Which policies are best at boosting innovation?

Policymakers have used a variety of measures to promote the innovation ability of regional economies in recent years. Some of the most prominent policies include:

Firstly, investments in improving R&D, education levels and other aspects of the regional innovation infrastructure, which are important, for instance, in the Europe 2020 agenda; and
Secondly, cluster and network policies, which seek to encourage innovation through promoting collaboration and knowledge sharing among actors within and beyond the region.

However, the impact of these factors on firm innovation still merits further research attention, in particular in terms of the interaction between firm collaboration activities and the regional context in which this takes place.

Drivers of innovation

Cooperation between firms and external agents is considered by many to be one of the most important drivers of innovation (e.g. Porter 1998, Chesbrough 2003, Nooteboom 2004, Tapscott and Williams 2006). The ability of draw on knowledge and new ideas both from outside and inside the firm increases the firm’s potential for developing new products and production processes. While this general idea is widely accepted, there has been some debate in recent years over the relative importance of local collaboration versus collaboration at a distance. The conventional view in economic geography is that local interactions benefit from more frequent face-to-face contact and trust-based relationships that facilitate the transmission of tacit knowledge (e.g. Saxenian 1996, Storper and Venables 2004, Sonn and Storper 2008, de Jong and Freel 2010). However, other authors highlight the need for reaching out to partners outside the local environment to avoid lock-in and myopic knowledge sourcing (Amin and Cohendet 1999, Bathelt et al. 2004, Moodysson 2008, Fitjar and Rodríguez-Pose 2011).

Another branch of the literature on regional development emphasises the impact of the environment in which the firm is located on the innovation ability of the firm (e.g. Storper 1997, Cooke and Morgan 1998). Different regional environments provide essential resources such as labour, specialised suppliers, and research institutions on which a firm’s innovation potential may depend. These common resources result from spatially bounded externalities of the activities of other actors. For instance, R&D externalities have been shown to have limited geographical reach (Audretsch and Feldman 1996, Anselin et al. 1997, Moreno et al. 2005, Rodríguez-Pose and Crescenzi 2008). The literature on creative cities has recently argued that skilled workers represent a similarly spatially bounded resource which draws firms to certain regions (Landry 2000, Florida 2002).

Our knowledge of how firm-level collaboration combined with the regional environment in which a firm operates affects innovation remains, however, limited. It is often assumed that firm-level interaction will have a stronger effect if there are more knowledge resources available in the context in which it operates, and conversely, R&D externalities may more easily be tapped into by firms with multiple formal and informal connections to other actors. These perspectives have mainly been developed in the literature on regional innovation systems, learning regions, and triple-helix networks (Cooke et al. 1997, Asheim and Isaksen 1997, Morgan 1997, Etzkowitz and Leydesdorff 2000, Leydesdorff 2000). However, this literature predominantly examines the relationship between the regional environment and local interaction, and has much less to say about whether the regional environment can also affect the ability of firms to link up successfully to partners in remote locations. A few studies consider the notion of a regional or cluster-level absorptive capacity (Giuliani 2005, Azagra-Caro et al. 2006), which may affect the capacity of all firms in the region to benefit from the development of global pipelines.

New evidence of the effect of collaboration on innovation

In our recent paper (Fitjar and Rodriguez-Pose 2015), we analyse the combined effect on innovation of collaboration with local and distant partners, and location in regional environments with different levels of R&D investments and education levels. The study is based on survey data of 1600 firms located in the five largest Norwegian city-regions, combined with statistical data on R&D investments and education levels in these regions. R&D investments in per capita terms vary considerably across regions in Norway. They are five times higher in the most R&D intensive region (Trondheim) compared to the least R&D intensive (Kristiansand). Similarly, the share of adults with tertiary education ranges from 25% in Kristiansand to 32% in Oslo. We study the effects of regional R&D investments and education levels, as well as of having extensive collaboration linkages at the regional, national and international level, on the likelihood of introducing new-to-firm and new-to-market product and process innovation. In addition, we assess the interaction between regional R&D and education and collaboration with partners at different geographical scales.

While there seems to be no influence of neither R&D expenditure nor education and regional cooperation on firm-level innovation when considered individually, the introduction of interaction terms in the analysis reveals that

• Regional R&D investments and education levels strongly shape the returns to collaboration at the regional, but also at the national and international scale.

Specifically, regional collaboration only contributes to radical product innovation in regions with high levels of internal R&D, while it is ineffective in regions with medium or low levels of R&D, as shown in Figure 1.

• Conversely, international collaboration does not interact significantly with regional R&D, but its effect on innovation is enhanced in those regions with a good endowment of human capital.

The effects of international collaboration on product innovation tend to be stronger in regions with an educated workforce, whereas regions with lower levels of education derive fewer benefits from global pipelines, due to the lower levels of absorptive capacity, as shown in Figure 2. In contrast, education has a negative interaction with regional and national collaboration, which are more likely to lead to innovation in regions with a less educated workforce. The local socioeconomic environment in Norway thus operates as a filter which either favours or limits the innovative capacity of firms, depending on their level of interaction both with neighbouring and distant economic actors.

Figure 1. Probability of introducing radical product innovation through cooperation with regional partners in regions with a high and low endowment of R&D.

Figure 2. Probability of introducing product innovation through cooperation with international partners in regions with a high and low endowment of human capital.

The transformation of connections and networks into innovation thus varies depending on the characteristics of the region in which a firm is located. Specifically, regional R&D investments are associated with stronger returns of regional and national collaboration in terms of its impact on radical product innovation. Conversely, regional education levels tend to be connected with lower effects of regional and national collaboration on product innovation, but with higher returns of international collaboration.

Concluding remarks

This suggests that policymakers need to consider regional context as a fundamental factor in shaping the innovative performance of firms. As the results of the analysis suggest, firms are embedded in geography and a thorough understanding of the context in which firms operate is needed in order to grasp firm trajectories. While firm conditions and firm networking remain crucial for firm innovation, operating in contexts where the R&D effort and the educational attainment of the population vary is also significantly associated with the returns to specific forms of networking. In this respect, context and geography generate the conditions, networks, and policy opportunities which influence a firm’s capacity to innovate. This means that the role of context has to be brought to the fore in the analysis of firm behaviour.

References

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Asheim, B, and A Isaksen (1997), “Location, agglomeration and innovation: Towards regional innovation systems in Norway”, European Planning Studies 5, 299-330.

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Azagra-Caro, J M, F Archontakis, A Gutiérrez-Gracia, and I Fernández-de-Lucio, (2006), “Faculty support for the objectives of university-industry relations versus degree of R&D cooperation: The importance of regional absorptive capacity”, Research Policy 35, 37-55.

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Fitjar R D and A Rodríguez-Pose (2015), “Networking, context, and firm-level innovation: Cooperation through the regional filter in Norway”, CEPR Discussion Paper 10624.

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This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Rune Dahl Fitjar is a Professor of Innovation Studies at the UiS Business School, University of Stavanger. Andrés Rodríguez-Pose is a Professor of Economic Geography, London School of Economics; Research Fellow, CEPR.

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