Knowledge Complementarity and Innovation

Examines the degree to which small firm innovation is dependent upon the external resources of location. Four classes of resource-yielding institutions are identified: university R&D, industrial R&D, agglomerations and clusters of firms in related industries, and networks of business service firms. Together, these form a network that provides input to the innovation process -- thus lowering innovation risk so that location becomes particularly relevant to a small firm with limited resources. After reviewing the literature on location, innovation is analyzed in a modified production function approach following Griliches (1979), in which innovative output depends upon inputs. U.S. Small Business Administration (SBA) data from 1982 is used, consisting of innovation citations containing information on 4,200 product innovations. Small firms (those with fewer than 500 employees) were found to make better use of university research, despite fewer formal relationships, though this may be due to less developed internal R&D departments. Conclusions show that while large firms benefit most from external knowledge resources, small firms benefit from the technological infrastructure of location. (CJC)