Over the recent years the macroeconomic performance of Europe has been persistently weak, with low growth and high unemployment, in absolute and relatively to rest of the world. There seems to be a widely shared consensus on the idea that potential growth is low in Europe and that this "structural slump" reflects mainly a "productivity deficit".
In order to put in place possible remedies for this decline the European Union (EU) has set the "Lisbon Agenda", where several objectives are defined and are announced to be met in 2010. In particular, related to the "productivity deficit", the goal for the research and development (R&D) expenditures / GDP ratio is to achieve at least 3% for the EU as a whole and to have two thirds of R&D expenditure financed by the business sector.
But the achievement of the goal for R&D intensity requires a clear understanding of what are the constraints for higher levels of R&D expenditure. In the present analysis, focusing on the case of Italy, we examine two important potential constraints for firms' R&D expenditure: local banking development and university-industry knowledge spillovers. Moreover we examine the causal relationship between university-industry cooperation and local R&D intensity of higher education sector. Using a large database of Italian firms taken from the Capitalia Survey, we show that geographical differences in the R&D intensity of higher education sector play a key role in increasing the probability of cooperation between universities and firms and, hence, knowledge spillovers. Moreover we find that, while university-industry cooperation represents an important determinant of R&D expenditures financed by business sector, local banking development does not have a significant impact. We argue that our findings have important policy implications.