A KNOWLEDGE-BASED MODEL OF REGIONAL GROWTH

A two-equation dynamic panel-data model with fixed effects is used to analyse the relationship between knowledge creation and economic performance among 17 Spanish regions over time (1989-2001). In the model, productivity depends on new knowledge, technological change is achieved using R&D effort over existing knowledge, and external effects of both new knowledge are productivity are allowed. Estimates show, first, that regional innovation depends on regional R&D, on the amount of human and physical capital available in the region, and on innovation in other regions; and second, that regional productivity depends on regional innovation, on updated human capital in the region, and on productivity in other regions. The results imply, first, that efficiency gains at regional level may be achieved by investing locally in the creation of new knowledge, either technological or organisational; second, that innovation in a region may be promoted by locally using greater amounts of existing knowledge, as well as by increasing local R&D effort; and third, that locally generated innovation and efficiency gains may reach other regions. L.E. Vila, C. Cabrer & J.M. Pavía 388 XVI Jornadas de la Asociación de Economía de la Educación 1. INTRODUCCIÓN In recent times, the levels of GDP per capita diverged across EU countries and often across regions within some countries, as was the case for Spain. These disparities were explained because of the fact that some economies, either at national or at regional level, were able both to increase the number of people working and improve their productivity, while others were not (Scarpetta et al., 2000). Over the 1989-2001 years remarkable increases both in the size and in the average educational attainment of the labor force were registered for Spain. Educational reforms, the rapid expansion of the higher education system, and the increasing participation of women both in post-compulsory education and the labor market played key roles. As a consequence, economic growth at national level was relatively high and persistent although its territorial distribution within the country was far from homogenous, leading to increasing disparities in wellbeing at regional level. The relationship between knowledge, science, technology and productivity appear to have changed in the 1990's. Innovation, that is, newly achieved knowledge that is applied to production, is now considered more critical to success in business and, ultimately, to the growth of economies. Information and communication technologies play a capital role in facilitating the diffusion of technological and organisational developments. According to OECD (2000), technology and innovation are the main drivers of increased economic growth performance in developed countries. Increases in efficiency, measured as multi-factor productivity (MFP), are mainly the result of the application of new technology along with more efficient ways of organising production. In this environment, the role of knowledge creation and accumulation in explaining divergences in economic growth among countries or regions becomes prominent. The education of the labor force is at the root of both technological and organisational developments; additionally, the diffusion of innovation relates to the availability of a workforce with sufficient and up-to-date competences. In particular, higher education relates to labor productivity in several ways through innovation. First, a substantial proportion of the effort in both basic and applied research is done within higher education institutions. Second, the education system provides qualified labor for industry and service sectors, including those who will develop research activities. Third, higher education is more productive the more volatile the state of technology is. Changes in the production process lead to increases in the demand for diverse types of highly qualified labor. The regional distribution of changes depends on the regional distribution of technological effort, which, in turn, relates to the supply of highly qualified labor. Consequently, regional divergences in income and wellbeing are likely to be explained in A knowledge-based model of regional growth. XVI Jornadas de la Asociación de Economía de la Educación 389 terms of regional patters of investment in new knowledge through research and higher education. This paper aims at clarifying whether and how the creation and accumulation of knowledge in a region improve its economic performance through efficiency gains in the use of the available resources, which would ultimately result in faster economic growth and higher well-being. Section two provides background by summarising the key features of the new growth literature linking knowledge and economic performance. Section three specifies a dynamic two-equation empirical panel-data model for knowledge creation and its impacts on economic efficiency within a regional framework. Section four describes the data set and the choice of variables. Estimation results from the model are shown and discussed in section five. Finally, section six concludes.