The Impact of Clustering on Firm Innovation

Are firms in clusters more innovative and productive than firms operating in more isolated areas? This article combines two rich firm-level data sets to analyze the effect of a dense geographical concentration of industries on the innovativeness and productivity of firms. The results show that increased concentration of employment in the same industry (localization) is associated with higher innovation output and higher productivity. At the same time, however, a higher number of firms in the same industry are associated with lower innovation output and lower productivity. These two findings are visible within a distance of 500 m away from the respective firms, but then vanish for longer distances. Furthermore, the article finds no evidence that increased concentration of employment in other industries (urbanization) is positively related to higher innovation output. In contrast, increased concentration of employment in other industries is strongly related to higher productivity, whereby this effect extends to large distances of up to 10 km. The results of the article thus suggest that those agglomeration externalities operating over longer distances, such as labor market pooling, work mostly across industries, while the comparatively more local knowledge spillovers tend to work mostly within industries.