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POSITION STATEMENT
An important contribution of the New Economic Growth theory has been to identify that knowledge does not solely descend like "manna from heaven", but spills over across geographic space creating endogenous growth through increasing returns. However, while the New Economic Growth theory has identified the important role that knowledge externalities play in generating endogenous growth, the actual mechanisms by which knowledge spills over to generate growth remain virtually unknown.
The starting point for most theories of innovation is the firm. In such theories the firms are exogenous and their performance in generating technological change is endogenous. For example, in the most prevalent model found in the literature of technological change, the model of the knowledge production function, firms exist exogenously and then engage in the pursuit of new economic knowledge as an input into the process of generating innovative activity. The most decisive input in the knowledge production function is new economic knowledge. Knowledge as an input in a production function is inherently different than the more traditional inputs of labor, capital and land. While the economic value of the traditional inputs is relatively certain, knowledge is intrinsically uncertain and its potential value is asymmetric across economic agents. The most important, although not the only source of new knowledge is considered to be research and development (R&D). Other key factors generating new economic knowledge include a high degree of human capital, a skilled labor force, and a high presence of scientists and engineers.
There is considerable empirical evidence supporting the model of the knowledge production function. For example, at the unit of observation of countries, the relationship between R&D and patents is very strong. Similarly, the link between R&D and innovative output, measured in terms of either patents or new product innovations is also very strong when the unit of observation is the industry. However, when the knowledge production function is tested for the unit of observation of the firm, the link between knowledge inputs and innovative output becomes either tenuous and weakly positive in some studies and even non-existent or negative in others. The model of the knowledge production function becomes particularly weak when small firms are included in the sample. This is not surprising, since formal R&D is concentrated among the largest corporations, but a series of studies has clearly documented that small firms account for a disproportional share of new product innovations given their low R&D expenditures.
The breakdown of the knowledge production function at the level of the firm raises the question, Where do innovative firms with little or no R&D get the knowledge inputs? This question becomes particularly relevant for small and new firms that undertake little R&D themselves, yet contribute considerable innovative activity in newly emerging industries such as biotechnology and computer software. One answer that has recently emerged in the economics literature is from other, third-party firms or research institutions, such as universities. Economic knowledge may spill over from the firm conducting the R&D or the research laboratory of a university.
Why should knowledge spill over from the source of origin? At least two major channels or mechanisms for knowledge spillovers have been identified in the literature. Both of these spillover mechanisms revolve around the issue of appropriability of new knowledge. Firms may develop the capacity to adapt new technology and ideas developed in other firms and are therefore able to appropriate some of the returns accruing to investments in new knowledge made externally.
By contrast, there may be new insights gained from shifting the unit of observation away from exogenously assumed firms to individuals, such as scientists, engineers or other knowledge workers - agents with endowments of new economic knowledge. When the lens is shifted away from the firm to the individual as the relevant unit of observation, the appropriability issue remains, but the question becomes, How can economic agents with a given endowment of new knowledge best appropriate the returns from that knowledge? If the scientist or engineer can pursue the new idea within the organizational structure of the firm developing the knowledge and appropriate roughly the expected value of that knowledge, he has no reason to leave the firm. On the other hand, if he places a greater value on his ideas than do the decision-making bureaucracy of the incumbent firm, he may choose to start a new firm to appropriate the value of his knowledge. In the metaphor provided by Albert O. Hirschman, if voice proves to be ineffective within incumbent organizations, and loyalty is sufficiently weak, a knowledge worker may resort to exit the firm or university where the knowledge was created in order to form a new company. In this spillover channel the knowledge production function is actually reversed. The knowledge is exogenous and embodied in a worker. The firm is created endogenously in the worker's effort to appropriate the value of his knowledge through innovative activity.
Research on the geography of innovative activity essentially shifts the model of the knowledge production function from the unit of observation of a firm to that of a geographic unit. The consistent empirical evidence supports the notion knowledge spills over for third-party use from university research laboratories as well as industry R&D laboratories. This empirical evidence suggests that location and proximity clearly matter in exploiting knowledge spillovers.
While a new literature has emerged identifying the important that knowledge spillovers within a given geographic location play in stimulating innovative activity, there is little consensus as to how and why this occurs. The contribution of the new wave of studies described in the previous section was simply to shift the unit of observation away from firms to a geographic region. But does it make a difference how economic activity spills over within the black box of geographic space?
Penetrating the black box, not of the firm, but of the knowledge spillover process would provide a strong analytical and empirical basis for the microfoundations of economic growth. Recent work has identified a number of key processes serving as the foundations for the microeconomics of growth. Innovative activity, one of the central manifestations of change, is at the heart of much of this work. Entry, growth, survival, and the way firms and entire industries change over time are linked to innovation. The dynamic performance of regions and even entire economies is linked to how well the potential from innovation is tapped. While a rich literature has emerged in recent years identifying the links between innovation, entry, growth, survival and industry evolution, the geographic component is generally lacking.
Very little has been done to measure and track knowledge externalities. Paul Krugman has argued that knowledge spillovers are impossible to measure because "knowledge flows are invisible, they leave no paper trail by which they may be measured and tracked." However, there may be an opportunity for the CSISS to be a leader in measuring the spatial dimension of knowledge externalities. Part of this challenge involves the measurement and the geographic linkages of various types of knowledge, such as R&D, patents, new innovations introduced into the market, publications, and citations. A different aspect involves identifying the geographic linkages between the various measures of knowledge and the geographic locus of their commercialization, which can involve the startup of new firms, growth of existing enterprises, and the survival and growth of all firms. Other types of measures focus on the interactioins and mobility of scientists, engineers and knowledge workers, in order to identify where and under what conditions is new knowledge produced, and where does it become commercialized and impact economic performance measures, such as growth.
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