Does distance matter? Geographic proximity, spillovers and economic growth in Mexico

During the last two decades, a great deal of theoretical and empirical research in economics has been devoted to analyze the determinants of long-run economic growth. Special attention has been given to the effects of knowledge spillovers and their localization on growth. The present study analyzes the growth effects of knowledge spillovers and geographic proximity across the thirty two Mexican states, for the period 1984–1999. Implications for the speed of convergence are considered as well. To do so, several econometric techniques are utilized. Ordinary and Non-linear Least Squares are employed to test the absolute convergence hypothesis. A Least Squares Dummy Variables fixed effects methodology is used to test for conditional convergence. Developments in the area of spatial econometrics are applied to growth theory to measure the effects of proximity and spillovers on the growth rate of per-capita real Gross State Product (GSP). Results indicate a positive, significant and robust effect of proximity and spillovers on the growth rate of per-capita real GSP. They also indicate a negative and significant effect of proximity and spillovers on the speed at which the states will catch up (converge) with rich states