25 Aug 2014Working Paper Summaries

Agglomeration and Innovation

by Gerald A. Carlino and William R. Kerr

It is well known that population and economic activity are spatially concentrated or clustered. But why does innovative activity tend to occur in clusters? What is the best way to measure this concentration? And what is the economic impact of this concentration? The authors take up these and related questions in this paper, a chapter of the forthcoming Handbook of Regional and Urban Economics. They summarize recent literature on agglomeration and innovation and explore how it relates to economic performance and growth. They also discuss the difference between invention vs. innovation and how these forces are measured; review patterns of innovation and agglomeration; and describe formal theories linking agglomeration and innovation. The authors also discuss research on other factors that work to sustain agglomeration clusters, link global clusters together, promote large vs. small company innovation, and similar phenomena. Throughout, they highlight important areas for future research. Key concepts include:

Empirical measurement in urban economic studies has made substantial strides forward in the last two decades, but much remains to be learned.
We need better insight into the long-term lifecycles of innovative places. This is true within countries-innovation cores have shifted between Detroit, Boston, Silicon Valley, etc. and will continue to do so-but also true across countries.
Many policymakers want to foster "the next Silicon Valley" type initiatives but they need better guidance. This is so in advanced economies, in nations currently looking to transition from resource dependence to a knowledge-based economy, in developing countries looking to leapfrog growth stages, and everywhere in between.
Innovation comes in many shapes and sizes-except in economic studies. Ideally, future research will develop a richer accounting of the variations of innovation and how they related to the traits of clusters.

Author Abstract

This chapter reviews academic research on the connections between agglomeration and innovation. We first describe the conceptual distinctions between invention and innovation. We then describe how these factors are frequently measured in the data and some resulting empirical regularities. Innovative activity tends to be more concentrated than industrial activity, and we discuss important findings from the literature about why this is so. We highlight the traits of cities (e.g., size, industrial diversity) that theoretical and empirical work link to innovation, and we discuss factors that help sustain these features (e.g., the localization of entrepreneurial finance).