Research Policy 51 (2022) 104081

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Research Policy
journal homepage: www.elsevier.com/locate/respol

Knowledge complexity and the mechanisms of knowledge generation and

exploitation: The European evidence
Cristiano Antonelli a, *, Francesco Crespi b, Francesco Quatraro a
a
Dipartimento di Economia e Statistica Cognetti de Martiis, Università di Torino, BRICK Collegio Carlo Alberto, Italy
b
Dipartimento di Economia, Università Roma Tre, BRICK Collegio Carlo Alberto, Italy

A R T I C L E I N F O A B S T R A C T

JEL classification: A knowledge complexity trade-off can be identified if and when the complexity of the stock of knowledge en­
O31 genders positive effects in the recombinant generation of new technological knowledge but negative ones in its
O32 exploitation in terms of productivity gains. On the one hand, the complexity of the stock of knowledge increases
R11
the scope for recombination and hence the amount of knowledge that each firm is able to generate with a given
Keywords: budget. On the other, the complexity of the stock of knowledge has controversial effects on productivity: the
Knowledge composition
indirect effects -via the larger amount of knowledge generated upstream- are positive but the direct ones can be
Knowledge complexity
Knowledge generation function
negative if they generate difficulties in the exploitation of a highly heterogeneous stock of knowledge. The
Knowledge exploitation econometric test on the European regions in the years 1997–2009, provides strong empirical evidence about the
Technology production function relevance of the composition of the stock of quasi-public knowledge and its twin positive effects in terms of the
Knowledge complexity trade-off direct support of the knowledge generation function and of the indirect one on productivity growth. Moreover,
the analysis highlights the negative direct effects on productivity dynamics, though with substantial heteroge­
neity across different groups of regions.

1. Introduction technological knowledge actually shapes the working of economic

Technological knowledge plays a central role in shaping the working
of an economic system and its growth. The stock of technological
knowledge available in the system is one of its crucial endowments. Its
effects, however, are far from being automatic. Because of the special
features of knowledge as a good and an economic activity, the under­
standing of the mechanisms by means of which it affects the working of
an economic system requires an articulated framework able to appre­
ciate and integrate the joint effects of its limited appropriability and
exhaustibility, and hence extendibility and cumulability, not only with
respect to the size but also to its composition, both in its generation and
in its exploitation.1 This undertaking builds upon the path-breaking
contributions of Zvi Griliches (Griliches, 1979, 1986, 1992, 1995) and
helps overcoming the limits of the new growth theory (Romer, 1990;
Grossman and Helpman 1991; Aghion and Howitt, 1992) highlighting
the variety of interdependent mechanisms by means of which
systems.2
This paper implements an empirical study to investigate the new
knowledge complexity trade-off that takes place if and when the effects
of knowledge composition at the regional level are positive on the
generation but negative in the exploitation of new knowledge. The
proposed analysis builds upon recent advances of the economics of
knowledge that have identified the intrinsic heterogeneity of knowl­
edge. Knowledge should be regarded as a highly differentiated bundle of
knowledge items, so that the composition of the stocks of knowledge
within economic systems plays an important role that adds to its sheer
size. The analysis on the composition of the stocks of knowledge have
highlighted knowledge complexity as a relevant dimension to explain
the dynamics of knowledge generation and the evolution of production
patterns for all the other goods (Hidalgo and Hausman, 2009; Petralia
et al., 2017; Antonelli et al., 2017; Balland et al., 2019; Rigby et al.,
2019; Broekel, 2019). In parallel, in the context of the ‘new growth

* Corresponding author.
E-mail address: cristiano.antonelli@unito.it (C. Antonelli).
1
The concept of knowledge extendibility dates back to Popper (1969), and it refers to the feature of knowledge constructs of being fruitfully “generalizable to other
settings or amenable to new theoretical developments” (Wunsch, 1984: p.8). See also Rochowiak (1988).
2
We thank for the useful comments on the previous versions of the paper by three anonymous referees and the guest editors of the special issue on Economic
Complexity.

https://doi.org/10.1016/j.respol.2020.104081
Received 1 March 2019; Received in revised form 13 May 2020; Accepted 24 July 2020
Available online 6 August 2020
0048-7333/© 2020 Elsevier B.V. All rights reserved.
C. Antonelli et al.
theory’, the complexity of knowledge and its impact on the dynamics of
the aggregate economy has been recently analysed by a few authors (see
for instance Magalhães and Afonso, 2017; Sequeira et al., 2018; Bucci
et al., 2019).
Such a concept has been mainly applied in the analysis of the
knowledge generation function, by recognizing that next to the effects of
the size of the stock of quasi-public knowledge, its composition has
distinctive consequences that affect the production of new knowledge
(Antonelli, 2011). Because of the dual role of knowledge as both an
input of the upstream recombinant knowledge generation activity and
its output and an input in the downstream productivity of all the other
goods, knowledge complexity appears to have strong potential in the
context of productivity dynamics explanations, i.e. in the analysis of the
productivity equation.3
In this context of analysis, an array of empirical investigations at the
firm, industrial and regional levels have tested separately the role of the
knowledge composition respectively in the knowledge generation
function and in explaining productivity growth, confirming that the
characteristics of the stock of knowledge is a relevant factor in both
cases. In particular, previous evidence suggests that the related variety
of the stock of knowledge helps increasing, with a given budget, the
levels of knowledge output. On the contrary, the impact of variety on
productivity dynamics seems to be more controversial as indicated in
the systematic review of the literature provided by Content and Frenken
(2016). In particular, the introduction of new varieties of knowledge
inputs can generate a tension between productivity-gains due to more
specialization and productivity-losses associated with the presence of
more complex knowledge bases to be applied to production processes
(Jones, 1995; Bucci, 2013; Ferrarini and Scaramozzino, 2016; Bucci
et al., 2019).
Moreover, previous empirical literature, did not specifically
addressed the simultaneous effects of the composition of the knowledge
stock on the knowledge generation function and on the productivity.
Hence, the present contribution aims at reconcile these different strands
of investigation in a single analytical framework able to assess jointly the
effects of the composition of the stock of knowledge both in the
knowledge generation function and in the technology production
function.
In particular, building on the work by Hidalgo and Hausman (2009),
and following the methodology proposed by Balland and Rigby (2017)
we focus on the notion of knowledge complexity, which reflects both the
variety and rarity of the knowledge stock available in a given economic
area. On the one hand, we can interpret this measure as an indicator of
qualified variety, so that increasing complexity is expected to have
positive impact on recombinant knowledge dynamics as it supports the
scope for the recombinant generation of new knowledge and eventually
leads to augmented rates of introduction of innovations. On the other
hand, as suggested by Balland and Rigby (2017) the proposed measure
of knowledge complexity also reflects the difficulty with which different
kinds of knowledge can be exploited directly into the technology pro­
duction function (TPF). For this reason, high levels of complexity can
hamper productivity dynamics.
More specifically, the proposed analysis investigates the relation­
ships between knowledge complexity, innovation and productivity in
order to unveil whether the positive effects of knowledge complexity
take place only in the upstream generation of knowledge and/or in the
3
Following the CDM literature (See Crépon et al., 1998) we use the term
“productivity equation” to identify the “technology production function” used
by Griliches (1979) to indicate the extended version of the traditional pro­
duction function, in which knowledge adds to the usual inputs to production, i.
e. capital and labour. Following Griliches we stick to the use of “knowledge
generation function” instead of the CDM innovation equation to denote the
activities that concern the generation of new knowledge (See Antonelli and
Colombelli, 2105a).
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Research Policy 51 (2022) 104081
downstream production of goods. In so doing, we aim to assess how the
composition – next to the size – of the stock of quasi-public knowledge
affects the working of the system and the mechanisms by means of
which it affects the productivity growth of economic systems. Our main
hypothesis is that knowledge complexity yields different effects on
knowledge generation and exploitation and eventually on productivity,
because of the differential channels and mechanisms at work.
The empirical analysis focuses on 189 European regions, over the
time span 1997–2009 for which we calculate a regional Knowledge
Complexity Index (KCI) based on the information contained in patent
applications. The results confirm our hypotheses on the existence of
different channels through which the size and the composition of the
stock of available knowledge shape the generation and exploitation of
new technologies and affect the economic productivity performances of
European regions.
The rest of the paper is organized as it follows. Section 2 provides a
synthetic account of the different approaches to the role of the compo­
sition of the knowledge stock in the generation and exploitation of
knowledge elaborated in the literature and presents the hypotheses.
Section 3 introduces the empirical analysis and elaborates a consistent
econometric approach. Section 4 presents the results of the empirical
tests. The conclusions summarize the main results of the analysis.
2. Literature background and research hypotheses
Previous literature investigated on the one hand the role of knowl­
edge as an input of the knowledge generation function and, on the other
hand, knowledge as a driver of productivity growth. In particular, the
literature on the knowledge generation function analyzed the effects of
the stock of existing knowledge on the generation of new knowledge,
which is now viewed as the outcome of an intentional and dedicated
activity characterized by the recombination of existing knowledge items
(Weitzman, 1996, 1998; Fleming and Sorenson, 2001). Because of
knowledge indivisibility the whole body of existing knowledge is a
necessary and indispensable complementary input next to research and
development activities to generate new knowledge. Hence both the
stock of knowledge internal to each agent and external to it are expected
to play a role (Jaffe, 1986; Coe and Helpman, 1995; Bottazzi and Peri,
2007; Ang and Madsen, 2015).
In particular, a large body of empirical literature at the regional and
local levels has showed the relevance of knowledge externalities in
generating innovation, but also that both geographical and technolog­
ical proximity matter (Antonelli and Colombelli, 2015a,b; Boschma,
2005; Drivas et al., 2016). Among others, Bottazzi and Peri (2003) es­
timate the effect of knowledge externalities in generating innovation, by
looking at R&D and patent data for European Regions in the 1977–1995
period. They find that spillovers are very localized and rapidly decay
with geographical distance. On the same line, Greunz (2005) estimate a
regional knowledge production function, finding that knowledge spill­
overs exist especially between geographically and technologically close
regions. Similarly, Moreno et al. (2005) highlight the relevance of in­
ternal regional factors (R&D expenditure and agglomeration economies)
beside the role of spatial spillovers due to innovation activities per­
formed by other regions. Moreover, the interaction between internal and
external technological knowledge with (both internal and external) so­
cioeconomic and institutional conditions has been found to play a role
for the regional innovation performance (Rodríguez-Pose and Cre­
scenzi, 2008). Interestingly, such a literature also shows that threshold
effects and complex interactions effects might be relevant (Charlot et al.,
2015), and that the magnitude of different sources of knowledge spill­
overs might be different. In particular, in the case of French regions, it
C. Antonelli et al.
has been found that spillover effects are associated with private R&D
activity that spills across industry boundaries, suggesting that Jacobs
externalities decrease more drastically with distance than Marshallian
externalities (Autant-Bernard and LeSage, 2011). However, even Mar­
shallian externalities have been found to differ by industry and to have
evolved over time (Figueiredo et al., 2015; Diodato et al., 2018).
The understanding of the heterogeneity of knowledge enables
important progress with the exploration of a new dimension: the role of
its composition (Quatraro, 2010; Rigby, 2015). The composition of the
regional stock of knowledge is considered as the source of augmented
opportunities for the recombinant generation of new knowledge both
within and between firms: i) the larger the variety of the knowledge
stock internal to each firm and the larger its knowledge output; ii) the
larger the variety of the knowledge stock at the system level and the
larger the knowledge output of each firm. Much attention in this context
has been paid -once more- to the effects of spillovers and related ex­
ternalities. So far, the analysis had privileged the role of Marshallian
knowledge externalities: the new approach explores the role of Jacobs
(1969) knowledge externalities (Glaeser et al., 1992; Feldman and
Audretsch, 1999; Frenken et al., 2007; Galliano et al., 2015). In partic­
ular, Rigby (2015) and Boschma et al. (2014) show that the probability
of filing a patent in a given technological class in a US city is strongly
influenced by its relatedness with the local technological base. The
analysis of the co-occurences of patents in the different technological
classes marks an important progress that enables to appreciate the levels
of diversity articulated in coherence and complementarity of the stock of
knowledge available in a given local context (Antonelli et al., 2010;
Quatraro, 2010 and 2016; Colombelli and Quatraro, 2018).
A step further in this research avenue has been made possible by
recent contributions that applied complexity theory to the analysis of
economic development. In particular, Hidalgo and Hausman (2009)
developed a measure of the complexity of products and of countries, and
showed how this measure is able to capture the complexity of the set of
capabilities available in different countries. In their perspective, not
only the number of the activities and the related knowledge bases
matter, but also, their relative scarcity. Building on this analysis, Balland
and Rigby (2017) used patent records from the US to identify the
technological profile of US metropolitan areas between 1975 and 2010.
Their findings suggest that knowledge complexity is unevenly distrib­
uted across US cities and that more complex technological structures do
not necessary lead to higher rates of patenting. Interestingly, more
complex patents are found to be less likely to be cited than less complex
patents when citing and cited patents are located in different metro­
politan areas, suggesting that the highest levels of the Knowledge
Complexity Index reveal that the knowledge developed in a given ter­
ritory is so sophisticated that it can only be (re)produced in a few areas.
Following the same approach, Balland et al. (2019), show that EU re­
gions tend to technologically grow more if they specialize in complex
technologies related to existing technologies in the region. Similarly,
Antonelli et al. (2017), find evidence that knowledge complexity posi­
tively contributes to the knowledge generation performance of Euro­
pean regions, suggesting that the composition of the knowledge base
represents a complementary input -next to its size- into knowledge
generation. Finally, Petralia et al. (2017) show that technological
diversification is higher for technologies related to countries’ compe­
tences, but also that countries, along their development paths, tend to
move towards more complex and valuable technologies, (Fig. 1).
3
Research Policy 51 (2022) 104081
Beside the analyses on the knowledge generation function, the role of
size and composition of knowledge stocks has been investigated in
relation to the analysis of productivity drivers. An abundant body of
literature has shown that the levels of (total factor) productivity are
positively and significantly associated with the size of the stock of
knowledge (see for instance the seminal contributions by Griliches,
1979, 1984, 1992) .4 Moreover, recent contributions have specifically
analyzed the interactions between complexity and the quantity of
knowledge or technological varieties in the system with respect to TFP
dynamics, suggesting that possible trade-offs between productivity gains
(due to more specialization) and productivity losses (due to more
complexity) may arise (Sequeira et al., 2018; Bucci et al., 2019).
In parallel, the analyses conducted at local and regional levels,
highlight the influence of agglomeration effects and local externalities
on regional economic performance, within the urban economics
approach (see De Groot et al., 2009 and Puga, 2010 for extensive re­
views). In particular, the New Economic Geography suggests that the
presence of open economies and localized spillovers is able to spur the
growth of output and productivity (Martin and Ottaviano, 1999; Bald­
win and Martin, 2004; Ottaviano and Thisse, 2004 among others).
Accordingly, Dettori et al. (2012) find a positive effect of human capital
and patent stock on total factor productivity, associated with significant
evidence about dynamic increasing returns triggered by diachronic
pecuniary knowledge externalities (Antonelli et al., 2011). Such results
have been further qualified, on the one hand, by research efforts
enquiring the role of both size and composition of knowledge on pro­
ductivity dynamics, and, on the other hand by empirical analyses
looking at the differentiated effects that knowledge and innovation
might have across different regions.
With respect to the first issue, working on OECD data Saviotti and
Frenken (2008) found that related export variety tend to stimulate GDP
growth per capita and labor productivity, while the effects of unrelated
export variety can be seen only in the medium-long run. This result
suggests that while related variety eases knowledge recombination into
new products, with direct growth effects, knowledge unrelated variety is
harder to recombine, but if successful, can sustain long-term growth.
Similarly, Falcioglu (2011) looked at productivity growth in Turkish
regions, and found that only related variety positively affects regional
productivity. Consistent evidence has been found for Dutch regions by
Boschma and colleagues (2011), by distinguishing between
manufacturing and service sectors. However, the empirical evidence on
the role of knowledge composition does not appear to be fully consoli­
dated as highlighted by the evidence provided in Quatraro (2010) and in
Cortinovis and Van Oort (2015).
On the other hand, while the bulk of previous studies have generally
focused on the effect of knowledge and innovation for the average re­
gion, more recent attempts have tried to identify eventual differentiated
impact across regions (Marrocu et al., 2013; Capello and Lenzi, 2015 and
2014). Interestingly, the key drivers of productivity gains have been
found to differ across different groups of regions, with a closer rela­
tionship between scientific knowledge and productivity dynamics in
regions with highest knowledge capabilities, but also with a strong link
between knowledge embedded in capabilities and higher productivity
performance in less knowledge intensive regions. This result suggests
that accounting for regional heterogeneity is important to properly ac­
count for differentiated pathways from knowledge and innovation
leading to higher productivity growth, and also claim for a more refined
4
The economic literature largely discussed both the theory behind the notion
of total factor productivity (TFP) and to what extent it finds empirical support.
Such debate showed that, among other factors, TFP may result from the existing
stock of knowledge, endogenously accumulated or adopted by each region or
country, but may also be linked to the externalities arising from the existing
stock of human capital -its quantity and quality-, and to an array of institutional
factors (Jones, 2009).
C. Antonelli et al. Research Policy 51 (2022) 104081

Fig. 1. Regional distribution of the focal variables (average values 2001–2006).

4
C. Antonelli et al.
analysis on the differentiated effects of different types of dynamic
increasing returns triggered by the special features of knowledge.
Building on the literature discussed so far, we propose that the
relevance of both the size and the composition of regional knowledge
bases in explaining regional performances needs to be investigated both
with respect to the generation of technological knowledge and to the
production of all the other goods. While the empirical literature at the
firm level building on the CDM model (Raymond et al., 2015) exten­
sively investigated the twin role of knowledge as an input in the gen­
eration of new technological knowledge and as a driver of productivity
dynamics, the relationships previously identified at the regional level
have been mainly investigated as separated issues, and their simulta­
neous appreciation is still largely unexplored.
As previously discussed, the extant literature showed that both the
size and the composition of the available stock of knowledge are rele­
vant in shaping innovation and economic performances as they exert
significant effects both in the knowledge production function (Jaffe,
1986) and in explaining productivity dynamics (see for instance Gri­
liches, 1979; Zachariadis, 2003; Ha and Howitt, 2007). However, the
introduction of new varieties of knowledge inputs can generate a tension
between productivity-gains due to more specialization and
productivity-losses associated with the presence of more complex
knowledge bases to be applied to production processes (Jones, 1995;
Bucci, 2013; Ferrarini and Scaramozzino, 2016; Bucci et al., 2019).
In view of the discussion articulated so far, we are able to spell out or
main working hypothesis. We hypothesize that a direct and an indirect
effect of complexity on productivity can be identified. The direct effect of
complexity pertains to the technology production function, while the
indirect effect is due to the influence that knowledge complexity exerts in
the upstream knowledge generation equation. This latter is based on the
role exerted by knowledge complexity in the knowledge generation
function, whereby the stock of knowledge available in the system is used
as an input in the production of new knowledge and in the eventual
introduction of innovations. Here, though knowledge complexity might
increase the technological distance and entropy in the system (Peretto
and Smulders, 2002), knowledge complexity is expected to display a
(net) positive effect triggered by the limited exhaustibility and appro­
priability of knowledge that enable perspective users to access and use
-again- existing knowledge at costs that are below equilibrium. Hence,
the provision of cheaper knowledge generated upstream with positive
effects in terms of pecuniary knowledge externalities leads to increasing
of total factor productivity.
On the contrary, regarding the direct effect, firms can be better able
to exploit a specialized knowledge base with low levels of complexity, as
the burden of knowledge increases with its heterogeneity and applies
more to its exploitation than to its generation. The complexity of the
stock of knowledge limits the advantages triggered by the mechanisms
of extensibility: the larger the complexity and the lower the output upon
which each knowledge item can be applied reducing the relevant
portion of the downward slope of average knowledge costs (Bucci et al.,
2019).
This argument has two main implications for the analysis of the ef­
fects of the size and the composition of the stock of knowledge. On the
one hand, both the size and the complexity of knowledge bases posi­
tively influence innovation performances, via knowledge exchanges and
recombinant innovation dynamics (Antonelli et al., 2017). On the other
hand, while the size of the stock of knowledge increases exploitation
opportunities, its composition has controversial effects due to burden of
heterogeneous knowledge. Hence, our hypothesis is that the effects of
knowledge complexity are strong and positive in knowledge generation,
while the contribution of knowledge complexity to productivity
5
Research Policy 51 (2022) 104081
dynamics can be negative when it limits the scope of knowledge appli­
cation and exploitation in the productivity equation (the downstream
technology production function of all the other goods that includes the
stock of knowledge as a key input). The intuition behind this research
hypothesis is that the complexity of the stock of knowledge tends to
reduce its extensibility, i.e. the opportunity for the use of
knowledge-as-it-stands. Hence, firms based in regions with high levels of
complexity of the stock of knowledge have lesser opportunities to
benefit from the limited appropriability of knowledge and to imitate it
freely.
In conclusion, the contribution to productivity growth of the size of
the knowledge stock is expected to be positive both in the knowledge and
in the productivity equations via: i) the pecuniary knowledge external­
ities generated upstream in the knowledge generation activities that
provide knowledge, as an input of the downstream technology produc­
tion function, at costs that are below equilibrium; and ii) the pecuniary
knowledge externalities in the knowledge generation activities where
the size of the knowledge base helps supporting the generation of new
knowledge by means of the reduction of the access and use cost of the
stock of knowledge as an input. On the contrary, knowledge complexity is
supposed to enhance productivity dynamics via the pecuniary knowl­
edge externalities provided to downstream firms that use knowledge as
an input in the production of all other goods -i.e.- the innovation
channel- but is expected to yield a negative contribution to the pro­
ductivity equation in its exploitation.
The implications of the analysis are important. All the elements of a
new possible trade-off emerge as the ultimate outcome of our hypoth­
eses. If knowledge complexity exerts positive effects on the generation of
new technological knowledge, but negative ones on its exploitation, it is
clear that a knowledge complexity trade-off takes place. Too much
complexity hampers the productivity with respect to all the other goods
but supports the output levels in terms of knowledge. An “equilibrium”
level of knowledge complexity can be identified according to the bal­
ance between negative and positive effects. In this respect, the specific
national, regional, and industrial (market and institutional) conditions
into which generation and exploitation, respectively, take place are
likely to have relevant effects on the actual levels of knowledge
complexity that firms are able to manage effectively.
3. The empirical analysis
3.1. Dataset
The dataset used for the present analysis consists of a large collection
of patent applications at the European Patent Office.5 Patent applica­
tions have been collected and elaborated through the last release of the
REGPAT database (February 2018). REGPAT is built upon the World­
wide Statistical Patent Database (PATSTAT) published by the European
Patent Office (EPO) twice a year and the OECD Patent Database, which
relies on the EPO Bibliographic Database and Abstracts (EBD) which
also integrates pre-regionalized data by the KU Leuven. Each record
provides detailed information concerning the application and priority
dates of the corresponding patent, the assignee and inventor’s names,
their addresses, the country identifier, the region codes, the application
5
The use of patent data in innovation studies is affected by some well-known
limitations. In particular, we are aware that the use of patent data might lead to
an underestimation of the contribution to the overall innovation output in a
specific region from smaller companies relying on informal incremental inno­
vation models, firms operating in the service sectors as well as firms relying on
alternative approaches to protect the value of innovation.
C. Antonelli et al. Research Policy 51 (2022) 104081

and publication numbers, along with additional input data of the from the Cambridge Econometrics’ European Regional Database (ERD),
regionalization algorithms.6 Patents have been assigned to regions on which is a highly disaggregated dataset across both sectoral and sub-
the basis of the addresses of the inventors.7 regional dimensions. Eurostat’s REGIO database is the primary source
We dropped regions belonging to the first quintile, in terms of patent of data for the ERD but is supplemented with data obtained from
applications, during the observed period.8 Moreover, we have retained AMECO, a dataset provided by the European Commission’s Directorate
regions that allowed us to have a balanced panel. The final database General Economic and Financial Affairs (DG EcFin).
covers the inventive activity of 189 geographical regions, located in 18
members states of the European Union (EU) over the 1997–2009 time
3.2. Variables and summary statistics
interval (see Table 1 for details) .9
Each patent application reports one or more International Patent
3.2.1. The dependent variables
Classification (IPC) codes. Such codes are the basis for our analysis of the
This paper investigates the impact of the complexity of the knowl­
technological composition of the regional portfolios. We used 4-digit IPC
edge base on productivity growth at the regional level. To do so, we
codes obtaining a mapping of all patents into 623 technology areas.
implement a two-step approach in which we estimate two related
Hence, for each region we have computed the number of patent appli­
equations, the ‘knowledge generation equation’, and the ‘productivity
cation in each of the 623 technology areas by year. Patents with more
equation’, so as to single out the direct effect of the complexity of the
than one IPC codes have been double counted.
knowledge base on regional productivity growth, from the indirect ef­
Data about the economic performances of regions have been drawn
fect channeled by the regional knowledge stock.
The dependent variable of the knowledge equation is the standard
Table 1 output measure of the knowledge production function, i.e. the regional
List of sampled countries. knowledge stock per employee (KSTOCK). The knowledge stock is
Country Freq. Percent Cum. calculated by applying the permanent inventory method to regional
AT 117 4.76 4.76 patent applications, implementing a 15% depreciation rate.10 The
BE 130 5.29 10.05 dependent variable of the productivity equation is the regional labor
BG 65 2.65 12.7 productivity (LP), calculated as the ratio between regional value added
CZ 104 4.23 16.93
and total hours worked by local employees.
DE 351 14.29 31.22
DK 65 2.65 33.86
ES 195 7.94 41.8 3.2.2. The complexity of the regional knowledge base
FI 13 0.53 42.33 Following an established tenet of literature, we adopt an indicator of
FR 260 10.58 52.91 the degree of complexity of the regional knowledge based on the in­
HU 78 3.17 56.08
formation contained in patent documents i.e. IPC (International Patent
IE 26 1.06 57.14
IT 156 6.35 63.49 Classification) codes (Antonelli et al., 2017; Balland and Rigby, 2017).
NL 156 6.35 69.84 In particular, the methodology is based on the adaptation of a method
PL 130 5.29 75.13 originally developed by Hidalgo and Hausmann (2009). The steps for
PT 65 2.65 77.78
the computation for the region-level indicators has been presented in
RO 78 3.17 80.95
SK 52 2.12 83.07 details in Balland and Rigby (2017) .11 Below we provide a synthetic
UK 416 16.93 100 illustration of the properties of such indicators.12
The Hidalgo and Hausmann (2009) method has been applied to
Total 2457 100 regional patent portfolios data based on the location of the inventors,
with the aim of obtaining a fine-grained analysis of the technological
composition of innovation activities carried out in a specific area. In
particular, the first step consists of identifying. whether region r = 1, …,
R is specialized in technology t = 1, …, T or not. This is achieved by
6
The address is linked to one or multiple regions on the basis of the postal implementing the revealed technology advantage indicator (RTA). The
code, the town name or using a mixed approach and manual correction. A
RTA is based on the patent applications that are observed in each region
specific field value designates all the records for which the regionalization
every year. It compares the relative frequency of patenting in a given
procedure has been unsuccessful.
7
Patents can be allocated to a single or multiple geographical zone according
technology t in region r, with the relative frequency of patenting in the
to the corresponding addresses of either their applicants or inventors. The two same technology t at the European level. If this index is larger than 1,
competing methodologies produce entirely different results and have distinct
economic interpretations: the former often indicates where the owner of the
10
intellectual property right has its headquarters or legal residence, whereas the We follow the established body of literature based on Hall et al. (2005) that
latter generally refers to the place in which the inventive process occurred. The applies to patent applications the same depreciation rate as the one applied to
second approach seems to provide a better approximation of the human capital R&D expenditures, i.e. 15% (see for example McGahan and Silverman 2006;
embedded in the local workforce, as it allows both the geographical and the Nesta 2008; Laitner and Stolyarov 2013; Rahko 2014).
11
temporal distribution of the competences and technological specializations to The index used in our analyses has been computed exploiting the R package
be measured consistently. ‘EconGeo’, described in Balland and Rigby (2017).
8 12
We chose to exclude the regions in the first quintile given that the number Broekel (2019) and Rigby et al. (2019) maintain that the application of the
of patents in these regions is extremely limited and this could bias the analysis. Hidalgo and Hausman methodology to European patent data does not give
For instance, the region with the highest number of patents among the excluded useful results, as the resulting complexity values of technologies differ sub­
regions is ES53 (Balearic Islands) which accounts for 0.01% of the total patent stantially from the US evidence. This is due to the fact the methodology rests on
count (188 patents out of almost 1.8 million in the 1994-2008 period). Table A2 the spatial diffusion of technologies, which tend to be more dispersed in the EU,
in the appendix provides information on the number of regions per country hence showing a higher ubiquity. Another issue could concern the underesti­
included in the analysis. It must be noted that this does not represent a selection mation of complexity. The basic question remains as to what extent the
bias, as it would do instead in microeconometric settings based on firm-level complexity of a technology has to be place-independent. There are alternative
data (Hewitt Dundas et al., 2019). approaches, which however are not free of limitations. While a comparative
9
Although the Cambridge Econometrics dataset as well as the availability of study of the performance of alternative indicators in different contexts is
patent data allow for a much wider coverage of countries and years, our sample beyond the scope of the present paper, this is certainly an issue worth of further
is constrained by the availability of data on regional R&D expenditure. investigation.

6
C. Antonelli et al. Research Policy 51 (2022) 104081

then the region is said to be specialized in the generation of technology t. strand, the knowledge generation equation can be specified as it
Once RTA is calculated for any technology in all regions, it is possible follows14:
to calculate: Kr, 0(i), which indicates variety, i.e., the number of tech­ ∑
→ KSTOCKi,t = α +β1 R&DSTOCKi,t− 1 +β2 KCIi,t− 1 +β3 MANi,t− 1 + φt + εi,t
nologies in which region i is specialized; K t,0 , which represents the
ubiquity of a specific technology, i.e., the number of regions specialized (1)
→ →
in technology j. Given the starting values, K r,0 and K t,0 , an iterative The technology production function (TPF) is as it follows:
formulae is applied to derive the Knowledge Complexity Index (KCI) that ̂ i,t−
LPi,t = a + b1 LPi,t− 1 + b2 Li,t− 1 + b3 KCIi,t− 1 + b4 KLi,t− 1 + b5 KSTOCK
synthetically measures the complexity of regional knowledge base.13 ∑
1

We report in the Appendix the ranking of technologies according to + β6 R&DSTOCKi,t− 1 + μt + ei,t

the values taken by the KCI variable. It can be seen that most complex (2)
technologies are those that may be understood as related to the phar­
The subscript i refers to region, while t refers to the year. By including
maceutical sector, while less complex technologies are related to the
in the productivity equation the predicted values of KSTOCK from the
manufacturing of machineries and parts thereof.
knowledge equation (Eq. (1)), we are able capture the differential effect
The following econometric analysis will use of the KCI indicator
of KCI on knowledge output and productivity, so as to ascertain to what
computed for each European region along the observed years. Such in­
extent the effect on productivity is indirect and driven by the effect on
dicator provides a consistent measure of the evolution of the degree of
knowledge, rather than direct.
complexity of the innovation activities carried out in a certain region, as
All variables in the Eqs. (1) and (2) have been transformed by
reflected by the related patent portfolio.
applying the inverse hyperbolic sine transformation, which can be
Note that the method derives implicitly complexity patterns from the
interpreted as a logarithmic transformation, but it is defined also for
empirical observation of the distribution of patenting activities across
values less than, or equal to, zero.15
regions. Hence, it is the degree of geographical clustering of different
Both the knowledge generation equation (KGE) and the technology
activities that reveals the properties of knowledge.
production function have been estimated by implementing the GMM
system estimator (Arellano and Bond, 1998; Blundell and Bond, 1998).
3.2.3. Other variables
Following the extant literature within the knowledge production
4. Results
function (KPF) framework, we include the following explanatory vari­
ables in the knowledge generation equation (KGE) (Moreno et al., 2005).
The results of the econometric estimations are reported in Tables 4, 5
First, we introduce an input measure of innovation, i.e. the stock of R&D
and 6. Table 4 concerns the innovation (knowledge generation) equa­
per employee (R&DSTOCK). This is obtained by applying the perma­
tion. The first column presents the baseline model. As expected the co­
nent method to the regional gross domestic expenditure on research and
efficient of R&DSTOCK is positive and significant, in line with the
experimental development (GERD), and using a 15% depreciation rate.
established literature within the knowledge generation function
Second, we include the share of manufacturing employees on the total
framework. Actually, R&D expenditures are considered as an input
level of regional employment (MAN) to control for the weight of sectors
measure proxying the quantity of knowledge available as a production
with higher propensity to patenting, provided that the literature has
factor in the equation in which patents proxy the output. The larger are
stressed that patenting is very rare in service sectors.
the investments in R&D activities, the higher is the output in terms of
The TPF also includes the ratio between the stock of fixed capital
patents. As for the control variables the share of manufacturing
formation and employment (KL), KSTOCK and the regional level of
employment (MAN) show the expected sign, as it is featured by a posi­
employment (L). All regressions also include time and region fixed
tive and statistically significant coefficient.
effects.
In the second column we introduce the proxy for the complexity of
Table 2 reports the descriptive statistics of the variables included in
the regional knowledge base, KCI. In line with the previous evidence
the empirical analysis, while Table 3 shows the pairwise correlation
reported in Antonelli et al. (2017), the coefficient of this variable is
coefficients amongst the variables. In some cases, these coefficients are
positive and significant, providing support to our hypothesis according
significant at the 5% level. However, it must be noted that, as far as the
to which not only the size but also the composition of the knowledge
variables that are used as regressors are concerned, the values of the
stock does contribute to the local generation of new technologies. From
coefficients do not raise particular concerns about multicollinearity.
a theoretical viewpoint this result suggests that knowledge complexity
enhances the effectiveness of innovation activities by providing local
3.2.4. The econometric model
economic agents with a larger set of potentially combinable knowledge.
The econometric model follows the logic behind the seminal model
Finally, the lagged values of MAN and GDP are characterized by positive
proposed by Crepon, Duguet and Mairesse (1997), by adapting it to the
and significant coefficients.
regional level. This level of aggregation does not present some of the
Finally, column (3) includes KCI and R&DSTOCK together in the
concerns arising at the micro-level, especially those related to selection
right-hand-side of the estimated equation. The results are consistent
bias and missing values of R&D expenditure. We are therefore left with
with those discussed so far. Actually, R&DSTOCK shows a positive and
two key equations, i.e. the knowledge (innovation) and the productivity
equation.
In line with the extant literature in the geography of innovation
14
It must be noted that existing studies implement the innovation equation by
using patent flows per capita as a dependent variable, and R&D flows per capita
13
The KCI has been calculated by using the eigenvector method. The values as an input measure. In this paper we opt for the original formulation stemming
obtained are the eigenvector associated with the second largest eigenvalue of from the seminal edited book by Griliches (1984), and use patent and R&D
the projected region-technology matrix. stocks. Nonetheless, in Table 5 we show the results obtained in regressions
implemented using patent and R&D flows, for the sake of comparison.
15
This is an alternative to the Box-Cox transformations, defined by the
1/2
following formula: inverse y = log[yi + (yi2 + 1) ]. Except for very small
values of y, the inverse sine can be interpreted as a standard logarithmic var­
iable. However, unlike a logarithmic variable, the inverse hyperbolic sine is
defined at zero and at negative values.

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C. Antonelli et al. Research Policy 51 (2022) 104081

Table 2
Descriptive statistics.
variable N min max mean St.dev. skewness kurtosis

lnPAT 2457 0.001 3.526 1.044 0.863 0.528 2.425

LP 2457 0.002 0.076 0.029 0.013 − 0.559 2.503
lnKCI 2457 − 0.047 0.009 − 0.002 0.006 − 1.774 9.071
GDP 2457 0.003 0.098 0.049 0.020 − 0.778 2.703
lnGERD 2268 0.005 3.791 1.396 0.912 0.255 2.119
man 2457 0.055 0.400 0.189 0.070 0.533 2.802
K_L 2457 0.054 3.749 2.296 0.651 − 1.253 4.127
L 2457 5.295 9.744 7.700 0.759 − 0.405 3.389
lnGERD 2268 0.005 3.791 1.396 0.912 0.255 2.119

Table 3
Pairwise correlation matrix.
KSTOCK LP KCI GDP R&DSTOCK MAN KL L

KSTOCK 1
LP 0.6315 1
KCI 0.4800 0.3744 1
GDP 0.6676 0.9582 0.4153 1
R&DSTOCK 0.8026 0.7459 0.3734 0.7624 1
MAN − 0.1497 − 0.4899 0.0625 − 0.4345 − 0.3489 1
K/L 0.4364 0.7749 0.2988 0.7711 0.6014 − 0.3661 1
L 0.1484 − 0.1473 0.1933 − 0.0877 0.1058 0.2114 − 0.2056 1

Table 4 Table 6
Knowledge Generation Function (KGE). TPF.
(1) (2) (3) (1) (3) (5)

KSTOCK t-1 0.7766*** 0.8580*** 0.7724*** LP t-1 0.6796*** 0.6794*** 0.6767***

(0.0051) (0.0026) (0.0053) (0.0100) (0.0102) (0.0076)
KCIt-1 0.0097** 0.0286*** KCI t-1 − 0.0015*** − 0.0013*** − 0.0016***
(0.0040) (0.0056) (0.0002) (0.0002) (0.0002)
R&D_FLOW t-1 0.0439*** 0.0442*** K/L t-1 0.0001 0.0001 0.0001
(0.0023) (0.0022) (0.0001) (0.0001) (0.0001)
MAN t-1 0.1302*** 0.0781*** 0.1233*** L t-1 0.0029*** 0.0025*** 0.0028***
(0.0042) (0.0044) (0.0039) (0.0003) (0.0003) (0.0003)
N 1675 1893 1667 R&DSTOCK t-1 − 0.0000 0.0002*** − 0.0000
AR(1) − 4.2963 − 4.5792 − 4.2439 (0.0001) (0.0001) (0.0001)
AR(2) − 0.9818 − 0.6423 − 0.9510 KSTOCK
̂ 1 t-1
0.0019***
Sargan statistic p<0.01 p<0.01 p<0.01
(0.0001)
GMM-system estimations KSTOCK
̂ 2 t-1
0.0011***
..Standard errors in parentheses (0.0001)
* p < 0.10. KSTOCK
̂ 3 t-1
0.0019***
** p < 0.05. (0.0001)
*** p < 0.01. N 1540 1675 1540
AR(1) − 5.5678 − 5.7115 − 5.5754
AR(2) 0.1313 0.5860 0.1373
Table 5 Sargan statistic p<0.01 p<0.01 p<0.01
Knowledge Generation Function (KGE, patent flows). GMM-system estimations.
(1) (2) (3) Standard errors in parentheses.
* p < 0.10.
PAT_flow t-1 0.8421*** 0.8693*** 0.8405***
(0.0053) (0.0032) (0.0055) ** p < 0.05.
KCIt-1 0.0127*** 0.0042 *** p < 0.01.
(0.0043) (0.0067)
R&D_FLOW t-1 0.0097** 0.0124***
significant coefficient, and the same applies to MAN. Also, our hypoth­
(0.0041) (0.0038)
MAN t-1 0.1178*** 0.0943*** 0.1101***
esis about the role of Jacobs’ externalities in local innovation dynamics
(0.0053) (0.0024) (0.0053) finds support, as the coefficient of KCI is positive and significant.
N 1675 1893 1667 Table 5 provides an additional set of estimations including the flows
AR(1) − 4.3576 − 4.6169 − 4.3197 instead of the stocks. As anticipated in Section 3, although a relevant
AR(2) − 1.0180 − 0.6988 − 1.0067
number of empirical studies in the geography of innovation literature
Sargan statistic p<0.01 p<0.01 p<0.01
implement the knowledge production function by including patent and
GMM-system estimation. R&D flows as dependent and independent variables respectively, we do
Standard errors in parentheses. prefer to stick to the original formulation stemming from Griliches
* p < 0.10.
(1984) that relies on the stocks of both patents and R&D expenditures.
** p < 0.05.
The results seem to be completely in line with those obtained in
*** p < 0.01.
Table 4. Indeed, R&DSTOCK shows a positive and significant coefficient
both in columns (1) and (3). The positive and significant coefficient of

8
C. Antonelli et al.
KCI is also confirmed in columns (2) and (3). For what concerns the
control variables, MAN is featured by a positive and significant
coefficient.
The estimation of the knowledge generation equation (KGE) allows
us to validate our hypothesis about the positive role of knowledge
complexity in the innovation dynamics grasped by the knowledge gen­
eration function. Moreover, this represents a necessary step to imple­
ment a test of our hypothesis about the effects of knowledge complexity
in the downstream technology production function, which requires to
estimating the impact of KCI on local productivity dynamics.
The results of the GMM estimation of the technology production
function are reported in Table 6. Each of the three columns includes the
predicted value of KSTOCK based on the estimation reported in the
correspondent column in Table 5. The lagged level of the dependent
variable (LP), is characterized by the expected positive and significant
coefficient. Moreover, it must be noted that the coefficient is signifi­
cantly lower than one, suggesting that in our sample regions we observe
convergence of labor productivity. The coefficient of R&DSTOCK is
positive and significant in two out of three estimations. The estimated
values of KSTOCK are also featured positive and significant coefficients
in all of the three models. This is in line with the established literature on
knowledge complexity and productivity and confirms the effectiveness
of the indirect channel through which knowledge complexity affects
labor productivity.
For what concerns KCI, one can observe, instead, that the coefficient
of this variable is negative and significant in all of the three. Such a
result suggests, that when the positive indirect effect of knowledge
complexity on productivity via the generation function is accounted for
(evidenced by the positive and significant coefficient of the KSTOCK ̂ terms of absolute levels of knowledge complexity.19
variables), the residual impact of knowledge complexity becomes
negative, due to reduced knowledge exploitation potential. This is
consistent with our hypothesis about the relationship between techno­
logical complexity and productivity spelt out in Section 3. In other
words, technological complexity is an opportunity as far as innovation
dynamics are concerned, but it can likely be an obstacle when economic
agents choose to use complex knowledge in their production processes
as an input-ready-to-be used, rather than in input in the recombinant
knowledge generation activities.16
4.1. Sensitivity
4.1.1. Estimations by macro-areas
The results of the econometric estimations reported in the previous
section provide support to the idea that the composition of the knowl­
edge stock affects in different ways the generation of innovation, and its
actual exploitation in the production process.
The overall results may however hide some important differences
amongst European regions, due to the heterogeneity of both innovation
and economic performances. For this reason, in this section we carry out
two distinct and yet complementary sensitivity analyses to ascertain the
differential impact of knowledge complexity across different types of
regions.17
The first test is based on the split of our sample of European regions
in five clusters, according to the taxonomy proposed by Capello and
16
It is worth stressing that this effect might also be due to other relevant costs
faced by firms in presence of excess variety, like coordination, search and
transaction costs (see Grimpe and Kaiser, 2010; Gkypali et al., 2017).
17
The heterogeneity of European regions in terms of economic and techno­
logical conditions raises an important issue related to the link between complex
dynamics and evolutionary patterns in terms of initial conditions and path-
dependence (see Gkypali et al., 2019). However, this goes beyond the scope
of the present paper.
9
Research Policy 51 (2022) 104081
Lenzi (2013) .18 The authors propose a taxonomy of European regions
reflecting the differential territorial patterns of innovation. Instead of
relying on the simple notion of knowledge intensity, five clusters are
identified, which reflect five different modes of approaching the inno­
vation process. The clusters are labelled as it follows: i) Imitative
innovation areas; ii) Smart and creative diversification areas; iii) Smart
technological application areas; iv) Applied science areas; v) European
science-based areas. Details about the features of the clusters can be
found in the original paper. For our purposes, it is worth stressing that
the last cluster is featured by highly formalized innovative efforts. These
become less and less formalized as one proceeds towards the first cluster,
while the weight of tacit knowledge increases. Also, the intensity of
innovation efforts decreases from the last to the first cluster. Table 7
reports the distribution of the observations in our dataset across the 5
clusters.
In order to ascertain the differential effect of knowledge complexity
across the five clusters we decided to proceed in the following way. We
have first generated five dummy variables, taking value 1 if the region
belongs to the relevant cluster, 0 otherwise. Then we have interacted
each dummy with the KCI variable. We finally obtained five interaction
variables, each taking the value of KCI when the dummy is equal to one,
zero otherwise. In this way we cover the entire distribution of the KCI
variable and we can directly appreciate the differential effect of KCI
across the five clusters of regions. As a consequence, the KCI variable per
se is not included in the regression (and in any case it would not be
identified). In so doing the provided econometric estimates are able to
capture the effects of knowledge complexity on productivity dynamics
within each cluster, thus taking into account structural differences in
The results of these additional estimations are reported in Table 8.
We only show the coefficients of the interaction variables, the other ones
being consistent with the previous estimations. Column (1) shows the
differential effect of KCI on the innovation dynamics of the regions in the
five clusters. Let us recall that all the variables have undergone a
transformation that approximates a logarithmic transformation. Though
with some caution, the coefficients can be read as elasticities. KCI seems
to yield negative and significant effects on the innovative dynamics of
regions in ‘Imitative’ areas, while no significant effects emerge for what
concerns ‘Smart and creative diversification’ areas. In these areas
innovative dynamics are very weak, mostly based on imitation or the
leveraging of tacit knowledge and learning-by-doing. The coefficient of
KCI is positive and significant for regions in “Smart technological
application” and “Applied science” qreasa, which are strongly involved
Table 7
Distribution of sampled observations across the 5 clusters as in Capello and
Lenzi (2013).
Cluster Freq. Percent Cum.
Imitative innovation areas 325 13.23 13.23
Smart and creative diversification areas 793 32.28 45.50
Smart technological application areas 689 28.04 73.54
Applied science areas 442 17.99 91.53
European science-based area 208 8.47 100.00
Total 2457 100.00
18
The authors wish to thank Roberta Capello and Camilla Lenzi for sharing
the details of the taxonomy.
19
Note that we show interaction effects in the form of direct effects (i.e., we
show the effects for KCI interacted with each of the n relevant interaction
categories). This is a strategy algebraically equivalent to showing the effects for
the non-interacted KCI and its interactions with only n − 1 interaction cate­
gories (i.e., in the form of differential impacts). We prefer displaying results in
this way as they directly show the impacts for each typology of region without
needing additional algebraic computations to get direct effects.
C. Antonelli et al. Research Policy 51 (2022) 104081

Table 8 coefficient along all of the observed quantiles. Also, it must be noted that
Differential effect of KCI across regional clusters. the magnitude of the coefficient is pretty stable up to the 50th quantile,
(1) (2) while it is slightly higher at the 75th and the 90th quantile. For what
KGE TPF concerns our main regressor of interest, KCI, the estimated coefficient
Imitative innovation areas − 0.5301*** 0.0258*** appears to be positive and significant across all of the reported quantiles.
(0.0574) (0.0038) Also in this case, the coefficients seem to be higher for regions at the
Smart and creative diversification areas − 0.1199 0.0053** 75th and the 90th quantile.
(0.0750) (0.0025) Table 10 instead concerns the technology production function. Also
Smart technological application areas 2.1832*** − 0.0918***
(0.1877) (0.0065)
in this case, each column reports the coefficients of the variables esti­
Applied science areas 0.3843** − 0.0557*** mated on the quantile of the distribution of the dependent variable
(0.1526) (0.0061) indicated in the header. The results show that R&DSTOCK is positive
European science-based area − 0.0992 − 0.0321** and significant along all the distribution, and the magnitude of the co­
(0.3846) (0.0130)
efficient increases as one moves upwards in the distribution. KCI shows
GMM-system estimations. interesting dynamics, as its coefficient turns out to be negative and
Standard errors in parentheses. significant across all of the quantiles. However, it can be noted that the
* p < 0.10. magnitude of the coefficients increases up to the median region, and
** p < 0.05. then it declines.
*** p < 0.01. Overall, our results provide further support to our working hypoth­
esis, and suggest that our estimates are quite reliable. When compared
in the application and generation of knowledge. with the results we have discussed in Section 4.1.2, these estimate
In column (2) we report instead the effect of KCI on the productivity suggest that at the aggregate level the positive effects of KCI is relevant
dynamics of the regions in the five clusters. The coefficient is positive for the generation of new technologies. The negative effect instead
and significant in the case of the ‘Imitative areas’ as well as of ‘Smart and dominates in the technology production function, due to the limits that
creative diversification areas’ (though weakly significant in this latter). excess knowledge heterogeneity raises to the extendibility and appli­
The effect turns out to be negative and significant for the Smart tech­ cability of existing knowledge to local economic activities. On the con­
nological application’ and ‘Applied science-based’ areas, while it seems trary, differential patterns have been identified, according to different
not yield significant effects on the productivity of regions in the ‘Euro­ modes of innovation that feature the sample region. This suggests that
pean science-based’ area. This evidence would suggest that the hy­ our hypothesis concerning the negative effect of KCI on productivity
pothesis on the negative effect of knowledge complexity on productivity dynamics needs to be qualified not according to the performance of
needs to be qualified. In regions strongly relying on imitation dynamics regions in quantitative terms, but in terms of dominant patterns of
for the preservation of competitiveness, excess specialization can hinder innovation dynamics. In this sense, our hypothesis that the negative
diversification and hence competition, while technological diversifica­ effect stems from constraints to the extensibility and applicability of too
tion increases the chances to develop distinctive comparative advan­ much heterogeneous knowledge receives further support by the com­
tages. On the contrary, the more regional economic agents rely on bination of these sensitivity tests.
genuine innovation dynamics eventually characterized by high absolute
levels of knowledge complexity, the more difficult is for local imitating 4.1.3. Spatial econometrics estimations
agents to leverage highly diversified local competences. As it has been shown by previous studies, the empirical analysis of
regional-level dynamics of innovation and productivity can be inter­
4.1.2. Fixed effects quantile estimation ested by spatial dependence amongst the units of observation. In these
To further investigate possible heterogeneities in how regions’ pro­ situations, linear regressions can yield biased results. Spatial econo­
ductivity dynamics are affected by KCI, we implement a fixed effects metrics models provide an empirical framework able to account for both
quantile regression for panel data (Canay, 2011). The results are re­ spatial dependence and heterogeneity (Anselin, 1988; LeSage, 1999).
ported in Tables 9 and 10. Many different empirical models could be implemented. However,
Table 9 reports the results concerning the KGE. Each column reports following Elhorst (2014), we decided to run a Spatial Durbin Model
the coefficients of the variables estimated on the quantile of the distri­ (SDM), i.e. an estimator including the spatial lag of both the dependent
bution of the dependent variable indicated in the header. Our results are and the exogenous variables, as it is the most comprehensive empirical
in line with previous estimations, and they are consistent with our hy­ framework (Varga, 1998; Elhorst, 2003, 2010).
potheses. In particular, R&DSTOCK shows a positive and significant Table 11 reports the results of SDM estimations. Column (1) refer to
the KGE. The results show that the spatial autoregressive component (i.
Table 9
e. neighbor regions’ knowledge production) is always positive and sig­
KGE (fixed-effects quantile estimation). nificant. The spatial lag of the focal regressor, KCI, is also featured by a
positive and significant coefficient.
(2) (3) (4) (5) (6)
In order to ascertain the impact of spatial dependence on the rela­
R&DSTOCKt-1 0.305*** 0.306*** 0.309*** 0.313*** 0.316*** tionship between the innovation outcomes and KCI, we report the
(0.00648) (0.00610) (0.00349) (0.00707) (0.00600)
marginal effects of the variables. As is common in the implementation of
KCI t-1 1.320** 0.853*** 1.563*** 2.594*** 2.014***
(0.561) (0.286) (0.348) (0.435) (0.399) spatial econometrics estimator, we show total, direct and indirect ef­
GDP t-1 2.318*** 2.641*** 2.853*** 2.769*** 3.044*** fects. The marginal effects indicate that KCI persistently feature a pos­
(0.272) (0.222) (0.167) (0.279) (0.233) itive and significant effect on regional innovation dynamics. Overall,
MAN t-1 1.332*** 1.310*** 1.275*** 1.199*** 1.230***
even after controlling for spatial dependence, our key hypothesis about
(0.0369) (0.0298) (0.0210) (0.0382) (0.0497)
Constant 0.150*** 0.225*** 0.302*** 0.397*** 0.437***
the positive impact of KCI on regional innovation cannot be rejected.
(0.0292) (0.0124) (0.0137) (0.0229) (0.0178) Column (2) of Table 11 reports the result of the SDM estimation of
N 2457 2457 2457 2457 2457 the technology production function. We only show the coefficients of the
Standard errors in parentheses. most relevant variables. The estimated coefficient of KCI is negative and
* p < 0.1. significant. The same applies to its spatial lag. Excess heterogeneity
** p < 0.05. seems to limit the extensibility and the applicability not only of
*** p < 0.01. knowledge generated within the region, but also of that generated in

10
C. Antonelli et al. Research Policy 51 (2022) 104081

Table 10
TPF (fixed-effects quantile estimation).
(2) (3) (4) (5) (6)

K/L t-1 0.000126* 0.000168*** 0.000312*** 0.000472*** 0.000610***

(0.0000663) (0.0000473) (0.0000459) (0.0000581) (0.0000767)
KSTOCK
̂ t-1
0.00583*** 0.00540*** 0.00490*** 0.00463*** 0.00426***
(0.000419) (0.000299) (0.000221) (0.000352) (0.000551)
KCI t-1 − 0.0128*** − 0.00930** − 0.00979** − 0.0125** − 0.0143*
(0.00413) (0.00446) (0.00404) (0.00507) (0.00816)
R&DSTOCK t-1 0.000721*** 0.000948*** 0.00114*** 0.00123*** 0.00137***
(0.000159) (0.0000997) (0.0000825) (0.000118) (0.000155)
L t-1 − 0.00323*** − 0.00330*** − 0.00330*** − 0.00331*** − 0.00338***
(0.0000531) (0.0000374) (0.0000237) (0.0000377) (0.0000774)
Constant 0.0447*** 0.0461*** 0.0468*** 0.0475*** 0.0485***
(0.000601) (0.000453) (0.000307) (0.000454) (0.000760)
N 2268 2268 2268 2268 2268

Standard errors in parentheses.

*
p < 0.1.
**
p < 0.05.
***
p < 0.01.

neighbor regions. To be sure, marginal effects indicate that such nega­

Table 11
tive effect holds with respect to both direct, and indirect and total ef­
Spatial econometrics estimation (SDM).
fects. Overall, also our hypothesis concerning the negative effect of KCI
(1) (2) on regional productivity dynamics cannot be rejected even after
KGE TPF
explicitly accounting for the spatial dependence of regional productivity
Main data.
KCI t-1 0.6333* − 0.0325**
The implications of the results are important. The empirical evidence
(0.3955) (0.0165)
R&DSTOCK 0.2752*** − 0.0004
confirms that knowledge complexity exerts positive effects on the gen­
t-1
(0.0103) (0.0006) eration of new technological knowledge, but negative ones on its
KSTOCK
̂ t-1 0.0064*** exploitation. The case of knowledge complexity trade-off is confirmed:
(0.0015) too much complexity hampers the productivity with respect to all the
Spatial lag regressor other goods but bolster up the output levels in terms of knowledge. The
KCI t-1 14.6594*** − 0.2879*** specific national, regional, and industrial market and institutional con­
(2.7702) (0.1114)
ditions into which knowledge generation and knowledge exploitation
R&DSTOCK t-1 − 0.1197*** 0.0066**
(0.0372) (0.0026) respectively take place have relevant effects on the levels of knowledge
Spatial autoregressive component complexity that firms are able to manage. From this viewpoint the evi­
rho 0.9265*** 0.8733*** dence confirms that the actual levels of knowledge complexity, practiced
(0.0199) (0.0381) by firms at the regional level, are -partly- endogenous.
Variance
sigma2 0.0040*** 0.0000***
(0.0001) (0.0000) 4.1.4. Other robustness checks
Direct effects A further set of robustness checks concerns the sensitivity of the
KCI t-1 1.9022*** − 0.0509*** results to the way one measures the composition of the knowledge stock.
(0.7152) (0.0172)
For this reason we report in Table 12 the results of the estimation of the
R&DSTOCK t-1 0.2875*** − 0.0001
(0.0108) (0.0006) knowledge generation equation and of the technology production
KSTOCK
̂ t-1 0.0068*** function by substituting a measure of knowledge variety for KCI. The
(0.0015) knowledge variety measure is obtained by calculating the information
Indirect effects entropy index for each region, constrained to those the technologies in
KCI t-1 229.1572** − 2.6334** which the regions shows a revealed technology advantage. This indi­
(110.1488) (1.2951) cator therefore captures the extent to which patents in the regional
R&DSTOCK t-1 2.0474* 0.0527*
(1.2234) (0.0301)
KSTOCK
̂ t-1 0.0492* Table 12
(0.0288) Innovation and TPF equations – Variety of RTAs.
Total Effects (1) (2)
KCI t-1 231.0595** − 2.6843** KGE TPF
(110.7390) (1.3003)
R&DSTOCK t-1 2.3349* 0.0526* Variety t-1 0.0023** − 0.0001***
(1.2281) (0.0303) (0.0009) (0.0000)
0.0560* R&DSTOCK t-1 0.0313*** 0.0001**
KSTOCK
̂ t-1
(0.0056) (0.0001)
(0.0297) N 2141 1533
N 2457 1430 AR(1) − 4.4765 − 5.6529
AIC − 6508.0789 − 15,600.7450 AR(2) − 0.5613 0.1004
BIC − 6415.1718 − 15,500.7018 Sargan statistic P<0.01 P<0.01
Standard errors in parentheses. GMM-system estimations.
*
p < 0.1. Standard errors in parentheses.
**
p < 0.05. * p < 0.10.
***
p < 0.01. ** p < 0.05.
*** p < 0.01.

11
C. Antonelli et al.
patent portfolio are clustered or dispersed across the technologies for
which the region shows an RTA.
The result indicates that even with a different measure of variety, the
evidence of a positive effect on innovation and of a negative one on
productivity seems to be robust. This provides further support to our
working hypothesis about the negative impact of the hetherogeneity of
the regional knowledge base on the application of local technologies for
production purposes.
Another source of bias in our results could be due to the intensity of
patenting in the sampled regions. Actually, for regions with a small
number of patents, the calculation of RTA, which is at the basis of the
KCI index, might turn out to be misleading. For this reason, in Table 13
we provide the results of the estimation of the knowledge generation
equation and of the technology production function carried out on the
regions in the top 20th centile of the distribution of patent applications.
The results are consistent with those obtained in the baseline esti­
mations. In particular, KCI show a positive and (weakly) significant
coefficient in the knowledge generation equation (column (1)), while it
is featured by a negative and significant coefficient in the technology
production function. Overall, the sensitivity analyses carried out in this
Section suggest that our results are robust to different specification of
the models and to the check for the most relevant sources of biases.
5. Conclusions
The stock of knowledge available in a system is a key endowment.
The mechanisms by means of which the size and composition of this
endowment contribute the working of economic systems, however, are
far more complex than assumed by standard new growth theory.
Technological knowledge is quite a special good, actually an activity,
characterized by the limited appropriability and exhaustibility that lead
to the accumulation of a stock of quasi-public knowledge. This stock can
be regarded as an endogenous endowment that deploy differentiated
effects in its generation and exploitation.
The mechanisms shaping knowledge generation differ from those
related to its exploitation. The size and composition of the stock of quasi-
public knowledge available in a system enable to access (due to its
limited appropriability), and use again (due to its limited exhaust­
ibility), existing knowledge inputs at costs that are lower than their
reproduction. The limited appropriability and exhaustibility of knowl­
edge trigger pecuniary knowledge externalities that affect both the
knowledge generation function and the technology production function.
In this respect, the paper makes three contributions to the literature:
i) it highlights the pervasive role of the composition of the stock of
knowledge together with its size, ii) it widens the scope of the analysis
on the role of knowledge complexity both in the upstream generation of
knowledge and in the downstream production of all the other goods; iii)
it identifies the working of three distinct mechanisms, by means of
which the complexity of the stock of quasi-public knowledge affects the
working of the economic system. The evidence provided in this paper
suggests that complexity of the stock of quasi-public knowledge: i)
qualifies the amount of knowledge that can be used as an input in the
recombinant knowledge generation function, ii) increases the amount of
knowledge that enters as an input in the downstream technology pro­
duction function; iii) hamper the ready-to-be-used exploitation of the
knowledge stock. This latter result indicates that the use of a knowledge
stock with high levels of complexity as an input ready to be used in the
production process of all the other goods can be made more difficult by
the excess array of technological domains that need to be mastered
which limit the benefits of knowledge extensibility.
The analysis of these three effects has been carried out in two steps,
by estimating the knowledge generation and the technology production
functions separately. The econometric model tests the equations on 189
European regions in the years 1997–2009 and adopts an indicator of the
degree of complexity of the regional knowledge base that use the in­
formation contained in patent documents building on the adaptation of
12
Research Policy 51 (2022) 104081
Table 13
Innovation and TPF equation (top 20% innovating regions).
(1) (2)
KGE TPF
KCI t-1 0.0930* − 0.0096***
(0.0512) (0.0017)
R&DSTOCK t-1 0.0332 0.0045***
(0.0451) (0.0011)
N 389 389
AR(1) − 4.1119 − 3.7331
AR(2) − 0.6179 0.8831
Sargan statistic P<0.01 P<0.01
GMM-system estimations.
Standard errors in parentheses.
* p < 0.10.
** p < 0.05.
*** p < 0.01.
a method originally developed by Hidalgo and Hausmann (2009). With
respect to this choice, our findings suggest that, despite the limitations of
this measure of complexity when applied to European patent data
(Broekel, 2019; Rigby et al., 2019), we were able to capture substantial
relative heterogeneity in terms of complexity across European regions,
which in turns affects their innovative and productivity performances.
Moreover, we showed that the evidence of a positive effect on innova­
tion and of a negative one on productivity is confirmed when a direct
measure of knowledge variety is considered. Nevertheless, further
research is needed to test the validity of our results when different
complexity indicators and different geographical contexts are
considered.
The other sensitivity analyses carried out on econometric results
showed that one can find significant differences in the effect of KCI
across European regions, based on their differential degree of speciali­
zation in knowledge-based activities and on different levels of produc­
tion efficiency. These results yield important implications for regional
innovation policies. First of all, consistently with an increasing body of
literature, one-size-fits-all innovation policies can hardly work for the
improvement of innovation and productivity performances at the
regional level (Capello and Lenzi, 2014). Regional innovation policies
should be instead fine-tuned according to the structural features of
regional innovation and economic activities, by explicitly accounting for
the distinction between knowledge generation and application. Second,
and related to the previous point, our results are connected to the
ongoing policy debate on smart specialization strategies (Rigby et al.,
2019). In this framework, it is advocated that regional policies should
consider the composition of the existing bundle of economic and tech­
nological activities to successfully orient and renew the regional pat­
terns of industrial and technological specialization. Our results suggest
that this process should take into account the intrinsic difficulties that
agents in specific places can have in the command of too much variety of
knowledge when the application to production processes is at stake.
Constraints to extensibility, application and imitation risk to yield the
unintended effect of depressing overall local productivity dynamics.
Overall, our results provide further support to the quest for place-based
regional development policies based on coordinated efforts aiming at
valorising untapped potential of regions by leveraging their structural
features (Barca et al., 2012).
In conclusion, the analysis of the divergent effects of knowledge
complexity on, respectively, productivity and knowledge output and the
results of the empirical investigations confirm that, after the knowledge
appropriability trade-off, a knowledge complexity trade-off takes place.
The knowledge complexity trade-off has important policy implications.
The social and private returns of knowledge complexity may differ.
Economic systems might benefit from higher levels of knowledge
complexity that firms are not able to manage because of its negative
effects on productivity. Market systems may engender, not only the -well
C. Antonelli et al. Research Policy 51 (2022) 104081

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