Knowledge Spillover and Firm Innovation: A Proximate Industry Peer’s Outbound Relocation

Abstract

This study leverages a unique research design, a proximate industry peer’s outbound relocation, to examine how knowledge spillover drives the positive association between agglomeration with industry peers and firm innovation. We expect a firm’s innovation performance to decrease when a proximate industry peer moves to another region because knowledge spillover from the industry peer to the focal firm is disrupted. Contrary to our expectation, we find that a proximate industry peer’s outbound relocation increases the focal firm’s innovation performance. Taking an abductive approach, we investigate the nature of the impact of outbound relocations of industry peers and provide a theoretical explanation to our unexpected founding. We argue a proximate industry peer’s outbound relocation creates an inter-region knowledge channel, which creates opportunities for firms to absorb distant knowledge from the relocated peer’s new region. To evaluate these ideas, we utilize novel data on relocations of nanotechnology R&D firms over 24 years. This study provides evidence on the association between a proximate industry peer’s outbound relocation and a focal firm’s innovation performance and on the creation of inter-region knowledge channels.