There has been a massive expansion of higher education in recent decades as part of attempts to create workforces with the skills to be able to compete successfully in the context of the knowledge based economy. At the same time, there is widespread unrest that universities are failing to respond to these new demands and are continuing to act as ‘ivory towers’ outside of rather than driving forward society. A key challenge for European policy-makers is therefore distinguishing the extent to which universities are realising their potential to contribute to the emergence of the knowledge-based economy. In this working paper we try to provide evidence on the key factors determining the contribution of higher education institutions (HEI) to innovation capabilities and expand the understanding of this contribution beyond traditional measures of the role of HEI on innovation capabilities. In this sense, we focus on the relevance of spill-overs through knowledge-transfer mechanisms as well as through human capital mechanisms.