Similarity Of R&D Activities, Physical Proximity, and The Extent Of R&D Spillovers

The diffusion of knowledge generates positive externalities if knowledge flows increase the productivity of Research and Development (R&D) by the recipients of these flows. This paper investigates the extent to which this positive spillover effect of knowledge diffusion depends on the similarity of research activities by the originator and recipient of the knowledge. The paper also investigates at what rate these spillover effects diminish as the distance between the originator and recipient increases. We find, using regional patent and R&D expenditure data from the European Union, that similarity between R&D activities is not only statistically significant, but salient: regions with completely dissimilar R&D activities exhibit essentially no spillovers at all. We also find an increase in the distance between the originating and recipient region by 550 kilometres reduces spillovers by 75% (as low as 55% in some specifications). Unlike much of the extant literature, the rate of spatial decay of spillovers is estimated jointly with the remaining parameters of the model rather than through specification searches over a set of alternative weight matrices. Our results are robust to the inclusion of unobserved country effects and border barriers.