Innovation and spillovers : evidence from European regions The importance of innovation for the economic performance of industrialized countries has been largely stressed recently by the theoretical and empirical literature. Moreover the intensity of knowledge externalities in generating innovation is the key parameter in determining sustained growth in a model with endogenous technological change. This paper takles the extremely important task of identifying and estimating a production function of innovation for European regions using Patent and R&D data 1977 1995. After correcting for the endogeneity bias we find that the elasticity of innovative output to R&D employment is around 1 while knowledge externalities exist are geographically localized in an area of 200 kms and are significant. Nevertheless these externalities are not strong enough to generate sustained growth and therefore European regions innovative activity is better represented by a model as Jones (1995) than by one as Römer (1990). Knowledge spillovers could be due to the similar technological specialization of close regions as we find significant spillovers also in technological space.