On the Marshall--Jacobs controversy: it takes two to tango

The literature is inconclusive as to whether Marshallian specialization or Jacobian diversification externalities favor regional innovativeness. The specialization argument poses that regional specialization towards a particular industry improves innovativeness in that industry. Regional specialization allows for knowledge to spill over among similar firms. By contrast, the diversification thesis asserts that knowledge spills over between firms in different industries, causing diversified production structures to be more innovative. Building on an original database, we address this controversy for the Netherlands. We thereby advance on the literature by providing a two-level approach, at the region level and the firm level. At the regional level, we compare specialized with diversified regions on numbers of accommodated innovators. At the firm level, we establish causalities between externalities and degree of innovativeness. The results suggest Marshallian externalities: specialized regions accommodate increased numbers of innovating firms and, consistently, incumbent firms' innovativeness increases with regional specialization. Once the product has been launched, innovators in diversified Jacobian regions prove more successful in commercial terms than innovators in specialized Marshallian regions. Copyright 2006, Oxford University Press.