What Makes Knowledge Tacit? - on the Evolution of Knowledge-Based Industrial Clusters

Geographical clusters of innovative activity are mediums for the efficient transfer of tacit knowledge and its effective translation into innovation. Their force of attraction stems from their ability to lower variable costs in innovative processes. Lower variable costs are the result of extensive investments in a common fixed asset: the economic and social structure of a cluster. The evolution of innovative industrial clusters is studied with an analytical framework, established on thermodynamic theory, that models the tradeoff between fixed costs and variable costs. We identify tacit knowledge as noise sensitive "high-fixed-cost knowledge" and demonstrate with the help of the analytical framework that it is more efficiently transmitted locally. Through the existence of a common context, geographic clusters reduce the effect of noise and make the transmission and application of tacit knowledge more efficient. Many properties of innovative clusters emerge as natural consequences of economic evolution, which inherently is a thermodynamic process. Our model has implications on the formulation of innovation policies and strategic industrial policies in general