Direct and indirect knowledge spillovers and industrial productivity

This paper analyses the importance of externalities related to the spread of innovation across sectors. Such spillover effects arise from R&D activities and input-output (IO) linkages among sectors in the country. We borrow Spatial Econometrics techniques to make consistent estimates of the impact of these systematic direct and indirect spillovers on sector's productivity and the possibility of other types of productivity spillovers in the error term. We find that direct spillovers emanating from IO horizontal linkages determine sector's productivity, while the indirect effects prove to be negligible. Furthermore, the technological intensity of IO linkages and the productive structure of the underlying economy are key factors determining the effectiveness of economic policies focused on increasing total industrial productivity.