates provide evidence of a positive and significant direct effect of human capital, and a positive and significant indirect effect of R&D on productivity growth. This may be interpreted as lending support to the recent focus of EU regional policy on raising educational attainment and R&D expenditures, although their channels of influence appear to differ. Our results also suggest that TFP convergence has taken place over our sample period and that geographic distance to the technology frontier matters.