Knowledge externalities and demand pull: The European evidence

This paper elaborates the microeconomic foundations of the demand pull hypothesis stressing the role of vertical knowledge externalities stemming from user-producer knowledge interactions that parallel vertical transactions. The paper articulates and tests the hypothesis that such competent demand is actually able to pull technological change only when it is expressed by advanced users, able to provide relevant knowledge externalities to their customers. Using input output tables we test empirically this hypothesis for 15 European countries in the years 1995-2007. The evidence confirms that the increase in productivity of the upstream sectors is positively influenced by the sector-level derived demand, according to the upstream rates of introduction of innovations and to the intensity of the user-producer interactions. The policy implications of the analysis enable to elaborate and implement the notion of a ‘competent’ public demand.