Missing links of knowledge spillover effects on firm intensity and regional development

This paper investigates the presence and extent of missing links that prevent the transmission and condition the flow of knowledge spillover effects (KSE) across space and time. Findings using a comprehensive database composed of 9242 innovative startups from Italy covering the period 2008-2018 and all 20 geographic regions as well as all economic sectors at the 2-digit level of aggregation indicate that missing links related to observed differences in industry structures and availability of pools of skilled human capital amount for large and persistent differences in terms of firm intensity differential across neighboring regions. More specifically, we observe that regions with initial existent high firm intensity are more likely to continue enhancing their labor pools by both endogenously increasing high-skilled human capital and by attracting high-skilled human capital from neighboring regions. Intra- and inter-industry spillovers are marked by high levels of heterogeneity. Consequently, we find that missing links related to KSE create directional effects, and these effects are neither symmetric nor reciprocal in adjacent geographical regions. Invisible barriers to KSE transmission, imposed by the presence of missing links, prevent the work of the invisible hand. The main result of this research is that the evidence using a large sample of Innovative Startups in Italy conclusively indicates that missing links of knowledge spillover effects account for a large proportion of the observed differences in new firm formation and entrepreneurial development. The presence of missing links in the transmission of knowledge spillovers appears to be a relevant element when explaining observed differences across time and space. Efforts to counter the presence of missing links of knowledge, namely, investment in human capital formation, and the development of institutional policy changes, appear to yield mixed results. On the one hand, entrepreneurial activity is fostered, but in a non-homogenous fashion across the entire country.Thus, the principal implication of this study is that in order for policy changes directed to promote economic growth and development via entrepreneurial activity, they need to account for the presence of missing links in the transmission of knowledge spillover effects across sectors of economic activity and across geographic regions given the large presence of heterogeneity across sectors and regions.