Regional Heterogeneity and Interregional Research Spillovers in European Innovation: Modelling and Policy Implications

In agglomeration studies the effects of various regional externalities related to knowledge spillovers remain largely unclear. To explain innovation clustering, scholars emphasize the contribution of localized knowledge spillovers (LKS) and, specifically when estimating the knowledge production function (KPF), of (interregional) research spillovers. However, less attention is paid to other causes of spatial heterogeneity. In applied works, spatial association in data is econometrically related to evidence of research spillovers. This paper argues that, in a KPF setting, omitting spatial heterogeneity might lead to biased estimates of the effect of research spillovers. As an empirical test, a spatial KPF is estimated using EU-25 regional data, including a spatial trend to control for unexplained spatial variation in innovation. Accounting for geographical characteristics substantially weakens evidence of interregional research spillovers.