The importance of proximity and location Maryann P. Feldman Advancing Knowledge and the Knowledge Economy: Knowledge and Place 10 January 2005 National Academies, Washington, DC

Maryann P.Feldman: Importance of Proximity and Location2 Theoretical Motivation Knowledge has incomplete property rights Knowledge has incomplete property rights once created it is often difficult to contain and to prevent others from benefiting or appropriating its potential value. once created it is often difficult to contain and to prevent others from benefiting or appropriating its potential value. Once created knowledge may spill over to benefit others able to monitor, observe and recognize its potential. Once created knowledge may spill over to benefit others able to monitor, observe and recognize its potential. Alfred Marshall (1890) The tendency of firms that use similar knowledge to co-locate Alfred Marshall (1890) The tendency of firms that use similar knowledge to co-locate Many technology and knowledge intensive industries are geographically clustered even though their product markets are not local and even though specialized inputs, such as skilled employees, are not tied to particular locations. Many technology and knowledge intensive industries are geographically clustered even though their product markets are not local and even though specialized inputs, such as skilled employees, are not tied to particular locations. Indeed, why are we here today? Indeed, why are we here today?

Maryann P.Feldman: Importance of Proximity and Location3 New Economic Geography Geographic concentrations of innovation generate knowledge spillovers Geographic concentrations of innovation generate knowledge spillovers Mechanism for enhancing performance & growth of firms Mechanism for enhancing performance & growth of firms opportunities for planned and serendipitous interactions. opportunities for planned and serendipitous interactions. Knowledge acquired through spillovers may be less costly than knowledge produced internally, or sourced externally from greater distance or through contractual agreements. Knowledge acquired through spillovers may be less costly than knowledge produced internally, or sourced externally from greater distance or through contractual agreements. Geographic proximity creates opportunities for trust building necessary to the effective exchange of ideas. Geographic proximity creates opportunities for trust building necessary to the effective exchange of ideas. promotes networking of firms engaged in related research. promotes networking of firms engaged in related research. importance of novelty in innovation leads to localized interaction to diverse sources of scientific knowledge importance of novelty in innovation leads to localized interaction to diverse sources of scientific knowledge

Maryann P.Feldman: Importance of Proximity and Location4 Firm’s Strategic Decision Firms that depend on rapid innovation for their success and survival consider Firms that depend on rapid innovation for their success and survival consider the potential for knowledge spillovers to generate competitive advantage by enhancing access to new knowledge, thereby lowering R&D costs, and boosting innovative output. the potential for knowledge spillovers to generate competitive advantage by enhancing access to new knowledge, thereby lowering R&D costs, and boosting innovative output. Face decisions about Face decisions about the organization of their own R&D activities the organization of their own R&D activities but also how their location relative to other firms affects their productivity, and but also how their location relative to other firms affects their productivity, and potential loss due to appropriability of their ideas potential loss due to appropriability of their ideas

Maryann P.Feldman: Importance of Proximity and Location5 Unique Data on Biotech Firms Individual Firm Observations for Canadian Biotech Firms, 1991 – 2000 Individual Firm Observations for Canadian Biotech Firms, 1991 – 2000 Ensures that observed clustering benefits are not spuriously capturing uncontrolled firm’s characteristics Ensures that observed clustering benefits are not spuriously capturing uncontrolled firm’s characteristics Enables the modeling the influence of a broad range of cluster characteristics on innovative output Enables the modeling the influence of a broad range of cluster characteristics on innovative output Specifies firms’ technological specialization in a more fine grain way Specifies firms’ technological specialization in a more fine grain way Provides an opportunity to examine clustering effect over compact geographic areas Provides an opportunity to examine clustering effect over compact geographic areas

Maryann P.Feldman: Importance of Proximity and Location6 The Returns to Inventive Activity Location Matters Location Matters Firms’ innovate eight times more when they are located within clusters Firms’ innovate eight times more when they are located within clusters Technological Specialization Matters Technological Specialization Matters Firms benefit more when they are located in clusters with strong representation in their specific technological specialization Firms benefit more when they are located in clusters with strong representation in their specific technological specialization Double the patent rate Double the patent rate Proximity Matters: Proximity Matters: Firms more centrally located within the cluster are more innovative Firms more centrally located within the cluster are more innovative Distance penalty of 12.7%/10Km Distance penalty of 12.7%/10Km

Maryann P.Feldman: Importance of Proximity and Location7 Firm Strategic Considerations Even after controlling for the number of alliances, location matters Suggests alliances are complementary strategic decisions for firms Suggests alliances are complementary strategic decisions for firms Moreover, if other firms in your cluster form strategic alliances Moreover, if other firms in your cluster form strategic alliances Your firm patenting benefits Your firm patenting benefits Why? Increased stock of knowledge available Why? Increased stock of knowledge available

Maryann P.Feldman: Importance of Proximity and Location8 Entrepreneurial Decisions If location matters it matters most at the margin – resource constrained small firms If location matters it matters most at the margin – resource constrained small firms Spillover-seeking entrants will locate near incumbents that represent greater potential sources of new, high quality knowledge Spillover-seeking entrants will locate near incumbents that represent greater potential sources of new, high quality knowledge Expropriation-avoiding entrants will locate far from technologically similar incumbents with greater capacity to recognize and absorb their knowledge Expropriation-avoiding entrants will locate far from technologically similar incumbents with greater capacity to recognize and absorb their knowledge

Maryann P.Feldman: Importance of Proximity and Location9 Socially Constructed Balance of spillover seeking and expropriation avoidance depends on cluster dynamics Balance of spillover seeking and expropriation avoidance depends on cluster dynamics Social cohesion among young firms fosters co- location with incumbents with more R&D employees, spending and alliances Social cohesion among young firms fosters co- location with incumbents with more R&D employees, spending and alliances And among small firms fosters co-location with incumbents with more R&D alliances and patent applications And among small firms fosters co-location with incumbents with more R&D alliances and patent applications Absent of increasing returns or social cohesion entrants tend to avoid incumbents whose R&D investments and capabilities make them capable of expropriating the entrant’s R&D Absent of increasing returns or social cohesion entrants tend to avoid incumbents whose R&D investments and capabilities make them capable of expropriating the entrant’s R&D

Maryann P.Feldman: Importance of Proximity and Location10 So what? Entrants choose locations within clusters by attending to factors influencing the balance of potential knowledge spillovers and expropriation Entrants choose locations within clusters by attending to factors influencing the balance of potential knowledge spillovers and expropriation Self-reinforcing virtuous cycles fostering dense clustering appear to be created by the interaction of technological concentration and social cohesion Self-reinforcing virtuous cycles fostering dense clustering appear to be created by the interaction of technological concentration and social cohesion “Growing clusters” is challenging “Growing clusters” is challenging Technological concentration is necessary, but not sufficient; its attractive force depends on incumbents’ R&D investment and innovative capabilities Technological concentration is necessary, but not sufficient; its attractive force depends on incumbents’ R&D investment and innovative capabilities The attractive force of social cohesion is limited without investments to create a pool of knowledge The attractive force of social cohesion is limited without investments to create a pool of knowledge Concentrated regions of innovative activity with social cohesion attract greater entry Concentrated regions of innovative activity with social cohesion attract greater entry