Externalities and Absorptive Capacity in a context of Spatial Dependence: The case of European Regions

This paper proposes a theoretical model which incorporates capital accumulation and spatial spillovers across economies, while allowing for differences in absorptive abilities. This model is later estimated for a sample of 215 European NUTS2 regions, before and after the last enlargement of the single-market area. Results confirm the relevance of local absorptive capacities, as are found to be directly linked with the process of making the most of externalities. More than that, capital accumulation externalities do not seem to take place in absence of local capabilities. Total Factor Productivity disparities are studied decoding its sources, and results conclude that after the last enlargement of the European Union, instead of a technological convergence, a twin-peak pattern has emerged. Central and Eastern European regions are lacking the benefits from interaction between physical and human capital, while geography appears to be a limitation for most peripheral regions. In this context, it will be difficult for peripheral regions to catch-up, because geographical distance means that these regions are less exposed to spillovers.