How Location Clusters Affect Innovation

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Innovation is thought to come easily for companies in a high-tech cluster such as Silicon Valley, where firms in related businesses colocate. In a cluster, reasoned economist Alfred Marshall some 80 years ago, “the mysteries of the trade become no mysteries; but are, as it were, in the air, and children learn many of them unconsciously.” So, as theorists who continue Marshall's line of inquiry like to propound, technology is so pervasive in a cluster that surely clustered companies must have an easier time innovating than their competitors in the hinterlands, right?

Maybe not, say the authors of a February 2002 working paper, who measured the relationship between clustering and innovation on U.S. software firms and found unexpected results. “I thought that firms would try to free-ride,” says co-author Brent Beal, assistant professor at Louisiana State University's E.J. Ourso College of Business Administration. It's thought that within clusters, there is a collective pool of knowledge that companies can tap by hiring from local firms or simply socializing with their brethren's employees. So Beal and his co-author Javier Gimeno, associate professor at INSEAD, expected clustered firms to spend less per employee on R&D, because they would garner some tacit knowledge simply by breathing the air. The clustered firm's employees and suppliers would bring knowledge to the table that nonclus-tered firms would need R&D investment to realize.

That pattern of R&D expenditure did-n't exist. Instead, the authors found that clustered firms launched fewer products for their R&D bucks. “[Clustering] didn't have much effect on the amount spent on R&D, but there is a negative impact on innovative output, which is counterintuitive,” says Beal.

Beal and Gimeno's research tracked 56 firms that primarily sold prepackaged software from 1982 to 1998 and determined the degree to which they were “agglomerated” (as the authors called clustering), by counting software firms at the county level. Beal and Gimeno are revising the paper, “Geographic Agglomeration, Knowledge Spillovers and Competitive Evolution,” which emerged from Beal's Ph.D. dissertation at Texas A&M University, for submission to the Academy of Management Journal after having presented it at the Academy of Management's 2001 annual conference.

There is another surprise in the data. Although the study finds that innovative output declined for clustered firms, revenue per employee was higher. That is, the few products that clustered firms introduced did better in the marketplace.

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