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Geographic agglomeration, knowledge spillovers, and competitive evolution

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Firms in the same industry often display a striking propensity to agglomerate (i.e. locate in the same geographic area). The relative geographic position of firms within an industry determines important aspects of firms' competitive environment and therefore has important strategic implications. This research empirically tests the proposition that agglomeration influences firm commitment to innovation, firm innovative productivity and, ultimately, firm performance in the marketplace. Competing hypotheses are developed from two different theoretical perspectives. From a knowledge-based perspective, knowledge spillovers from the private innovative efforts of agglomerated firms give rise to a concentrated and geographically-localized pool of available knowledge. The availability of these spillovers to agglomerated firms simultaneously facilitates firm-level innovation and reduces the incentive for firms to continue to invest in private innovative activity. A second theoretical perspective suggests that agglomeration increases competitive rivalry and evokes more concentrated and determined organizational effort to succeed, thereby encouraging the development of higher-order competitive advantage and increasing firms' chances of long-term success. Results suggest that agglomeration reduces firm-level incentive to engage in private innovative activity and that localized knowledge spillovers, although beneficial in the short run, deteriorate over time and therefore fail to provide long-term competitive advantage to agglomerated firms.

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