Innovation: Location Matters

  • Michael E. Porter and Scott Stern
  • July 15, 2001

The defining challenge for competitiveness has shifted, especially in advanced nations and regions. The challenges of a decade ago were to restructure, lower cost and raise quality. Today, continued operational improvement is a given, and many companies are able to acquire and deploy the best current technology. In advanced nations, producing standard products using standard methods will not sustain competitive advantage. Companies must be able to innovate at the global frontier. They must create and commercialize a stream of new products and processes that shift the technology frontier, progressing as fast as their rivals catch up.

What are the drivers of innovation? Traditional thinking about the management of innovation focuses almost exclusively on internal factors — the capabilities and processes within companies for creating and commercializing technology. Although the importance of these factors is undeniable, the external environment for innovation is at least as important. For example, the striking innovative output of Israeli firms is due not simply to more effective technology management, but also to Israel’s favorable environment for innovation, including strong university-industry linkages and a large pool of highly trained scientists and engineers. The most fertile location for innovation also varies markedly across fields. The United States has been an especially attractive environment for innovation in pharmaceuticals in the 1990s, while Sweden and Finland have seen extraordinary rates of innovation in wireless technology.

Our research has documented the patterns of innovation across the Organization for Economic Cooperation and Development (OECD) as well as in emerging nations over the past quarter century in order to understand how national circumstances explain differences in innovative output. We find that a relatively small number of characteristics of a nation’s business environment explains a striking proportion of the large differences in innovative output across countries. Our findings reveal the striking degree to which the local environment matters for success in innovative activity and show the sharp differences in the relative progress of OECD and emerging countries in innovative vitality.

Location matters for innovation, and companies must broaden their approaches to the management of innovation accordingly: by developing and commercializing innovation in the most attractive location, taking active steps to access locational strengths, and proactively enhancing the environment for innovation and commercialization in locations where they operate.

The Role of National Innovative Capacity

The vitality of innovation in a location is shaped by national innovative capacity.