Nonlinear Effects of Human Capital and R&D on TFP: Evidence from European Regions

Abstract

The aim of the paper is to study the impact of human capital and R&D on Total Factor Productivity (TFP) from a nonlinear perspective. In the spirit of the theory of innovation-driven growth and models with thresholds in human capital and low-growth equilibria, we hypothesize that the impact of human capital and R&D on TFP is nonlinear. We also make an attempt to explain complementarities between R&D expenditures and human capital, applying developments in the R&D-based growth models. We use spatial panel data models to estimate the link among R&D, human capital, and TFP across the European regions between 2009 and 2014. Empirical evidence shows that there are decreasing returns to human capital and R&D in the European regional space. Moreover, R&D and human capital turn out to be strategic complements. Finally, regional TFP is found to be positively affected by TFP of neighboring regions.Sustainability 2020, 12, 1808 2 of 14 human capital that cannot be revealed using the standard linear approach. Secondly, we extend our analyses by incorporating the spatial dimension of knowledge spillovers into our empirical model. It gives a new insight into the role of geography in explaining regional TFP differences.Our article is organized in the following way. Part 2 includes the literature review and hypotheses development. Part 3 presents data and empirical models. Part 4 shows empirical findings and discussion, and Section 5 concludes and indicates directions for future research. Literature Review and Hypotheses Development The Link Between R&D and TFP: Some Stylised Facts about Possible NonlinearitiesAs generally accepted, R&D expenditures are targeted toward increasing the stock of knowledge so as to discover new applications and inventions [11]. According to the possibility of the research commercialization into commercial applications, there is a distinction between fundamental research, applied research, and development. Similarly, a distinction is made between R&D directed toward process R&D (the introduction of new methods of production) and product R&D (the invention of new and modified goods). As such, the impact of R&D on productivity is twofold. Firstly, process R&D may increase productivity by enhancing the quality or lowering the average production costs of existing goods. Secondly, product R&D may widen the range of intermediate inputs or final goods available [12].The association between R&D investments and TFP has a conceptual basis in the literature on R&D-based stream of endogenous growth models, which is rooted in the neoclassical growth theory. According to the neoclassical theory, total factor productivity reflects a shift in the production function resulting from technical progress [13]. Since technical progress is closely related to the knowledge stemming from research and development activities, endogenous technical change is regarded to be generated by formal R&D investments. The first generation of R&D-based models assumes that more R&D labor should result in more TFP growth. In other words, th...

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