This paper assesses the impact of R&D spillovers on production, for a balanced panel of 1203 Italian manufacturing firms, over the period 1998-2003. The estimations are based on a translog production function augmented by a measure of R&D spillovers, that combines the geographical distance and technological similarity within each pair of firms. We find three key results. Firstly, we show that the translog production function is more suitable to model firm behavior than the Cobb-Douglas model. Secondly, we argue that the external stock of technology exerts a significant impact on production. This impact is high, whatever way is chosen to weight the innovation flows, and is highly sensitive to the geographical diffusion of technology. Lastly, it emerges that R&D spillovers are Morishima complements to physical and R&D -own capital and Morishima substitute for labor.

Starting from theoretical predictions of the role of R&D as a source of growth (Romer, 1990), many researchers have looked at how to measure and model, the R&D spillovers. The common approach has been to consider the stock of indirect R&D capital as an augmenting variable of a production function, whatever be the level of analysis (firm, industry, country). However, at firm level there are few papers which explicitly deal with this issue.1 These studies have two main common denominators, although their comparison is not very informative (they differ in the span of the periods, the sample of firms they analyze and in the methodologies they use).

The first common denominator considers the use of Cobb-Douglas as the preferred functional form, to include the R&D spillovers in a production function. Secondly, in all papers, R&D spillovers are measured through other firms’ stock of R&D capital. If on one hand, there is no application which uses a more flexible production function other than Cobb-Douglas, on the other hand, several methodological improvements have been made, in order to properly measure the R&D spillovers.

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