The governance of localized knowledge externalities

Abstract

This paper articulates the hypothesis that there is an optimal size of knowledge pools. Too little a density of innovation activities reduces the accessibility of external knowledge. Too large a density enhances congestion and reduces appropriateness. Firms can benefit from actual increasing returns stemming from the indivisibility, replicability and non‐exhaustibility of knowledge only when the size of innovation networks is comprised between the two extremes. The empirical evidence confirms that the output elasticity of knowledge, included in a typical Griliches production function, is itself a quadratic function of the size of innovation networks. Knowledge externalities do trigger increasing returns that are external to each firm, only within a well defined interval. Knowledge externalities are a property of the system into which firms are embedded. As such they are endogenous to the system and likely to exhibit specific properties related to the changing characteristics of the system itself. The quality of knowledge governance mechanisms in place plays a key role in assessing the actual size of the net positive effects of knowledge externalities.

Keywords:

• knowledge externalities
• localized increasing returns
• knowledge governance

JEL classification:

• O33

Acknowledgements

We acknowledge the funding of the European Union Directorate for Research, within the context of the Integrated Project EURODITE (Regional Trajectories to the Knowledge Economy: A Dynamic Model) Contract No. 006187 (CIT3), in progress at the Fondazione Rosselli. We acknowledge and thank the referees and the guest editor, Jackie Krafft, who have provided basic guidance in the revision of the paper.

Notes

1. The analogies with the argument elaborated by Sheshinsky (1967) are clear. Sheshinsky argued in fact that effects of learning by doing may add on in a standard Cobb–Douglas production function with constant returns to scale according to specific circumstances. With respect to Sheshinsky we are able to specify the conditions that shape the actual emergence of localized increasing returns.

2. The main drawbacks can be summarized in their sector‐specificity, the existence of non‐patentable innovations and the fact that they are not the only protecting tool. Moreover the propensity to patent tends to vary over time as a function of the cost of patenting, and it is more likely to feature large firms (Pavitt 1985; Levin et al. 1987; Griliches 1990).

3. A percentile is the value of a variable below which a certain percent of observations fall. So the 20th percentile is the value (or score) below which 20% of the observations may be found. The 25th percentile is also known as the first quartile; the 50th percentile as the median.