Knowledge Externalities, Agglomeration and Regional Development in the EU: Motivating Place-Based Regional Intervention

Human capital, knowledge accumulation and agglomeration externalities are indicated as prominent sources of increasing returns. Their simultaneous contribution to regional development is investigated in this paper accounting for non-linearity, threshold effects and spatial dependence. Based on EU25 regional data (1995-2007), results highlight differentiated growth patterns for less and more developed regions, the effect of externalities being considerable in the latter case. The evidence weakly relate externalities to agglomeration, suggesting it is neither necessary nor sufficient for regional growth. Externalities are, oppositely, related to knowledge accumulation and human capital. With this respect, existing gaps are identified as the most relevant cause of the economic disadvantage of lagging regions. This, in turn, strengthens the arguments in favour of a place-based approach to regional policy.