Knowledge spillovers and the new economy of cities

Despite much theorizing about the role of geographic concentration of employment in knowledge spillovers, local densities' role in promoting innovations has largely been unexamined. More often, studies have considered the effects of city size variables on innovative activity, although the role of scale was not the main focus of these studies. This paper considers the role of knowledge spillovers on innovations at the MSA level. The authors use patents per capita in an MSA as our measure of innovations in that MSA. They find that the rate of patenting is positively related to the employment density of the highly urbanized portion of an MSA (its urbanized area). Specifically, the authors find, on average, that rate of patenting is 20 percent to 30 percent greater in an MSA with a local economy that is twice as dense as the local economy of another MSA. Since local employment density doubles more than four times in the sample, the implied gains in patents per capita due to urban density are substantial. Thus, these findings confirm the widely held view that the nation’s densest locations play an important role in creating the flow of ideas that generates innovation and growth.