Why are Some Regions More Innovative than Others? The Role of Firm Size Diversity

Ajay K. Agrawal, Iain M. Cockburn, Alberto Galasso, Alexander Oettl

NBER Working Paper No. 17793
Issued in January 2012
NBER Program(s):Productivity, Innovation, and Entrepreneurship

Large labs may spawn spin-outs caused by innovations deemed unrelated to the firm's overall business. Small labs generate demand for specialized services that lower entry costs for others. We develop a theoretical framework to study the interplay of these two localized externalities and their impact on regional innovation. We examine MSA-level patent data during the period 1975-2000 and find that innovation output is higher where large and small labs coexist. The finding is robust to across-region as well as within-region analysis, IV analysis, and the effect is stronger in certain subsamples consistent with our explanation but not the plausible alternatives.

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Document Object Identifier (DOI): 10.3386/w17793

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