DP9766 Why are some regions more innovative than others? The role of firm size diversity

Author(s): Ajay Agrawal, Iain M Cockburn, Alberto Galasso, Alexander Oettl
Publication Date: December 2013
Keyword(s): cities, externalities, firm size diversity, innovation, patents, spin-outs
JEL(s): L16, O18, O47
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: http://www.cepr.org/pubs/dps/DP9766

Large firms spawn spin-outs caused by innovations deemed unrelated to the firm's overall business. Small firms generate demand for specialized services that lower entry costs for others. We study the interplay of these two localized externalities and their impact on regional innovation. We examine MSA-level patent data during the period 1975-2000 and find that innovation output is higher in regions where large and small firms coexist. The finding is robust to across-region as well as within-region analysis and the effect is stronger in certain subsamples in a manner that is consistent with our explanation.