The Geography of Innovative Firms

Résumé

Firms that spread innovation activities across multiple local markets account for most U.S. innovation output. How does this geographical structure influence aggregate innovation and growth? Should governments encourage innovative firms to expand their geographical reach to more local markets? To answer these questions, we develop an endogenous growth model that incorporates multi-market innovative firms and local knowledge spillovers across innovative plants. We show that firms may be either overly concentrated or excessively dispersed across locations, depending on the elasticity of innovation to R&D inputs and the sensitivity of knowledge diffusion to a firm’s local presence. Estimating the model using data on firm R&D locations, patents, and citation networks, we find that innovative U.S. firms are excessively geographically concentrated. Our quantitative analysis suggests that financial incentives for broader geographical expansion could be more effective than a standard R&D subsidy in promoting growth. Moreover, in contrast to the regressive nature of a standard R&D subsidy, such incentives may help reduce regional disparities. (joint work with Craig A. Chikis and Benny Kleinman.)