01 Mar 2006

Knowledge Capital as the Source of Growth

Hannu Piekkola

Download Publication


European Network of Economic Policy Research Institutes (ENEPRI) Working Paper No. 43, 23 pages

Regional disparities in the growth rates of GDP and total factor productivity (TFP) are a major policy concern in the EU, not least because of its inclusion of new transition economies. The growth rate of a nation’s TFP especially depends on its level of human capital rather than the increasing rate of human capital. The growth that is driven by innovation and the catching-up process spurred by technology imitation relies on education-based human capital and related agglomeration. This explains why education provides a permanent advantage, which over time may increase in importance in the labour market. This paper examines the role of knowledge agglomeration in productivity growth in Finland. The analysis rests on a very detailed assessment of knowledge capital in firms, using linked employer-employee data at the micro level. It shows that the agglomeration of education-based human capital explains the regional divergence in the growth rates of GDP and TFP in Finland since 1995. High-growth firms are observed to have highly paid occupations and intangible capital – characteristics that are vital for growth to continue in firms that are far from the leader firm at the frontier of their industry in terms of productivity. In low-productivity firms, knowledge capital that is derived from sources other than educational attainment is also found to be essential for growth.

Theme: 18. Regional labour market
JEL classification: J240, R110, O300, O400, O520
Keywords: regional growth, endogenous growth, catching up, technology transfer.