John Van Reenen and colleagues assess the impact on growth of 'knowledge spillovers' between corporate research labs located close to each other

John Van Reenen

English

Research Papers in Economics

President Obama recently proposed increasing the
generosity of the US tax credit system for corporate
spending on research and development (R&D) and
making it a permanent feature of the US tax code. 
This was justified by the idea that more R&D would lead
to growth, not just worldwide but particularly in the
United States.
But such a bold claim raises some fundamental questions:
does the location of R&D matter? Will a firm be more
productive if it locates in one region rather than another?
And do R&D ‘spillovers’ – the benefits to firms other than
the company spending its money on R&D – decline with
distance and, if so, how quickly?
The answers are important for several reasons, most
notably for understanding regional growth. If
geographical spillovers are confined to narrow
geographical markets, growth rates will diverge, poor
regions will get poorer and rich ones will get richer.
Few doubt that, in the long run, new and better products
and processes are stronger determinants of firm growth
than growth in demand for existing products. Given the
importance of this issue, it is not surprising that
economists have studied the link between a firm's R&D
and its productivity.
Equally if not more important is the fact that not only
does a firm's research affect its own productivity, but
there are also significant spillovers from the R&D efforts
of other firms. This idea, which is at the heart of modern
growth theory, dates back to the 1960s and attempts
were first made to quantify the impact in the 1970s. Our
research puts a new twist on the hunt for R&D spillovers,
focusing on geography.
In the analytical framework we use, a firm’s productivity is
a function of its own knowledge and the ‘spillover pool’, a
weighted average of other firms' knowledge. To work out
which firms benefit from R&D spillovers, we have to figure
out which ones are close ‘neighbours’. This boils down to
working out some distance ‘weights’ – the bigger the
weight, the closer you are, and thus the more likely you
are to benefit from a neighbouring firm’s research. So for
firms in California, it matters whether you are located in
Silicon Valley or near Yosemite National Park! 
These weights thus play two roles: they determine both
the set of firms that contribute to the spillover pool and
the relative importance of the firms within that set. For
CentrePiece Winter 2010/11
Location, location, location:
why geography matters for R&D
A key insight of economic geography is that proximity is good for
productivity. Research by John Van Reenen and colleagues explores this
relationship in the context of corporate research labs, revealing a strong
link between R&D and growth driven by ‘knowledge spillovers’ between
firms located close to each other.
in brief...
14
A firm whose inventors
are close to other firms’
R&D will benefit a lot
more from new ideasexample, in the geographical context of the United
States, we might limit attention to firms that are in the
same state and weight those firms by their geographical
distance from the firm doing the R&D. 
But there are channels other than geography that affect
R&D spillovers. For example, firms that perform R&D in
similar technology classes might benefit from each 
other’s efforts (‘technological spillovers’). On the other
hand, firms that produce similar products might actually
be hurt by the R&D efforts of product market rivals as
these competitors will steal business from them if they
innovate successfully. 
Moreover, these spillover links are not independent. For
example, firms in the same geographical region might
perform R&D in similar technology classes, as in Silicon
Valley. Our research assesses all three channels
simultaneously. Although we focus on geographical
spillovers, we control for technological spillovers and
business-stealing effects. 
We postulate that inventors are more likely to 
be sources of spillovers than top management. Although
for many small firms the locations of corporate
headquarters and research labs are highly correlated,
many large firms have several labs in different locations
so taking account only of headquarters could severely
underestimate the importance of inventors learning from
neighbouring inventors.
Our research indicates that the locations of researchers
are indeed more important than the locations of
headquarters, but both have explanatory power.
Furthermore, the effects of R&D fall with distance, and
geographical R&D markets are very local. 
We conclude that location does matter. There is a strong
link between R&D and growth through knowledge
‘spilling over’ between firms. Among other things, this
means that research will generally be under-provided by
the market. 
But the process of R&D spillovers driving growth has an
important geographical element: having your inventors
close to where the R&D is occurring means that you
benefit a lot more from new ideas. This is why local
policy-makers like to attract R&D facilities into their areas,
but it is also why regional economic convergence, if it
occurs, is often so slow.
Our findings are complementary to those of Michael
Greenstone and colleagues (2010), who find that locating
a large new plant in a region increases the productivity of
other plants in that region. Moreover, our research
provides an explanation for the findings of Daniel Wilson
(2008), who documents that local policy-makers invest
substantial sums in the form of tax incentives to attract
R&D labs to their regions.
CentrePiece Winter 2010/11
This article summarises ‘Spillovers in Space: Does Geography
Matter?’; by Sergey Lychagin, Joris Pinkse, Margaret Slade 
and John Van Reenen, CEP Discussion Paper No. 991
(http://cep.lse.ac.uk/pubs/download/dp0991.pdf).
Sergey Lychagin and Joris Pinkse are at Pennsylvania State
University. Margaret Slade is at the University of British
Columbia. John Van Reenen is director of CEP .
Further reading
Michael Greenstone, Richard Hornbeck and Enrico Moretti
(2010) ‘Identifying Agglomeration Spillovers: Evidence from
Winners and Losers of Large Plant Openings’, Journal of
Political Economy 118(3): 536-98
Daniel Wilson (2009) ‘Beggar thy Neighbor? The In-state, Out-
of-state and Aggregate Effects of R&D Tax Credits’, Review of
Economics and Statistics 91(2): 431-6
15
Geographical growth
spillovers explain why
local policy-makers
compete to attract
corporate R&D labs to
their regions

In brief: Location, location, location: why geography matters for R&D

http://cep.lse.ac.uk/pubs/download/cp332.pdf

In brief: Location, location, location: why geography matters for R&D

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