Desperately seeking spillovers? Increasing returns, industrial organization and the location of new entrants in geographic and technological space

Using detailed data on Canadian biotechnology firms during the 1990s, we explore the geographic scope of knowledge spillovers and the balance spillover-seeking and expropriation-avoidance in entrants’ locations. Our findings indicate that knowledge spillovers are highly localized, with entrants attracted to incumbents’ R&D employees and spending within 500 m, but not further. We also find that two local contextual factors enhance the tendency toward spillover seeking. One is increasing returns to positive information externalities that accompany concentrations of technologically similar firms. The other is the entrepreneurial and open industrial organization that arises when incumbents with direct ties to universities concentrate geographically. Our findings provide empirical evidence of forces promoting geographically concentrated and technologically specialized industrial micro-clusters, as well as factors reinforcing the significance of co-location for the creation of new knowledge.