Knowledge Capital as the Source of Growth. CEPS ENEPRI Working Papers No. 43, 1 March 2006

Piekkola, Hannu. (2006) Knowledge Capital as the Source of Growth. CEPS ENEPRI Working Papers No. 43, 1 March 2006. [Working Paper]

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Abstract

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.

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