HBS Working Knowledge has an interesting new working paper by Gerald Carlino and William R. Kerr, "Agglomeration and Innovation". The paper discusses the academic literature and the authors' views on the factors that explain the geographic concentration of innovation. Not surprisingly, innovation concentrates in metropolitan areas. Innovation is defined in a classic way as "invention that is commercialized", which in the vernacular would be described as entrepreneurship. Other findings from the article are quoted below:
- The benefits from local public subsidies for basic research may not stimulate growth in targeted communities, except for creating a few jobs for scientists and engineers.
- They relate co-agglomeration levels [of innovation] to the extent to which industry pairs share goods, workers, and knowledge. They find evidence for all three mechanisms, with knowledge spillovers again the most localized.
- For all industries, the localization effects of being near similar businesses decay rapidly with distance within cities—the positive localization effect from being within one mile of another company in one’s own industry is at least ten times greater than the positive effect realized when locating two to five miles away from said company.
- While most thoughts of innovation clusters today naturally begin with Silicon Valley, it is important to recall that innovation clusters do move over time.
- On the relationship between agglomeration and innovation… What is better established is the development and sharing of specialized business services. This has been especially true with the case of entrepreneurial finance (e.g., angels, VC). Traditional sources of financing, such as bank loans, may be unavailable to innovative start-ups due to their high risk, large financing requirements, and asymmetric information, especially in high-tech industries (Gompers and Lerner, 2001).
- The strong concentration of the commercialization of innovation... to the need for specialized business services (e.g., firms specializing in market research and product testing, specialized patent lawyers, and the availability of financing) and similar infrastructure.
- Knowledge spillovers are geographically concentrated
- There is general empirical evidence that R&D at local universities is important for firms’ innovative activity. Audretsch and Feldman (1996) and Anselin et al. (1997) find localized knowledge spillovers from university R&D to commercial innovation by private firms
Setting aside the academic speak, innovation and entrepreneurship benefit from:
- Like minded people very nearby
- Support by research universities, and
- Support services nearby, most notably capital.
The article should be required reading for politicians. Most government support for entrepreneurship appears to be mis-directed or wasted.
Note: While Miami has made progress in developing the entrepreneurial community, certain theoretical requirements still need to be further addressed.