In this paper, we use different methods to estimate the Verdoorn equation with the aim to test for the presence of increasing returns to scale in the manufacturing sector across NUTS-2 European regions during the period 1995-2006. Method and Results We extend the basic Verdoorn equation by considering the spatial dimension both in terms of geographical proximity and hierarchy. Our results corroborate the presence of spatial effects, identify increasing returns to scale at different hierarchical levels and highlight some degree of spatial heterogeneity. Conclusions The analysis underlines the role of space in regional productivity growth processes, both in terms of geographical proximity and hierarchy. The productivity of European regions is characterized by both positive spatial spillovers, possibly due to technological diffusion, and negative spatial spillovers, possibly due to spatial competition effects.
Keywords: Verdoorn law, returns to scale, european regions
Jel Code: C31, O47, R11, R12