Variety, economic growth and knowledge intensity of European regions: a spatial panel analysis

Although the theoretical framework on agglomeration externalities and the channels through which they influence the regional economy appear well established, the empirical evidence on their magnitude and impact has been rather ambiguous and inconclusive. Applying the concepts of related and unrelated variety to an interregional European dataset and using spatial panel analysis, this paper provides critical information on the type and functioning of agglomeration externalities in relation to regional heterogeneity in knowledge intensity and innovation. We demonstrate that modeling this regional heterogeneity in a spatial panel setting is a crucial condition for identifying the positive agglomeration effects of (un)related variety on regional growth. The outcomes have substantial implications for European regional policy: We argue that policies should be both conceptually enriched and more empirically informed.