THE KNOWLEDGE COST FUNCTION

This paper contributes to the economics of knowledge with an analysis of the knowledge cost function, shedding light on the determinants of the large variance in the cost of knowledge across firms. The amount and the composition of external knowledge and the internal stocks of knowledge that firms can access and use in the generation of new technological knowledge help to reduce the costs of knowledge. The empirical analysis is based on a panel of companies listed on UK and the main continental Europe financial markets for the period 1995 - 2006, for which information about patents have been gathered. The econometric analysis of the costs of knowledge considers the unit costs of knowledge on the left hand side, and on the right hand side next to R&D expenditures, the stock of knowledge internal and external to each firm, and their size. In order to articulate the different facets of the external knowledge that is made accessible by proximity with firms collocated in the same region (NUTS2), we include variables proxying for regional variety, complementarity and similarity. The results confirm the Marshallian hypothesis that the size and composition of the stock of external knowledge play a key role in reducing the actual cost of the generation of new technological knowledge at the firm level. The evidence also shed new light on the Schumpeterian hypothesis suggesting that the size of the stock of internal knowledge helps in reducing the costs of knowledge, while costs of knowledge increase with the size of R&D expenditures and employment.