This paper examines the impact of knowledge endowments on the economic growth of European regions by considering the channels through which they (labor productivity or employment) increase income levels (Per Capita GDP). A wide array of knowledge base indicators are considered here for explaining the growth performance of 150 developed NUTS 2 regions over the period 1995-2002. Their effect is estimated by controlling the occurrence of catching-up (or convergence), the regional structural features, and the presence of spatial correlation. The results show that Per Capita GDP (PCGDP) growth is positively affected by both the R&D intensity and the share of adults with tertiary education. However, while R&D is particularly effective in explaining the growth of labor productivity, the occupation ratio is significantly influenced by educational attainments. The policy message arising from these findings seems quite straightforward for the regions experiencing a virtuous pattern of economic growth, based on increases in both productivity and employment. For those characterized by a trade-off between the latter variables, the policy approach appears to be more problematic. The paper shows that such a trade-off is particularly evident for the developed regions of the Southern European countries.

In Europe, before the financial crisis and the relevant economic downturn, the policy debate turned around the choice of the best strategy to be adopted in order to relaunch the competitiveness of the European Union (EU) member countries. After decades of income and technological convergence towards the US frontier, the pace of expansion of Europe fell behind that of the US from the mid-1990s, especially due to the widening in productivity dynamics. The Atlantic divide, in terms of the capability to innovate, was one of the key factors widely recognized to drive the US-EU growth divergence, and accordingly, strengthening the knowledge base of the EU countries was almost unanimously considered the most proper initiative to restore their ability to grow in a long-run perspective.

Attention has been paid by both scholars and policy makers to the role played by knowledge capabilities in explaining the growth disparities among, and within, the EU countries, industries, firms and, not secondarily, regions. The latter represent a privileged perspective to understand the real chances of Europe to rebound, since they allow one to take into account the within-country heterogeneity in industry specialization and innovation capability, as well as the economic interdependence within the EU economic space, that both administrative boundaries and industry classifications tend to disguise. The present paper builds upon recent evidence on the drivers of regional economic growth in Europe, namely R&D investment and human capital endowment, and extends this line of research by looking for the channels through which these kinds of investment translate into increases in regional income levels. While it is well-established that Per Capita GDP (PCGDP) growth is higher in regions well-endowed with highly educated workers, devoting larger resources to research activities, the importance of such factors for the dynamics of employment and labor productivity remains relatively unexplored. To this goal, the paper decomposes PCGDP growth into changes in both output per worker and employment ratio, and separately estimates a growth equation for each of these indicators by using, as explanatory variables, a wide array of knowledge measures and structural characteristics (along with the typical controls adopted in this kind of estimations). We perform both a standard (OLS-based) and a spatial (ML-based) regression for 150 developed NUTS 2 regions of the EU over the period 1995-2002, which is a crucial time interval for the widening in the EU-US growth differentials.

Knowledge Management Journal, Knowledge Economy, Gross Domestic Product, GDP, Financial Crisis, Information and Communication Technologies, ICT, Global Markets, Economic Integration, Spatial Econometric Framework, Per Capita GDP, PCGDP, Economic Development, Linear Regression Models.