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The New Geography of Innovation
Clusters, Competitiveness and Theory

Xavier Tinguely
ISBN: 9781137367136
DOI: 10.1057/9781137367136
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The New Geography of Innovation
10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

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The New Geography of
Innovation
Clusters, Competitiveness and Theory
Xavier Tinguely
University of Fribourg, Switzerland

© Xavier Tinguely 2013
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in accordance with the Copyright, Designs and Patents Act 1988.
First published 2013 by
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To my parents, Suzanne and François and my brother Alain
Contents
List of Illustrations x
Acknowledgements xv
List of Abbreviations and Acronyms xvii
Introduction 1
Part I The Economics of Innovation 5

Introduction to Part I 5
1 Preamble to the Study of Innovation 7
1.1 Main concepts and definitions 8
1.2 Innovation and implementation 16
1.3 Concluding remarks 22
2 Innovation and Economic Performance 24
2.1 Innovation through the history of economic thought 25
2.2 Innovation and economic growth 29
2.2.1 Toward a formalized model assessing the impact of
innovation on growth: the exogenous perspective 31
2.2.2 Toward a formalized model assessing the impact of
innovation on growth: the endogenous perspective 35
2.3 Competitiveness as a unifying concept in the evaluation
of the economic impact of innovation 43
2.3.1 Innovation and economic development (catching-up) 44
2.3.2 Innovation and employment 46
2.3.3 Innovation and competitiveness 48
3 The Measurement of Innovation 52
3.1 Input measures of innovation 53
3.2 Output measures of innovation 56
3.2.1 Patent data as an intermediate measure of
the innovation process 57
3.2.2 Innovation counts as a final measure of
the innovation process 65
Conclusion to Part I 69
vii

viii Contents
Part II The Nature of the Innovation Process and

the New Geography of Innovation 71
Introduction to Part II 71
4 The Cognitive Nature of the Innovation Process 73
4.1 Entering the black box: innovation in the process 74
4.2 Analyzing the innovation process: from the linear
perspective to the “chain-linked” type of model 76
4.3 Toward a more accurate representation of the innovation
process: the “chain-linked” type of model 80
5 The Clustering of Innovative Activity 86

5.1 The role of location on innovation and competitiveness:
the emergence of the cluster perspective 87
5.2 The crucial role of location and external sources of
knowledge in the innovation process: the concept of
systems of innovation 97
5.3 Empirical evidences of the concentration of innovation:
a review of the literature 104
6 The Geography of Innovation in a Globalized Economy 109

6.1 Multinational enterprises and globalization: a theoretical
explanation of multinational enterprises activity 111
6.2 The globalization of the innovation process 119
6.3 The role of clusters in the global innovation strategy of
multinational enterprises 123
Conclusion to Part II 131
Part III The Distribution of Inventive Activity –

Evidence from Patent Data in Switzerland and Focus on
the Basel Pharmaceutical Cluster 133
Introduction to Part III 133
7 Geographical Distribution of Inventive Activities and

Inventive Performance in Switzerland 137
7.1 Presentation of the database 138
7.2 The geographical patterns of inventive activities in
Switzerland 140
7.2.1 Analysis of the evolution of the number of patent
applications at the EPO by applicants and inventors
located in Switzerland 143

Contents ix
7.2.2 Evaluation of the spatial distribution of patent

applications at the EPO by applicants and inventors
located in Switzerland 149
8 Sectoral Distribution of Inventive Activity and Specialization
Patterns – Towards an Identification of Switzerland’s Main
Inventive Clusters 181
8.1 The sectoral distribution of inventive activity in Switzerland 182
8.2 Specialization patterns and identification of Switzerland’s
main inventive clusters 193
9 Clusters and the New Geography of Invention – An Empirical

Analysis of Pharmaceutical Patents Applied for in the Basel
Employment Basin 208
9.1 Notes on innovation in the pharmaceutical sector and the
Swiss pharmaceutical industry 209
9.1.1 The pharmaceutical industry in Switzerland 212
9.2 The internationalization of inventive activities – evidence
from pharmaceutical patent applications lodged by
applicants located in the Basel employment basin 213
9.3 The role of clusters and cross-cluster relationships in the
global inventive strategy of firms – evidence from
pharmaceutical patent applications lodged by applicants
located in the Basel employment basin 217
Conclusion to Part III 231
General Conclusion 233
Notes 236
References 245
Appendices 289
Appendix 1: Glossary of the Principal Notions Surrounding the
Concept of Innovation 289
Appendix 2: Extract of the First Page of a Patent Application at the EPO 290
Appendix 3: Map of the Geographical Regions Analyzed 291
Appendix 4: Interview Protocol 295
Index 299

List of Illustrations
Box
1.1 Nondiffusion of the Dvorak Keyboard 11
Figures
1.1 R&D expenditure by source of financing, as percentage of
national total, 2008 or nearest year available 18
1.2 Patent applications at the European Patent Office (EPO) by
institutional sector as percentage of total patent applications in
the EU-27 countries, 2004 18
1.3 Firms having introduced a product or process innovation as a
percentage of all firms, 2002–2004 19
2.1 Pattern of growth and technological revolutions 30
2.2 The Solow–Swan model of growth with no population growth
and no technological change 32
2.3 The Solow–Swan model of growth with population growth but
no technological change 34
2.4 Innovation and competitiveness 49
3.1 Conceptual foundations of innovation indicators 53
3.2 Illustration of the relationship invention, patent and
innovation 62
4.1 The linear model of innovation 76
4.2 Kline and Rosenberg’s “Chain-Linked Model” 81
5.1 A new integrative framework capturing the sources of
productivity and competitiveness 89
5.2 The cluster effect – relationship between the different actors of
a cluster 94
5.3 Detailed circular model of the product innovation process 102
5.4 The value system 103
5.5 Cluster as a unique, geographically concentrated cobweb of
interrelationships 108
6.1 Clusters and the global innovation strategy of
multinational enterprises from innovation-driven
economies 128
6.2 Representation of the global network of subsidiaries
implemented by a firm X initially located in cluster X 130

List of Illustrations xi
7.1 Number of patent applications per 10,000 inhabitants at

the EPO by applicants located in OECD countries, 2008 145
7.2 Evolution of the total number of patent applications at
the EPO by applicants located in Switzerland (1977–2008) and
total applicants (1978–2008) 145
7.3 Evolution of the total number of patent applications at
the EPO by inventors located in Switzerland (1977–2008) and
total applicants (1978–2008) 146
7.4 Number of patent applications per 10,000 inhabitants at
the EPO by inventors located in OECD countries in 2008 148
7.5 GDP per capita vs. patent applications per capita at
the EPO by applicants located in OECD countries in 2008 148
7.6 GDP per capita vs. patent applications per capita at
the EPO by inventors located in OECD countries in 2008 149
7.7 Spatial distribution of patent applications at the EPO by
applicants located in Switzerland – Cantons 151
applicants located in Switzerland – Districts 152
applicants located in Switzerland – Main regions 153
applicants located in Switzerland – Employment basins 154
inventors located in Switzerland – Cantons 155
inventors located in Switzerland – Districts 156
inventors located in Switzerland – Main regions 157
inventors located in Switzerland – Employment basins 158
7.15 Evolution of the number of patent applications per 10,000
inhabitants at the EPO by applicants located in Switzerland,
1981–2008 159
7.16 Spatial distribution of patent applications per 10,000
inhabitants at the EPO by applicants located in Switzerland –
Cantons 161
inhabitants at the EPO by applicants located in
Switzerland – Districts 162
Main regions 163

xii List of Illustrations

Employment basins 164
7.20 Evolution of the number of patent applications per 10,000
inhabitants at the EPO by inventors located in Switzerland,
1981–2008 165
inhabitants at the EPO by inventors located in
Switzerland – Cantons 166
Switzerland – Main regions 168
Switzerland – Employment basins 169
employees at the EPO by applicants located in
employees at the EPO by inventors located in

List of Illustrations xiii
8.1 Sectors showing strong specializations in certain

employment basins, 2005 and 1977–2008 201
8.2 Spatial representation of the main inventive clusters at
the employment basin level in Switzerland 203
8.3 Industrial sectors and cluster-like features, employment
data, 2005 204
8.4 Industrial sectors and cluster-like features, patent applications
data, applicant level, 2005 205
8.5 Industrial sectors and cluster-like features, patent applications
data, inventor level, 2005 206
9.1 Total business enterprise R&D expenditure of Swiss firms
abroad by sector, 2000, 2004 and 2008 216
9.2 Geographical distribution (countries and main regions) of
inventors of the pharmaceutical patents applications lodged
at the EPO by applicants in the Basel employment basin, 2005 223
Tables
2.1 Main sources of capital influencing growth in the
endogenous theory 37
3.1 Main strengths and weaknesses of patent data in the
assessment of technological activity 64
6.1 Outward foreign direct investment stock, 1980, 1990,
2000 and 2010 112
6.2 Inward foreign direct investment stock, 1980, 1990, 2000
and 2010 113
6.3 A typology of cross-border co-operation modes 119
7.1 Example of allocation mistakes observed in the OECD
REGPAT database (June 2012) 139
7.2 Evolution of the total number of patent applications at the
EPO by applicants located in Switzerland, 1977–2008 144
7.3 Total number of patent applications at the EPO by inventors
located in Switzerland, 1977–2008 147
8.1 Sectoral distribution of patent applications at the EPO by
applicants established in Switzerland, 1977–2008 and
2000–2008 183
inventors established in Switzerland, 1977–2008 and
2000–2008 186
applicants established in Switzerland in 2005 189

xiv List of Illustrations

inventors established in Switzerland, 2005 190
8.5 Regional distribution of patent applications at the applicant
level for the ten most inventive sectors in the top three
employment basins, 2005 191
8.6 Regional distribution of patent applications at the inventor
level for the ten most inventive sectors in the top three
employment basins, 2005 192
8.7 Regional specialization of the top inventive sectors at the
applicant level measured through the RTA index, employment
basins, 2005 195
8.8 Regional specialization of the top inventive sectors at the
inventor level measured through the RTA index, employment
basins, 2005 198
9.1 Direct and indirect importance of the pharmaceutical
industry in Switzerland in 2010 212
9.2 Countries of residence of the inventors of the pharmaceutical
patents applied for at the EPO in the Basel employment
basin in 1985, 1995, 2005 and 2008 215
9.3 Region of residence of inventors of the pharmaceutical patents
lodged at the EPO by applicants in the Basel employment
basin in 2005 219
9.4 Distribution of inventors of the pharmaceutical patents
applied for at the EPO in the Basel employment basin
by applicants in 2005 224
9.5 Geographical distribution of the pharmaceutical patents
applications lodged at the EPO in the Basel employment
basin by applicants in 2005 226

Acknowledgements
This book could not have been completed without the great support of a
large number of people. Although these few lines cannot fully reflect the
extent of my gratefulness, I would like to thank them warmly and let them
know that this journey could not have been possible without their help. It
goes without saying that they are by no means responsible for any shortcom-
ings in the final version.
First and foremost, I am indebted to Professor Philippe Gugler for his encour-
agement and pertinent advice throughout this process. Thanks to his enthu-
siasm and willingness, I had opportunities that few other doctoral students
could have dreamt of. Working with him at the University of Fribourg has
been an honor and has provided an unparalleled learning experience.
Professor Joseph Deiss, despite his numerous commitments, reviewed my
work with great acuity. His knowledge and unique experience were valuable
assets in the finalization of this research. It has been a privilege for me to
work with him. I would like to thank him for his support throughout this
process and for having let me discover some aspects of his tenure as President
of the 65th session of the General Assembly of the United Nations.
I would like to acknowledge the support provided by the Swiss National
Science Foundation (SNF), which allowed me to spend a year researching
at the Fox School of Business of Temple University in Philadelphia. In this
context, thanks are due to Professor Ram Mudambi, who offered me a posi-
tion of visiting scholar at his institution. His kindness and hospitality made
my American experience unforgettable. I also would like to thank Professor
Mercedes Delgado for her dedicated help and advice. It was a pleasure to
collaborate with her and the rest of the team at Temple.
I am also indebted to the members of the Board of Trustees of the
Foundation for the 25th anniversary of the Swiss Bank Corporation at the
Faculty of Economics and Social Sciences of the University of Fribourg, for
their award of a grant in 2012.
Thanks are due to Swissnex Boston, and especially to Andreas Rufer and
Dr Felix Moesner, who put me in contact with representatives of Swiss phar-
maceutical firms established in the U.S. To that extent, I wish to express my
gratitude to Jeffrey Lockwood (Global Head of Communications at Novartis
Institutes for BioMedical Research) and Mark Noguchi (Global Head of
Alliance Management for Roche Partners) for their time and insights into
the role of location and clusters in the innovation strategy of their firms.
Special thanks also go to my colleagues and friends at the University of
Fribourg, particularly Julie Michel and Michael Keller.
xv

xvi Acknowledgements
Last but not least, I owe a great debt to my family for their love and
constant support. I am blessed that I have never had to worry about anything
and that they let me choose my own path. I am particularly grateful to my
mother, Suzanne, who has been present for me in every situation, my father,
François, who has been of inestimable help throughout my studies and a
lifelong inspiration, and my brother, Alain, for having been the best brother
I could have imagined. I finally would like to thank everybody who accom-
panied me in this journey and contributed to making it one of the best times
in my life.

List of Abbreviations and Acronyms
ARIPO African Regional Intellectual Property Organization
BC Before Christ
BERD Business Enterprise R&D Expenditure
BRIC Brazil, Russia, India and China
CIS Community Innovation Survey
EPO European Patent Office
FDI foreign direct investment
FSO Federal Statistics Office
FTE full-time equivalent
GATT General Agreement on Tariffs and Trade
GCI Global Competitiveness Index
GCR Global Competitiveness Report
GDP gross domestic product
GERD gross domestic expenditure on R&D
GNP gross national product
IFDI inward foreign direct investment
IMF International Monetary Fund
IPC International Patent Classification
JPO Japan Patent Office
MNE multinational enterprise
NACE Nomenclature statistique des Activités économiques dans la
Communauté Européenne
NOGA Nomenclature Générale des Activités Economiques
OECD Organisation for Economic Co-operation and Development
OFDI outward foreign direct investment
OLI ownership, location, internalization
PCT Patent Co-operation Treaty
R&D research and development
RTA revealed technological advantage
SME small and medium-size enterprise
SMI Swiss Market Index
SPRU Science Policy Research Unit
STI science, technology and innovation
TRIPS Trade-Related Intellectual Property Rights Agreement
UN United Nations
UNCTAD United Nations Conference on Trade and Development
USPTO United States Patent and Trademark Office
WEF World Economic Forum
xvii

xviii List of Abbreviations and Acronyms
WIPO World Intellectual Property Organization

WIR World Investment Report
WTO World Trade Organization

Introduction
The world has changed, and at an absurd pace. While life evolved rela-
tively slowly until the beginning of the 19th century, the last decades have
witnessed tremendous advances. In less than three hundred years, people
saw the plough or the stagecoach being replaced by hybrid cars, high-speed
trains or airplanes, and carrier pigeons or the Morse code by the Internet,
smartphones or iPads. Based on Schumpeter’s idea of innovation cycles
(1939, p. 212ss.), Gordon (2012, pp. 1–2) broke down this unique episode
of growth in human history into three successive and cumulative indus-
trial revolutions (IR): IR#1 (1750–1830) defined by the invention of steam
engines, cotton spinning and railroads; IR#2 (1870–1900) marked by the
invention of electricity, internal combustion engines and running water
with indoor plumbing; and IR#3 (initiated in the 1960s-ongoing) character-
ized by the advent of computers and the Internet. The accumulated stock of
knowledge and the various groundbreaking scientific discoveries generated
over an especially short period of time not only altered the way people travel
and communicate but also directly impacted the organization of society and
how people work and interact.
Innovation has been the cornerstone of this evolution and the first
economic thinkers quickly perceived that the tendency of men to constantly
challenge their current condition would be the force that could disrupt any
possible equilibrium or stationary state within the economy (Schumpeter,
1937/1989, p. 166). Although the study of innovation did not enter main-
stream economics until relatively recently, it is now well established that
technological change is the main engine of competitiveness and economic
growth in the long run (i.a. Romer, 1990; Grossman and Helpman, 1991a;
Aghion and Howitt, 1992).1 However, in a world in which everything goes
faster, the inherent nature of the innovation process has changed. On the
one hand, the fast technological revolution, the emergence of new countries
on the international economic stage or the sophistication of trade regula-
tion tools has underlined a shift towards a globalization of the economy.
Companies can now take advantage of the special characteristics of many

2 The New Geography of Innovation
different types of environments. It is, for example, relatively easy for a firm
to establish a manufacturing plant in South East Asia in order to benefit
from the low cost of the local workforce or to penetrate the world’s leading
knowledge hubs by establishing a subsidiary or implement a joint venture in
Silicon Valley in order to try to absorb knowledge spillovers created within
the San Francisco Bay Area. However, on the other hand and at the same
time, another trend towards a spatial concentration of economic and innova-
tive activity has been identified (i.a. Krugman, 1991a; Feldman, 1994; Porter,
1998a; Dunning, 2008). Despite the widening of the geographical options
offered by globalization, production and innovation still appear particu-
larly concentrated in specific locations (Asheim and Gertler, 2005). Clusters,
defined in their strictest sense by Porter (1998a, pp. 197–198) as “geographic
concentrations of interconnected companies, specialized suppliers, service
providers, firms in related industries, and associated institutions in partic-
ular fields,” are the ultimate representation of this regionalization stream.
Interactions between cluster participants create a stimulating and dynamic
environment conducive to productivity growth, innovation and new busi-
ness formation that is difficult for firms based elsewhere to match (Delgado
et al., 2010a, b).
Behind the title “Clusters, competitiveness and the new geography of
innovation: theoretical foundations and evidence from patent data in
Switzerland” the goal of this research is therefore to assess both theoretically
and empirically the self-reinforcing relationship between innovation, clus-
ters and firms in today’s economy. Three parts will guide the reader through
the discovery of this still relatively unexplored issue and the fascinating
question at stake in the new geography of innovation.
Part I focuses on the economics of innovation. It reviews the main
concepts and definitions surrounding the notion of innovation, the major
theories which have established it as a driver of economic growth, and the
different types of measure that have been developed to evaluate innovative
performances. It set the necessary theoretical base for the rest of this study
and provides a solid theoretical framework demonstrating the economic
significance of innovation.
Part II explores in more detail the nature of the innovation process and
the impact of globalization on the geography of innovation. It emphasizes
that, although the inherent characteristics of the innovation process tend to
make innovative activities concentrate in particular locations, the pressure
to constantly innovate, intensified by global competition, has increasingly
prompted firms to establish their research activities in foreign locations
in order to improve their technological assets. While clusters represent
unique opportunities for firms to enhance their innovation capacities, few
researchers have assessed the role of clusters in the new geography of inno-
vation (Mudambi and Swift, 2010, 2012). Based on a meticulous theoretical

Introduction 3
construct, Part II progressively introduces an analytical framework depicting

the relationship between innovation and clusters in a globalized economy.
Part III provides an empirical investigation of the distribution of inventive
activities in Switzerland based on several unique databases of patent applica-
tions at the European Patent Office (EPO). After an evaluation of the inventive
performance of Swiss regions at different regional levels and an identifica-
tion of the country’s main inventive clusters, Part III presents insights to
the role of clusters in the new geography of innovation by focusing on the
examination of the innovation process of applicants established in the Basel
pharmaceutical cluster. Through detailed cartographic profiles and in-depth
analyses, it offers a perspective on the main issues identified in Parts I and II
and on the current challenges of the management of innovation.
In a particularly unstable world economy, this thesis strongly contrib-
utes to putting forward the crucial role of innovation as the main driver of
economic growth and the importance of clusters as sources of knowledge
and competitiveness. By providing a clear picture of inventive activities in
Switzerland, it also provides policymakers with a powerful tool to assess the
inventive profile of regions and to implement the most suitable policies to
sustain Switzerland’s innovativeness and prosperity in the years to come.
Furthermore, this research also offers managers precious insights to the
potential benefits of clusters in the global innovation strategies of firms and
the generation of new knowledge.

Part I
The Economics of Innovation
Introduction to Part I
As put forward by Fagerberg and Verspagen (2009, p. 218): “Innovation is

one of those words that suddenly seem to be on everybody’s lips.” There is
not one day that goes by without seeing an article in the press or hearing
news that deals with the primacy of innovation in today’s economy. If we
“google” the word “innovation,” more than 400 million hits pop up on
the subject. During the last decades, firms have increasingly implemented
specific innovation strategies, consultancy agencies have published reports
on how to manage innovation successfully, and politicians have praised
policies that support innovation and placed it at the heart of their competi-
tiveness programs. A similar pattern has been observed in scientific publica-
tions. A plethoric literature has recently emerged on many different aspects
of the innovation process (Fagerberg, 2005, p. 1). Although this research
attention has greatly contributed to a better understanding of the economics
of innovation, the study of innovation as an independent field of research is
still recent and many researchers are still investigating unexplored features
of innovation.
While doing full justice to the many academic contributions to the field
would be too ambitious, the aim of this first part is to respond to three main
pairs of questions:
● What is innovation and what are the main notions surrounding the
concept of innovation?
● What is the role of innovation in economics and what is the relationship
between innovation and economic performance?
● How has innovation been assessed and what indicators have been devel-
oped to measure it?
In order to answer these questions, this first part has been structured
around three main chapters. The first chapter is a preamble to the study of

innovation and aims to present the main features of the notion of innova-
tion and to set the necessary theoretical background to a study of innova-
tion. The second chapter focuses on the crucial role of innovation in the
enhancement of economic growth and standards of living in the long run.
Finally, the third chapter is devoted to the presentation of the main indica-
tors that are currently used to measure innovation, with a special focus on
patent data as they are at the core of the empirical analysis conducted in the
third part of this thesis.
Two preliminary remarks have to be made. First, measurement issues are
addressed after the evaluation of the impact of innovation on economic
performance. This structure is justified by the fact that most of the research
on the economic significance of innovation (and especially the high-profile
literature on growth) was primarily seeking to provide pure theoretical
constructs rather than empirical demonstrations (Carter, 2007, p. 15).
Second, this first part revisits the relevant existing economic literature on
innovation with the purpose of elaborating a progressive framework leading
to the theoretical and empirical analysis of the geographical features of inno-
vation in the second and third parts of this book. In a world economy still
recovering from one of the worst financial crises since the Great Depression
of the 1930s and with many of the world’s most developed countries strug-
gling to keep their finances healthy and facing massive challenges to even
sustain growth, recalling and re-centering some key aspects of the economic
virtues of innovation may inspire current and future decision-makers in
their mission to appropriately support economic development. Emphasizing
the primacy of innovation in economics is even more important in today’s
damaged world economy, which is still trying to figure out a way to deal
with the new imperatives of globalization and the new role of knowledge as
a pivotal determinant of competitive advantage.

1
Preamble to the Study of Innovation
Apart from early insights into the economics of innovation by some of
the major thinkers of the 18th and 19th centuries such as Smith, Ricardo
or Marx, and the groundbreaking contribution of Schumpeter in the early
20th century, innovation did not really arouse the interest of economists
before the second half of the 20th century (see Section 2.1). Although schol-
arly interest in the study of innovation is therefore still relatively recent,
research on the role of innovation in economic and social change has flour-
ished over the last five decades in a number of quite disparate economic
fields such as macroeconomics (growth theory), industrial organization
(organization and strategies of innovative firms), public finance (poli-
cies encouraging innovation), and economic development (technology
transfer, catching up and innovation system) (Hall and Rosenberg, 2010,
p. 3). While only one out of 10,000 social science articles contained the
word “innovation” in its title in the 1950s, this increased to almost 20
out of 10,000 in the 2000s (Fagerberg, 2005, p. 2). The multi-disciplinary
nature of innovation research and its progressive implementation in main-
stream economics have generated a plethora of literature. As underlined by
Fagerberg (2005, p. 4), “the literature on innovation is so large and diverse
that even keeping up-to-date with one specific field of research is very
challenging”. As a consequence, although the knowledge about innova-
tion, its determinants and its social and economic impact has been greatly
enhanced, the number of contributions to the field implies a selectivity in
presenting research findings.
The aim of this chapter is therefore to introduce the main characteristics
of innovation and to set an appropriate basis for moving on to the rest of the
study. This chapter is divided into two sections. Section 1.1 focuses on the
main concepts and definitions surrounding the notion of innovation. It care-
fully defines innovation, explores the distinction between innovation and
invention, and introduces the different types of innovation. Section 1.2 then
investigates the main actors in the implementation process of innovation.
As business enterprises play a key role in the development of innovation,

the organization of their internal structure is particularly important in the

success of the innovation process. In order to assess the internal structure
of firms, the concept of the value chain will be introduced and used as a
guiding analytical framework throughout.
1.1 Main concepts and definitions
Innovation is defined by the OECD (2005, p. 46) as “the implementation of

a new or significantly improved product (good or service), or process, a new
marketing method, or a new organizational method in business practices,
workplace organization or external relations”. Although this broad defini-
tion does not (and does not aim to) capture all the subtleties of the cogni-
tive nature of innovation, it pinpoints some crucial aspects that will help us
build our analysis.
First, the OECD’s definition rightly emphasizes the importance of novelty.
Innovation is about newness and the minimum requirement is that an inno-
vation must be new (Schumpeter, 1939; SPRU, 1972; Kamien and Schwartz,
1982; Dorfman, 1987). Although newness is a fundamental characteristic
of innovation, the notion of novelty may nevertheless be ambiguous. For
example, if an agent “X” introduces an innovation for the first time in one
context and an agent “Y” then introduces the same innovation in another
context at a later date, to what extent would the latter be considered an
innovator? Although the answer to this question is a matter of convention,
Schumpeter’s pioneering work offers some possible answers (Fagerberg,
2005, p. 8).1 In his classical theory of the business cycle, Schumpeter iden-
tified the entrepreneur as the only agent of economic change and defined
him as the individual who carries out innovation by implementing “new
combinations” of factors (Schumpeter, 1939, p. 102ss.; Hagedoorn, 1996,
p. 885). In a certain way, Schumpeter considered the entrepreneur as a
personification of innovation (as the innovator) (De Vecchio, 1995, p. 16;
Hagedoorn, 1996, p. 888ss). Innovation, or the ability and initiative of
entrepreneurs, creates new opportunities for profits, which in turn attracts
a “swarm” of imitators and improvers to exploit new openings (Freeman
and Soete, 1997, p. 18). Based on Schumpeter’s view, agent “X” would
therefore be considered as the innovator (he is the first to introduce the
innovation), while agent “Y” would be either the imitator or the improver.
Nevertheless, in both cases it would be consistent to call “Y” innovator as
well, since he introduces the innovation for the first time in a new context
(Fagerberg, 2005, p. 8).2
This finding is in line with the influential research conducted by Kline
and Rosenberg (1986) on the innovation process. Many innovations occur
while a product or process is diffusing (Rogers, 1995, p. 10). This issue has
been concretely observed in these last decades with the emergence of new
countries on the international economic stage. In an article investigating

Preamble to the Study of Innovation 9
the extent of innovation in the electronic industry of the newly indus-

trializing economies of east and southeast Asia, Hobday (2000, p. 163)
emphasized that, from a remote latecomer starting position, these firms
have become highly competitive in several key electronics fields by imple-
menting and adapting innovations new to the company, although not
new to the world. These firms have defied conventional product life cycle
theories of how to compete in electronics by continuously repeating a
successful “behind-the-frontier” catch-up innovation cycle. Because many
innovations occur from behind the technology frontier, innovation could
be defined as a product or process newer to the firm than to the world or
marketplace (Schmookler, 1966; Myers and Marquis, 1969; Nelson and
Rosenberg, 1993; Kim, 1997).
In his classical work on “Invention and Economic Growth,” Schmookler
(1966, p. 10) confirmed this statement by defining invention as a new
combination of pre-existing knowledge. Hobday (2000, p. 131) therefore
draws the conclusion that viewing innovation solely as the successful
introduction of a new or improved product (or process) to the marketplace
fails to capture the very important transformations that occur in firms.
Introducing an innovation in a new context often implies considerable
adaptation, and subsequent innovations that may significantly increase
productivity and competitiveness (Fagerberg and Godinho, 2005, p. 518).
This issue has been extensively discussed in the international business
literature under the motto “think globally, act locally” (Pearce, 1990;
Casson, 1991; Rugman and Hodgetts, 2001; Criscuolo, 2004; Rugman and
Verbeke, 2004a; Verbeke, 2009). For example, food products primarily
destined to meet the tastes of German households will not necessary satisfy
those of American or Japanese consumers. As underlined by Dunning and
Lundan (2008, p. 368ss), multinational enterprises have to adapt their
products to meet local needs and this adaptation process may lead to new
innovations.
The debate on the subtleties of the notion of newness allows us to seize
the opportunity to continue our analysis by stating that innovation is not
a new phenomenon. Since the dawn of civilization, men have always tried
to develop new or better ways of doing things and to apply them in prac-
tice (Fagerberg, 2005, p. 1). Among a countless number of examples are
the invention of tools carved in stone in the Paleolithic and early Stone
Age, which reflected the need of hunter-gatherers to rely on tools that
were more solid than those which came readily to hand (such as broken
bones, cleft sticks or sharp stones) (Williams, 2000, p. 15). Similarly, the
sedentariness of populations and the related intercommunity trade that
grew triggered the invention of the wheel around 3,500 BC, which in turn
set off all the subsequent innovations we know today (Williams, 2000,
p. 45). More recently, after having shaken up the computer industry with
its MacBook, the music industry with its iPod (and iTunes), the mobile

phone industry with its iPhone, Apple, one of the most innovative compa-
nies of the last decade, has recently revolutionized the way in which digital
media are consumed with the release of its iPad (The Economist, 2010,
Internet source). Similarly, by surfing on the “green wave” and all the
recent innovations aimed at promoting the consumption of environmen-
tally friendly energy, the project “Solar Impulse” pushed technological
barriers by developing the first solar aircraft (Solar Impulse, 2010, Internet
source). The aim of these few simple examples is to emphasize that inno-
vation is a perpetual phenomenon strongly anchored in human nature.
As postulated by classical writers such as Aristophanes, “necessity is the
mother of invention”. Although invention and innovation (nowadays) go
far beyond the simple satisfaction of human needs, this quote reflects the
desire of man to constantly challenge the current state of knowledge and
technology.3
An important distinction has to be made between invention and inno-
vation.4 According to Fagerberg (2005, p. 4), invention is the first occur-
rence of an idea for a new product or process, while innovation is the first
attempt to carry it out into practice. In other words, before an invention
can become an innovation, further entrepreneurial efforts are required to
develop, manufacture and market it (OECD, 2009b, p. 12). A patent, for
example, is an indicator of invention. Additional developments are neces-
sary before it becomes an innovation (OECD, 2009b, p. 12). Together with
the notion of newness presented above, this distinction is critical in prac-
tice and emphasizes the relevance of the OECD’s definition. For example,
the Swiss Federal Institute of Intellectual Property (2013a, Internet source)
defines invention (in its definition of patents) as “(in the legal sense,) a
solution to a technical problem. Inventions include products (e.g., heat-
able ski boots, or chemical compounds such as aspirin) and processes (e.g.,
a process for freeze-drying coffee). If an invention is novel, non-obvious
to a person skilled in the art and can be commercially applied (useful) it is
patentable”.5
Schumpeter was the first to argue that innovation needs to be distin-
guished from invention, which he defined as discovery (Schumpeter, 1939,
p. 6ss; Freeman and Soete, 1997, p. 6). He justified this distinction by the
fact that he saw innovation as a specific social activity carried out within
the economic sphere (mainly the firm) and with commercial purpose, while
inventions, in principle, can be carried out everywhere (Fagerberg, 2003,
p. 131). With regard to Schumpeter’s theory, the role of the inventor and
the innovator (as the entrepreneur) may be quite different and it is well
known that some highly potential inventions failed to become successful
innovations because they did not get the necessary entrepreneurial support
and belief, which would have helped them to be implemented and to pene-
trate the market. One of the most interesting examples has been exposed by
Rogers (1995, pp. 8–10) and is presented in Box 1.1.

Box 1.1 Nondiffusion of the Dvorak Keyboard
Although a large majority of people are now familiar with the use of computers
most of them do not realize that our fingers tap out words on a keyboard that is
called “QWERTY” (or “QWERTZ” according to the country), named after the first
six keys on the upper row of letters. The inefficiency and awkwardness of this
keyboard is nevertheless widely acknowledged (think about the learning process).
In 1932, August Dvorak, a professor at the University of Washington, developed
a much more efficient keyboard arrangement (using time-and-motion studies).
The “Dvorak keyboard” has the most frequently used letters across the home row
of the keyboard and the less frequently used ones on the upper and lower rows.
Furthermore, the amount of work assigned to each finger is proportionate to its skill
and strength. While a finger on one hand is stroking a key, a finger on the other
hand can be moving into position to hit the next key. Typing rhythm is therefore
highly facilitated. Despite its overwhelming advantages, the Dvorak keyboard did
not replace the inferior QWERTY keyboard because the computer industry lobby
was hewing to the old design.6 This example shows that although innovations may
have obvious, proven advantages, they are not always diffused and adopted.
Full case may be consulted in Rogers (1995, pp. 8–10).
Although the distinction between invention and innovation may seem

obvious, in practice it may not always be simple. On the one hand, history
has repeatedly proven that the same invention may have been conceived
independently at different places and different times (Fagerberg, 2005, p. 5).
For example, Diamond (1998, p. 10), in an attempt to provide an explana-
tion for the regional inequalities of development in the world, stressed that
although most of Eurasia and much of the Americas and Sub-Saharan Africa
gradually developed agriculture, herding, metallurgy, and complex political
organizations, each of these new developments appeared earliest in Eurasia.
He also noticed that the mass production of bronze tools, which was just
beginning in the South American Andes in the 15th century, was already
established in parts of Eurasia over 4,000 years before. Writing is another
example of an invention that developed progressively and independently
in parts of Eurasia and America between 3,300 and 900 BC (Diamond, 1998,
p. 10). It is nevertheless worth noting that although this phenomenon could
still happen today, the globalization of the world economy, the improvement
in communications and the greater diffusion of knowledge have tended to
lessen the probability of its occurrence.
On the other hand, the time lag between invention and innovation may
be very different according to the industry or the context (Fagerberg, 2005,
p. 5). Whereas invention and innovation may be hard to distinguish in
dynamic and research-oriented industries, such as biotechnology, chemistry
or pharmaceutics, a lag of several years or decades is not rare and reflects
the time necessary to work out and implement ideas (Rogers, 1995, p. 35ss).
These long time lags between invention and innovation may be explained

either by, as yet, insufficient demand for the invention or by the, as yet, non-
existence of critical inputs necessary to its development (Fagerberg, 2005,
p. 5). For example, teleportation has been a fantasy of many scientists for
years but the current state of knowledge and technology do not yet allow
for its implementation. Moreover, a complicating factor is that invention
and innovation are a continuous process. Many inventions require comple-
mentary inventions and innovations to succeed at the innovation stage
(Fagerberg, 2005, p. 5). For example, the computer, as we know it today,
is radically different and much-improved compared to the first commer-
cial models. Indeed, most innovations are the result of a large number of
previous inventions and innovations.
Schumpeter was the first to classify innovations according to their radical-
ness compared to current technology (Freeman and Soete, 1997, p. 18). He
identified two types of innovation: “radical”, which he defined as funda-
mental changes that represent revolutionary modifications in technology
and a clear departure from existing practices (such as the railroadization or
the electrification of the world);7 and “incremental” (or “marginal”), which
are minor improvements or simple adjustments in current technology
(Schumpeter, 1939, p. 101). Although Schumpeter mainly focused his analysis
on radical innovations, which he believed were of greater economic impor-
tance, it is now well established in the literature that the cumulative impact
of incremental innovations is just as great (if not greater) than that of radical
ones (Lundvall, 2010, p. 8ss). Whereas models of standard economics, which
perceived innovation as extraordinary events coming from the outside and
temporarily disturbing the general equilibrium before a process of adjust-
ment establishes a new state of equilibrium, might have been adequate in
pre-industrial societies where innovations occurred as rare and exogenous
events, in modern capitalism innovation is a fundamental, inherent, ubiq-
uitous and cumulative phenomenon (Lundvall, 2010, p. 8ss). As emphasized
by Kline and Rosenberg (1986, p. 283), it would be a serious mistake to treat
innovation as if it was a well-defined and homogenous process that could be
identified as entering the economy at a precise date or becoming available at
a precise point in time. Invention and innovation are a continuous process
(Fagerberg, 2005, p. 5). Innovations of a highly visible sort – such as elec-
tric power, trains, airplanes, antibiotics or computers – are the outcome of a
multitude of less visible technological improvements and their first versions
were often very crude and primitive (Kline and Rosenberg, 1986, p. 283).
The second contribution of the OECD’s definition lies in the distinc-
tion between different “types” of innovation. In his attempt to define and
theorize economic development, Schumpeter was the first scholar to clas-
sify innovations according to their characteristics (Spence and Kirchhoff,
2006, p. 146). He identified five different types of innovation which are still
frequently cited in the literature: new products, new methods of production,
new sources of supply, the exploitation of new markets, and new ways to

organize business (Schumpeter, 1934, p. 66). The economic literature has

since been principally articulated around the first two of these (Simonetti
et al., 1995, p. 77ss).
In a first step, Schmookler (1966, p. 8) emphasized the distinction between
“product technology” and “production technology”. He defined the former
as knowledge about how to create or improve products, and the latter as
knowledge about how to produce them (Fagerberg, 2005, p. 7). This distinc-
tion was crucial to him because he noticed that an industry’s production
technology is improved to a large extent by changing its inputs, that is,
the products it buys from other industries (Schmookler, 1966, p. 196).
According to Schmookler (1966, p. 210–11), if differences exist in the rich-
ness of different inventive potentials of the product technologies of different
supplying industries, the pressure to improve an industry’s production tech-
nology tends to be met by the creation of relatively more new products in
supplying industries with richer product inventive potentials. In brief, inven-
tors tend to select the most efficient means for achieving their ends, and at
any moment, some means are more efficient than others (Schmookler, 1966,
p. 211; Rosenberg, 1974, p. 94).
This distinction between product and production technology has been
gradually replaced by the current terminology of “product innovation” and
“process innovation” (Utterback and Abernathy, 1975, p. 639ss). A product
innovation is defined by the OECD (2005, p. 48) as “the introduction of
a good or service that is new or significantly improved with respect to its
characteristics or intended uses”.8 Product innovations can utilize new
knowledge or technologies, or be based on new uses or combinations of
existing knowledge or technologies (OECD, 2005, p. 48). For example, while
the first microprocessors and digital cameras were new products using new
technologies, the first MP3 player, which combined existing software stand-
ards with miniaturized hard-drive technology, was a new product combining
existing technologies (OECD, 2005, p. 48).9 A process innovation is defined
as “the implementation of a new or significantly improved production or
delivery method” (OECD, 2005, p. 49). Process innovations can be intended
to decrease unit costs of production or delivery, to increase quality, or to
produce or deliver new or significantly improved products. The implementa-
tion of new automation equipment on a production line or the adoption of
new technologies intended to improve the efficiency of an ancillary activity
are examples of process innovations.
The reason why most of the focus has been directed towards the distinction
between product and process innovation lies in the fact that their economic
and social impact may differ (Fagerberg, 2005, p. 7). Whereas a product inno-
vation is commonly assumed to have a relatively positive effect on economic
indicators, such as growth of income or employment, process innovation
may have more ambiguous effects due to its cost-cutting nature (Fagerberg,
2005, p. 7). This issue has been carefully investigated in the vast literature

analyzing the relationship between innovation and employment (i.a. Sauvy,

1981; Freeman et al. 1982; Berman et al. 1994; Vivarelli, 1995; Addison and
Teixeira, 2001; Edquist et al. 2001; Pianta, 2001; Acemoglu, 2002). Pianta
(2005, p. 572), for instance, stressed that because process innovations lead
to greater efficiency of production, with savings in labor and/or capital, and
with a potential for price reductions, the usual outcome is higher produc-
tivity and loss of employment. Nevertheless, to the extent that process inno-
vations increase product quality or reduce prices, a rise in demand (when
elasticity is high) may result in more jobs (Pianta, 2005, p. 572).
An important point has also been raised by Edquist et al. (2001, p. 83ss),
as new goods enter the economy either as consumption goods, interme-
diate goods or investment goods, innovative investment goods have a dual
nature; first they start as new products in the industries producing them,
but then become process innovation in the industries acquiring them.
Their employment consequences are therefore likely to be positive in one
industry, and negative (when demand offsets are insufficient) in another
industry. However, the economic and social impact of product and process
innovation tend to become blurred at the level of the overall economy as
the product of one firm may end up being used to produce goods or services
in another (Fagerbeg, 2005, p. 7). In his classical treaty “La machine et le
chômage”, Sauvy (1981) reached a similar conclusion. Through his “théorie
du déversement” (“offloading” or “discharging” theory), he stated that
technical progress induces a transfer of employment from one activity to
another. He illustrated his point through the example of the mechanization
of the automotive industry in France. According to which, while the French
car manufacturer Renault substituted a large number of its skilled workers by
machines, many technicians transferred to the winter sports industry and
contributed strongly to its development.
In other words, the savings in costs, following a process innovation in a
single firm or industry, will generate additional income and demand in the
economy at large, which will (to some extent) “compensate” for any initial
negative effects (Fagerberg, 2005, p. 7). The distinction between product
and process innovation has been diffused in many fields of the economic
literature. In the frame of the technology life-cycle theory,10 the literature on
technology management, for instance, holds a central place in the analysis
of the dynamics of product and process innovation (Mueller and Tilton,
1969; Utterback and Abernathy, 1975; Clark, 1985; Klepper, 1996; Adner
and Levinthal, 2001). The main pattern described by this theory emphasized
that product innovations are initially the dominant mode of innovation
until successive product innovations ultimately yield a “dominant design”
when the optimal product configuration is reached. As product design stabi-
lizes, increasingly automated production methods are employed and process
innovation to lower costs takes over as the dominant innovation mode until
both types of innovation begin to slow down (Porter, 1983, p. 22).

However, the distinction between product and process innovation has

also been questioned and should not lead us to conceal other important
aspects of innovation. On the one hand, some authors stated that the
distinction should not be carried too far as most innovative firms intro-
duce both at the same time (Pianta, 2005, p. 573). On the other hand,
other scholars tried to extend and refine this distinction. On the basis of
the SPRU database on innovations in Great Britain,11 Simonetti et al. (1995,
p. 77ss) found that product and process innovations were highly sensi-
tive to the definition adopted. According to their study, only 3.1% of the
innovations monitored could be unequivocally labeled as either product or
process, while as many as 96.9% of them fell into a grey zone. This result
led the authors to conclude that although the distinction between product
and process innovation remains useful more precise definitions should be
adopted. By the same token, many studies addressed further types of inno-
vations. The OECD (1992) for instance distinguished “technological inno-
vations” as a diverse category of innovation that contains both product
and process innovations. Henderson and Clark (1990) introduced the
distinction between “modular innovations”, which represent changes in
product design or in components of a product or service, and “architectural
innovations”, which correspond to changes in product architecture or the
way components are combined.
Nonetheless, the most influential contribution has certainly been the recog-
nition of the crucial importance of organizational innovations (Bruland and
Mowery, 2005). Many trailblazing innovations, which changed the face of
the world during the first half of the 20th century, were of the organizational
kind, involving entirely new ways to organize production and distribution
(Fagerberg, 2005, p. 7). “Fordism” is particularly illustrative here. In another
vein, the progressive implementation of self-service in stores after the Second
World War (represented by an Americanization of selling methods and the
implantation of the American retailer Woolworths, recognized as a key actor
in the development of self-service, in Britain) revolutionized not only the
relationship between buyers and sellers but also the whole retail industry
(Shaw et al., 2004). Furthermore, in line with Schumpeter’s thinking (1934),
Chandler (1990) emphasized that organizational innovations are not limited
to new ways of organizing the process of production within a given firm.
Organizational innovations also include arrangements across firms such as
the reorganization of entire industries. Chandler (1990, p. 51) illustrated his
point by highlighting the tremendous impact the establishment of the trans-
portation and communication network in the United States between the
1850s and the 1880s had on the organization of the whole US distribution
industry.12
Recognizing the growing importance of refining the distinction between
innovation types, the OECD (2005, p. 49ss) introduced in its definition of
innovation a further distinction between organizational innovations and

marketing innovations. It defined the former as “the implementation of

a new organizational method in the firm’s business practices, workplace
organization or external relations” and the latter as “the implementa-
tion of a new marketing method involving significant changes in product
design or packaging, product placement, product promotion or pricing”
(OECD,2005, p. 49ss).
1.2 Innovation and implementation
Now that the main concepts surrounding the notion of innovation are
defined, it is important to identify concretely who innovates. As empha-
sized by the OECD (2010a, p. 55ss), people are at the heart of the innova-
tion process. They generate ideas and knowledge which spark innovation
and spread new technologies, products or services in the workplace and
throughout society (OECD, 2010a, p. 55ss). Almost every aspect of research
and development (R&D) and innovation requires the input of skilled people
(OECD, 2010b, p. 41ss). They play a crucial role in generating new knowledge
through basic and applied research, developing, installing and improving
new materials, products and devices, designing and engineering production
processes, running tests and collecting data or adapting and adopting tech-
nologies within the economy (OECD, 2010b, p. 41ss). It is worth noting
that the particular skills involved in these activities are not confined to
advanced academic knowledge or in-depth scientific capabilities, but they
also range from practical technical skills to management and team-working
skills (OECD, 2010b, p. 41ss). Because skilled people are central to economic
and social development, enhancing human capital has long been a priority
for many countries. In a report evaluating the importance of human capital,
the OECD (2007a, p. 34) found out that “if the average time spent in educa-
tion by a population rises by one year, then economic output per head of
population should grow by between 4% and 6% in the long run”. Although
this result has to be interpreted with caution, it nevertheless underlines the
crucial role of people and education in enhancing prosperity in the long run.
Furthermore, besides stimulating innovation and productivity, investing in
human capital also tends to be associated with better health, happiness and
other social benefits, such as lower crime and higher levels of social engage-
ment (OECD, 2001, p. 9ss).
Although people are the core cog to the innovation process, they have
largely been taken for granted in the innovation literature because most
innovations are too complex for one person to accomplish individually
(Thompson, 2004; Edquist, 2005). While the creative and imaginative genius
of the individual can be the mainspring of inventions, most innovations
have stemmed from the work of teams (Williams, 2000, p. 8). As emphasized
by Fagerberg (2005, p. 5) going back over Schumpeter, inventions may be

carried out anywhere, but innovations mostly occur in firms, though they
may also be implemented in other types of organization, such as univer-
sities, research institutions or hospitals. Innovation is a cognitive process
which relies on multiple sources of knowledge. This point will be thoroughly
developed in the second part of this volume because it largely contributes to
the understanding of the spatial features of innovation. The heterogeneity
between people’s skills, capacities and knowledge within an enterprise or
any innovation team makes the outcome of the innovation process highly
uncertain (Van de Venn et al. 1999, p. 3). Mobilizing, managing and directing
these innovation teams are therefore one of the keys to the success of the
innovation process.
To some extent, statistics on R&D reflect the prevalence of firms in the
innovation process.13 In 2008, almost 70% of total R&D expenditure in OECD
countries was carried out by business enterprises, 17% by higher education
institutions and 11% by government research institutes (private, non-profit
expenditure accounted for the rest) (OECD, 2010b, p. 31). Although public-
sector R&D might generate basic knowledge and technology spillovers that
lead to breakthroughs and innovation, econometric analyses have shown
that R&D performed by the business sector is likely to be the strongest driver
of a positive association between total R&D intensity and output growth
(OECD, 2003/2010b; Jaumotte and Pain, 2005; van Pottelsberghe, 2008).
Regarding the sources of funding for R&D performed in OECD countries in
2008, almost 65% were funded by business enterprises and 28% by govern-
ment budgets (other national sources and funds from abroad accounted
for the rest) (OECD, 2010b, p. 31). As illustrated in Figure 1.1, the source
of funding varies significantly between countries. For instance, while almost
60% of R&D expenditure was funded by government budgets in Poland or in
Greece, almost 80% was funded by private enterprises in Japan or in Israel.
These differences reflect the industrial and institutional environment of each
country and no “right mix” of funding sources can be determined.
Patent data confirm the dominance of business enterprises. As illustrated
in Figure 1.2, the breakdown of patent applications by institutional sector
in EU-27 countries emphasizes the preponderance of the business enter-
prise sector in terms of patent applications at the European Patent Office
(EPO). Although the European average hides discrepancies at national level,
almost 80% of patent applications at the EPO in 2004 were filed by business
enterprises. Moreover, in most countries government, higher education,
private non-profit and hospital sectors accounted for less than 10% of patent
applications at the EPO (Eurostat, 2008, p. 3). In a similar exercise aimed at
detecting the ownership of inventions, the OECD reached the same conclu-
sion by revealing that over the period 2003–2005 nearly 80% of patents filed
through the Patent Cooperation Treaty (PCT) were owned by the private
sector (OECD, 2008a, p. 24).14

Business enterprises Other (other national sources + abroad) Government
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Poland
Greece (2005)
Slovak Republic
New Zealand (2007)
Italy (2007)
Hungary (2007)
South Africa (2006)
Mexico (2007)
Norway (2007)
Spain (2007)
Austria
Portugal (2007)
United Kingdom
Turkey
Canada
Ireland (2007)
Iceland
France
Netherlands (2003)
Czech Republic
EU-15 (2007)
Australia (2006)
Denmark
Belgium (2007)
Slovenia
Sweden (2007)
Total OECD (2007)
United States
Germany (2007)
Finland (2007)
Switzerland (2004)
Korea (2007)
Luxembourg (2007)
Israel (2006)
Japan (2007)
Figure 1.1 R&D expenditure by source of financing, as percentage of national total,
2008 or nearest year available
Source: Adapted from OECD (2010b, p. 31).
Hospitals
0% Other
Private non-profit 16%
sector
2%
Higher education
sector
1%
Government
sector Business
1% enterprise sector
80%
Figure 1.2 Patent applications at the European Patent Office (EPO) by institutional
sector as percentage of total patent applications in the EU-27 countries, 2004
Note: “Other” groups individual applicants and patent applications for which a sector could not
be specified.
Source: Adapted from Eurostat (2008, p. 3).
While it is clear that business enterprises account for the majority of R&D
expenditure and patent applications, these two indicators do not provide
direct information on the implementation of innovations – this issue will
be thoroughly developed in Chapter 3. On the one hand, R&D data offer

Large SMEs All firms
Canada (manuf.)
Switzerland
Germany
Austria
Luxembourg
Belgium
Sweden
Denmark
New Zealand
Korea (manuf.)
Finland
United Kindom
Netherlands
Norway
France
Japan
00 10 0 20 0 30 0 40 0 50 0 60 0 70 0 80 0 90 0
Figure 1.3 Firms having introduced a product or process innovation as a percentage

of all firms, 2002–2004*
Note: * For New Zealand: 2004–05; for Japan: 1999–2001; for Switzerland: 2003–05
Source: Adapted from OECD (2009a, p. 29).
input measures of innovation, but give little direct evidence for the outputs
of the R&D process. As put forward in BusinessWeek, referring to a study of
the Doblin Group (BusinessWeek, 2012, Internet source): “Despite spending
huge sums on R&D, most corporations have dismally low levels of inno-
vation productivity.” On the other hand, patent data convey information
on the output of the inventive process, but further entrepreneurial efforts
are required to reach the innovation level. Innovation surveys that analyze
innovation in firms through a microeconomic perspective are often more
suitable to assess the implementation process of innovations. Unlike R&D
and patent data, which tend to underrate innovation in small and medium
enterprises (SMEs) because of cost issues, innovation surveys allow a better
understanding of the implementation process of innovations in all types of
firm. Figure 1.3 shows the result of an innovation survey conducted by the
OECD in 2009 (OECD, 2009a, p. 29) which evaluated the share of firms with
a product or process innovation in a selected sample of countries over the
period 2002–2004.
As illustrated, the share of firms with a product or process innovation
ranges from over half in Austria, Germany, Luxembourg and Switzerland
(as well as in manufacturing firms in Canada) to less than a third in France,
Japan and Norway. Regarding the breakdown by firm size, SMEs seem to be
relatively less innovative on average than large firms and differences among
countries are much less pronounced when the focus is on large firms.

1.2.1 The value chain model as a guiding

analytical framework
As business enterprises are the main actors in the implementation process
of innovation,15 the organization of their internal architecture plays a key
role in the success of the innovation process and in their overall competi-
tiveness. It is therefore particularly important to identify the place of inno-
vation activities among the various other activities performed by a firm
and to understand the role of innovation in the whole firm’s value crea-
tion process, since generating profitability is, at the end of the day, the
ultimate goal of every business enterprise. The concept of the value chain,
developed by Porter in 1985, represents a particularly useful tool to isolate
every value activity performed by a firm, from the purchase of inputs to the
commercialization and support of an output (Porter, 1985). By emphasizing
the role of innovation in the value creation process, the value chain model
helps us not only to analyze how innovation is managed internally at the
level of a particular firm but also to assess the embeddedness of the firm’s
innovation process with its surrounding environment and the opportuni-
ties offered by the globalization of the world economy. As a consequence,
the model of the value chain will be particularly valuable to evaluate the
geographical implications of innovation in the second and third part of
this book and will be used as a guiding analytical framework throughout
this study.
Porter founded his concept of the value chain on a thorough observation
of the sources of a firm’s competitive advantages. These arise from its capacity
to generate value for its buyers that surpass production costs (Porter, 1995,
p. 3). As emphasized by Porter (1995, p. 11), two main types of competitive
advantage may be identified: lower cost or differentiation. In other words,
competitive advantage stems from either the ability to offer lower prices
than competitors for equivalent benefits, or by providing unique advantages
at a premium price that exceed the extra cost of differentiating (Porter, 1995,
p. 11). As defined by Porter (1995, p. 36), firms are “a collection of activi-
ties that are performed to design, produce, market, deliver and support its
product”. As a consequence, competitive advantage cannot be evaluated
by looking at a firm as a whole but by analyzing the many discrete, but
interrelated, activities a firm performs (Porter, 1995, p. 33). Potential sources
of competitive advantage are everywhere in a firm and each activity may
contribute to a firm’s relative cost position or create a basis for differentia-
tion, and thus a specific competitive advantage (Porter, 1995, p. 33).
The concept of the value chain is a particularly useful tool to identify the
internal dynamism of firms and the various stages of economic activity that
constitute the production sequence of a specific product or service from start
to finish (Dunning and Lundan, 2008, p. 205ss). By disaggregating firms into
their basic strategically relevant activities, the value chain allows a thorough
analysis of the sources of a firm’s competitive advantage. It is worth noting

that value, not cost, is used to analyze competitive positions. While costs can
be deliberately raised in order to command a premium price through differen-
tiation, creating value that exceeds production costs is the ultimate goal of any
strategy aiming to create sustainable competitive advantage, whether the enter-
prise follows a cost leadership strategy or a differentiation strategy. Figure 5.4 in
Chapter 5 (p. 105) illustrates the value chain as conceptualized by Porter and
will be used as a guiding analytical framework throughout this thesis.16
The value chain consists of nine value activities that are linked together in
several ways. These value activities reflect, with the margin, the total value
created by a firm. Value activities are defined as the physical and technolog-
ical activities through which a firm creates a product valuable to its buyers.
They are divided into two broad types of activity, which can be broken down
into sub-activities when assessing a firm’s competitive position: primary
activities and support activities. The former, displayed along the bottom
of the value chain model (see Figure 5.4), ranges from the management
of production inputs and the physical creation of the product, to service
activities that enhance or maintain the value of the product, such as after-
sales assistance. The latter sustain the primary activities and themselves by
providing human resources, technology or procurement (purchased inputs
such as raw materials, machinery, equipment or buildings). The dotted lines
signify that support activities can either be associated with specific primary
activities or support the entire chain. Firm infrastructure, including func-
tions such as general management, planning, finance or accounting, is more
likely to support the entire chain. As emphasized, technology development –
defined in its broader sense – is considered by Porter as a support activity
that can either sustain a particular primary activity or the whole value chain.
According to Porter (1995, p. 165), every value activity embodies technology
and technology development is not confined to R&D but consists of all
activities that improve the product or the process.
As innovation is a crucial condition for firms to develop and maintain a
competitive edge, the management of innovation has recently attracted a
large amount of research, which has largely contributed to improving the
scientific knowledge about how the innovation process can be positively influ-
enced (i.a. Kaplan and Norton, 1992; Hamel and Prahalad, 1994; Rothwell,
1994; Van de Ven et al., 1999; Van der Panne et al., 2003; Verloop, 2004;
Cooper, 2005; Lazonick, 2005; Pavitt, 2005; Powell and Grodal, 2005; Tidd
and Bessant, 2009; Eveleens, 2010). For example, Hansen and Birkinshaw
(2007) adapted and specified Porter’s value chain to the specific concept of
the management of innovation and recommended viewing innovation as a
value chain on its own. Similarly, Mudambi (2008, p. 703), by referring to
Porter and Millar (1985), praised the usefulness of Porter’s value chain model
by stating that: “our understanding of the strategic aspects of creating and
capturing value from knowledge can be enhanced by placing them within
the context of the firm’s value chain”. Nevertheless, as advanced by Pavitt

(2005, p. 96): “The heterogeneity and contingent nature of innovation

means that there can be no simple ‘best practice’ innovation model for firms
or manager to follow. Each firm proceeds on the basis of its prior experience
and the technological trajectories evident in the specific industry or product
group. But the lack of global ‘best practice’ should not be taken to mean that
innovation strategy does not matter, nor that good management cannot
make a difference to firms’ productivity, market share, or profitability.”
The value chain is not a sequence of independent functions but a system of
interdependent activities (Porter, 1995, p. 36). Linkages between value activ-
ities have a direct impact on a firm’s competitive advantage. The way one
activity is performed directly influences the cost or performance of another.
Technology is an important building block of the value chain and techno-
logical change is one of the main drivers of competitiveness. It is never-
theless worth noting that technology alone does not yield any competitive
advantage. It is how technology is embedded within the value chain and
linked with other value activities that will affect the competitive position
of a firm. As stated by Porter (1995, p. 169), “technology affects competitive
advantage if it has a significant role in determining relative cost position or
differentiation”.
1.3 Concluding remarks
As has been shown in this chapter, the concept of innovation is particu-

larly broad and subtle and cannot be restrained by a single definition or
narrowed to a certain type. Although a distinction between product, process,
organizational or marketing innovation may be possible when looking at
individual cases, the frontier between these types of innovation tends to
blur at the level of the overall economy since, for example, a product inno-
vation may yield process, organizational or marketing innovation, and vice
versa. Similarly, although the distinction between invention and innovation
is important, innovation is a continuous process and no innovation could
have been implemented without an initial invention.
Section 1.2underlines the primacy of firms in the innovation process.
Although people are the backbone of invention and innovation, most inno-
vations are too complex for a single individual to carry out. The internal
organization of firms and the management of innovation are therefore
central to the success of the innovation process. As illustrated in Porter’s value
chain model, technology development is a key driver of firms’ competitive-
ness. Nevertheless, as there is innovation potential in every value activity, it
is how technology development is embedded within the whole value chain
that will influence a firm’s competitive advantage.
During a plenary session on entrepreneurship, innovation and interna-
tional business during the 2011 IB conference at the University of Reading
(UK) Casson said, “technology does not make money, it is how the value

chain is organized that makes money”. Moreover, and as developed in the

second part of this book, firms do not innovate on their own, but rely on
multiple interactions with their environment (Fagerberg, 2005, p. 12). It is
this cognitive nature that explains the geographical features of innovation
and the fact that a firm’s value chain is integrated in a broader value system
(Feldman, 1994; Porter, 1995).
As the integration of technology development and innovation within
a firm’s value chain is central for it to sustain and develop a competitive
advantage, it is particularly important to analyze carefully to what extent
innovation influences economic performance and how the impact of inno-
vation on economic variables has been approached by economists through
the years.

2
Innovation and Economic
Performance
Kline and Rosenberg wrote in their influential 1986 article (p. 279): “There
is no need to belabor the point that technological innovation is absolutely
central to economic growth and to improvements in efficiency. If there is any
residual doubt, one need only think back 100 years to 1885 and ask, ‘Would
any commercial firm operating as it did then survive in today’s economy?’”
The answer to this question is undoubtedly no. Similarly, a firm operating
as it did in 1985 would not survive in today’s global economy. Although it
is now well established that innovation and technological change are essen-
tial in enhancing long-term economic growth and standards of living, the
study of the impact of innovation on economic performance has long been
partially neglected in mainstream economics.
The aim of this chapter is therefore to present those main theories and
empirical studies that have gradually formalized the relationship between
innovation and economic performance. To that extent, this chapter is
articulated around three main sections. The first section reviews the tradi-
tional theories which investigated the role of innovation in contributing to
economic and social change throughout the history of economic thought.
The second section is devoted to the analysis of the relationship between
innovation and economic growth, which has received the most scholarly
attention by far. Finally, the third section looks at the impact of innovation
on catching-up and employment before emphasizing how competitiveness
can be a unifying concept in the evaluation of the economic significance
of innovation. By investigating the link between innovation and competi-
tiveness Section 3 proposes a new perspective on how recent developments
in the field of competitiveness can provide a relevant analytical framework
to integrate the different findings emerging from the literature presented in
previous sections. The introduction of the concept of competitiveness also
allows us to approach theories which address the economic impact of inno-
vation at different levels of analysis (firm/micro level vs. regional/country/
macro level) under a single umbrella.
24

Innovation and Economic Performance 25
In so doing, this chapter will not only contribute to recalling the economic
virtues of innovation but also go beyond the formal precepts of growth
theories to better underline the importance of innovation in an increasingly
knowledge-oriented economy. While many countries are currently facing
major economic challenges (unemployment, low growth rate, high levels
of debt, and so on), a focus on the key role of innovation in the stimula-
tion of competitiveness should offer today’s leaders a source of inspiration
to implement the most suitable policies for once more achieving a high level
of growth and to sustain prosperity in the long term.
2.1 Innovation through the history of economic thought
Although the study of innovation as a separate field of research only really

started in the second half of the 20th century, some pioneering insights on
the economic impact of innovation had already been expressed by some
of the major thinkers in the history of economic thought. As suggested by
Guellec and Ralle (2003, p. 26), two classic British economists, Smith (1776)
and Ricardo (1819), laid the groundwork for the growth theory. They both
depicted growth as the result of an accumulation of capital, namely the
quantity of production means available to workers. In other words, they
explained the growth of wealth per capita as the result of the growth of
capital per capita. Although their vision of the long term was relatively
pessimistic – they predicted that growth would progressively disappear and
plunge the economy into a “stationary state”1 – they formulated some valu-
able intuitions about the potential economic importance of innovation. For
instance, Smith, in his classic treaty “The Wealth of Nations”, introduced a
famous chapter emphasizing the virtues of the division of labor on produc-
tivity growth.2 By using the example of pin manufacture, Smith demon-
strated that the breaking down of large tasks into many tiny activities allows
each worker to become an expert in one isolated area of production, thus
increasing his personal efficiency as well as the efficiency of the firm as a
whole. The specialization of the work force and the division of labor induce
different types of innovation. By specializing in one precise task, a worker is
more likely to anticipate the specific need of his field of expertise by intro-
ducing product or process innovations (such as the invention of new tools
or the development of new production techniques) likely to increase his
productivity. The division of labor also implies a whole reorganization of the
firm, prompting major organizational innovations both at the firm level and
at the industry level.
Although innovation and technological change were present in these
classic theses, they remained confined to a peripheral position and were not
seen as a way to avoid a stationary economy in the long run. As noted by
Guellec and Ralle (2003, p. 29), the marginal role occupied by innovation

in classic theories resulted from a relative neglect of long-term analysis. For

instance, in the third edition of his book “On the Principles of Political
Economy and Taxation” (1821), Ricardo inserted a chapter on machinery in
which he focused on the effects of machines on employment. In his analysis,
machines were seen as destructive of jobs, substituting capital for labor, and
not as a source of potential productivity gains. As in Smith’s works, short-
term analysis dominated long-term perspective in Ricardo’s.
It is only with Schumpeter’s groundbreaking contribution that the roles
of innovation and technological change were formally integrated into an
economic perspective. Built on his background as an economist at the
turn of the 20th century, Schumpeter conceived an evolutionary approach
to long-term capitalist development by combining insights from Marx’s
dynamic outlook, the need for detailed, case-oriented, historical research
advocated by the German historical school led by von Schmoller, and the
micro-based approach praised by the neoclassicals in which evolution was
seen as the result of the interaction between individual actors rather than
as a macroeconomic process (Fagerberg, 2003, p. 126ss.). However, unlike
the classical or neoclassical approach, Schumpeter refuted the fact that the
economy would fall into a stationary state in the long run (Schumpeter,
1939, p. 72ss.; De Vecchio, 1995, p. 3). Although Schumpeter was a great
admirer of Walras and of the elegant construct which demonstrated the
game of balancing forces leading the economy to a static equilibrium
(Fagerberg, 2003, p. 128), he felt that “there was a source of energy within
the economic system which would of itself disrupt any equilibrium that
might be attained” (Schumpeter, 1937/1989, p. 166). Schumpeter never-
theless believed in the power of equilibrating forces in a world without
qualitative change (Schumpeter, 1939, p. 30ss.). He was however strongly
convinced that a stationary stance in the economy would never (or only
occasionally) be reached in the real world (Fagerberg, 2003, p. 128–129).
In his thoughts, innovation was that “source of energy” which would
constantly disrupt any possible equilibrium (Schumpeter, 1939, p. 86–87).
Schumpeter’s main goal was therefore to establish a theory of economic
evolution that would analyze the process of qualitative change through
time by setting up a dynamic approach based on rigorous historical obser-
vations (Fagerberg, 2003, p. 129).3
Schumpeter started his analysis by leaning upon the dynamic vision
developed by Marx in his study of capitalist evolution and social change.4
As Schumpeter noted: “what distinguishes him [Marx] from the economists
of his own time and those who preceded him, was precisely a vision of
economic evolution as a distinct process generated by the economic system
itself” (Schumpeter, 1937/1989, p. 166). Although Marx did not believe
in the sustainability of the capitalist system and, in line with the classics,
did not see growth as a lasting phenomenon, he was the first scholar to

recognize the economic role of innovation.5 He principally articulated his

thesis around the fact that “capitalist evolution was driven by technological
competition between firms” (Fagerberg, 2003, p. 129). In other terms, Marx
perceived innovation as the engine of economic growth. He postulated in his
classic book “Capital: A Critique of Political Economy” that capitalist firms
have to constantly introduce new and more efficient machinery to increase
their productivity and to remain competitive (Fagerberg, 2003, p. 130).
Those that succeeded would be rewarded by higher profits and an improved
competitive position, while those that failed would suffer from a decline in
profits and, eventually, be thrown out of the market. This argument became
the cornerstone of Schumpeter’s theory of evolutionary dynamics and is
now commonly referred to as “the Marx-Schumpeter model of technolog-
ical competition”, or as the model of “creative destruction”. As will be put
forward in the next section, models based on creative destruction state that
inventions constantly replace old technologies or products and make them
obsolete (Aghion and Howitt, 1998, p. 53ss.).
Like Marx, Schumpeter acknowledged the transitory nature of the
economic reward associated with successful innovation (Schumpeter,
1939, p. 105; Fagerberg, 2003, p. 130). “It [the profit] is the premium
put upon successful innovation in capitalist society and is temporary by
nature: it will vanish in the subsequent process of competition and adapta-
tion (Schumpeter, 1939, p. 5).” The argument goes: if one firm introduces
an important innovation, it will be rewarded by higher profits. Acting
quickly – before somebody else does – is therefore crucial to reap the poten-
tial economic reward of innovation. This has been directly identified by
Schumpeter as a key feature of the innovation process. Attracted by profit
opportunities, imitators (other firms) will then try to penetrate (“swarm”)
the market in the hope of absorbing a share of the benefits. As a conse-
quence, the initial innovator’s first mover advantages will tend to progres-
sively decline (Schumpeter, 1939, p. 106).
Schumpeter nevertheless extended Marx’s thoughts in two main ways.
First, while Marx limited his perception of innovation to process innova-
tions (as in mechanization), Schumpeter documented four additional types
of innovation, as already presented in Chapter 1 (new products, new sources
of supply, the exploitation of new markets, and new ways to organize
business). Second, unlike Marx, Schumpeter saw imitators as a potential
source of further innovation and not simply as the signal of an imminent
slowdown of growth. According to him, interactions between the initial
innovator and the swarm of imitators have a direct impact on growth.
As underlined by Fagerberg in an interpretation of Schumpeter’s theory
(2005, p. 15): “one (important) innovation tends to facilitate (induce)
other innovations in the same or related fields. In this way, innovation-
diffusion becomes a creative process – in which one important innovation

sets the stage for a whole series of subsequent innovations.” Therefore, this
dynamic fosters a marked growth of the sector in which the (important)
innovation occurred.
Schumpeter also pointed out that an innovation in one sector may
induce other innovations in related and supporting sectors or industries
(Schumpeter, 1939, p. 213ss.). The interdependency of the economy is there-
fore likely to make innovations “cluster” in certain sectors or industries,
geographical locations and time periods, unveiling thus temporally “growth
hubs” within the economy (Schumpeter, 1939, p. 213ss.).6 Although sooner
or later the growth of such sectors and their surroundings will tend to slow
down, Schumpeter pinpointed a certain cyclical pattern in the economy
(Fagerberg, 2003, p. 131).
Based on these observations, he derived a complex – and discursive – anal-
ysis of business cycles articulated around existing typologies developed by
the business cycle theorists Kondratieff, Juglar and Kitchin, who classified
business cycles according to their length. Schumpeter introduced a model in
which a basic Kondratieff long wave cycle of approximately half a century
was divided into six eight- to nine-year Juglar cycles, which in turn were each
broken down into three Kitchin cycles of about forty months (Schumpeter,
1939, p. 213ss.).
Although Schumpeter’s integrated model of business cycles has been
subject to much criticism – mainly because it was based on cycles which
were already being questioned and because it relies on relatively poor
statistical evidence – it brought illuminating insights to many aspects of
economic history and on the crucial role of innovation in the explanation
of long waves of growth in economic activity (Maddison, 1991). As under-
lined in Section 2.2, Schumpeter is commonly associated with Kondratieff
after having established a possible relation between innovation and long
waves of growth (commonly referred to as “innovation cycles”) (Fagerberg,
2003, p. 130).
Schumpeter further complemented his analysis by focusing on the social
features of the innovation process. He was the first scholar to depart from
the study of innovation as a given phenomenon to investigate how inno-
vations were actually created (Fagerberg, 2003, p. 131). Schumpeter defined
innovation as a new combination of existing knowledge and viewed the
innovation process as a specific social activity (Schumpeter, 1939, p. 88; De
Vecchio, 1995, pp. 15, 19). He also stressed the inherently uncertain nature
of the innovation process because it implies a constant struggle against
force of habit or inertia (De Vecchio, 1995, pp. 9, 145). As he noted in 1934:
“in the breast of one who wishes to do something new, the forces of habit
raise up and bear witness against the embryonic project” (Schumpeter,
1934, p. 86). It was in this context that Schumpeter introduced his famous
entrepreneurial function (Freeman and Soete, 1997, p. 6). According to

him, entrepreneurs – first seen as individuals and later as enterprises –

were the actors who had the competences to step outside the boundary of
routine and to disrupt any possible equilibrium (Fagerberg, 2003, p. 133).
Entrepreneurs were at the core of Schumpeter’s theory of economic evolu-
tion. They were the personification of the perpetual “source of energy”,
inducing innovation and economic growth (De Vecchio, 1995, p. 16). The
role of entrepreneurs will be further developed in the second part of this
thesis, when we will focus on the geographical characteristics of the inno-
vation process.
As suggested, Schumpeter greatly contributed to a better understanding of
the role of innovation and entrepreneurial dynamism in economic growth.
By approaching economic development as “a process of qualitative change,
driven by innovation, taking place in historical time” (Fagerberg, 2005,
p. 6), Schumpeter developed an original approach to the role of innovation
in economic and social change. Despite his insightful analysis, Schumpeter’s
theory did not have a significant impact on economic thought at the time.
One of the reasons given to explain this relative lack of interest lies in the
fact that Schumpeter’s disruptive theory was hard to formalize empirically
(De Vecchi, 1995, p. 3). As presented in the next section, advances in math-
ematics nevertheless progressively allowed growth theorists to incorporate
some of Schumpeter’s main ideas into their growth models (Fagerberg,
2005, p. 18).
However, Schumpeter indirectly influenced much research in fields such as
growth, international trade or competitiveness (Fagerberg, 2005, p. 15). For
instance, Vernon’s product life cycle theory (1966) – often referred to as one
of the pioneering attempts to theorize the activity of multinational enter-
prises (MNEs) – largely relies on Schumpeter’s vision of technological compe-
tition. Furthermore, the worldwide slowdown in economic activity during
the 1970s triggered a revival of interest in Schumpeter’s theory of long-term
economic and social change (Fagerberg, 2005, p. 18). For instance, Mensch
(1979) and Perez (1983) studied the role of organizational and institutional
change in the success of innovation. They particularly stated that major
innovations often require deep organizational and institutional change to
have a significant impact on growth, and that force of habit or rigidity are
important growth-impeding factors likely to explain variation of growth
over time. The study of the relationship between technological, organiza-
tional and institutional change has since been an important research issue
(Freeman and Louçã, 2001).
2.2 Innovation and economic growth
In the literature devoted to the analysis of the impact of innovation on economic

performance, the study of the relationship between innovation and economic

growth has received most attention (Fagerberg et al., 2005, p. 486). According to
Feldman (2004, p. 8), economic growth has to be understood in its most simple
sense as an increase in wealth as measured by indicators of change in the total
value of goods and services produced, such as Gross National Product (GNP)
or Gross Domestic Product (GDP) for countries, such as an increase in employ-
ment or tax base for sub-national or local jurisdictions, and such as an increase
in output measures like sales, profits or market share for firms. The analysis of
growth is therefore ineluctably multi-level since the growth performance of
firms (micro-level) directly influences the growth performance of regions and
countries (macro-level) (Ketels, 2008, p. 112; Porter, 2008, p. 48).
Understanding the determinants of growth and answering questions such as
“why has the wealth generated in the world’s most developed countries been
multiplied by fourteen since 1820?” or “how can differences in growth rates
between countries be explained?” have always aroused the interest of scholars
(Maddison, 2001; Guellec and Ralle, 2003, p. 3).7 As underlined in the previous
section, Schumpeter and the economic historians contributed to establishing
a link between economic growth and major historical developments or inno-
vations, such as the industrial revolution or the rise of electricity (Bruland
and Mowery, 2005; Verspagen, 2005, p. 498). Figure 2.1 below illustrates this
heuristic perspective of evolutionary economics based on historical artifacts.
As indicated, innovations were seen as the main trigger of economic
growth, likely to induce uneven growth patterns through time (Verspagen,
Bessemer Managerial Growth

process capitalism
Joint stock
Assembly
Canal mania company
belt
The telegraph
Thomas A. Networks
Edison
Factory system
Mechanization The rise of The rise of The American The rise of

of textiles, steam as a electricity as system of information and
production of pervasive a pervasive manufacturing commnication
pig iron technology technology technology
1750 1800 1850 1900 1950 2000

Industrial Age of Age of Age of The
Revolution Steam and Electricity Mass Information
Railways and Steel Production Age
Figure 2.1 Pattern of growth and technological revolutions

Source: Adapted from Verspagen (2005, p. 498).

2005, p. 498). At an early stage, the introduction of a major innovation stim-

ulates subsequent inventions and innovations, which improve and diversify
the initial advance – Schumpeter used the term “cluster” to describe this
process (Schumpeter, 1939, p. 212ss.). This dynamic environment fosters
a period of rapid technological progress and growth until opportunities
become less frequent and the rate of change starts to slow down and eventu-
ally even decline (Verspagen, 2005, p. 498).
Although this pragmatic approach was appealing and particularly insightful
in rightly stressing the fact that: (1) growth was a whole historical and social
process that could not solely be captured by statistical constructs, such as
data on per capita income; and (2) it was beyond dispute that technological
change was the main driver of a constant increase in living standards; it
nevertheless lacked a formal empirical setting to establish the precise role of
innovation in growth. Based on these observations and thanks to improved
mathematical tools, several models formalizing the relationship between
innovation and growth have emerged since the mid-1950s (Fagerberg,
2005, p. 18). Successively, models of exogenous and of endogenous growth
shaped the contours of current growth theory. They will be presented in the
following two subsections.
2.2.1 Towards a formalized model assessing the impact of

innovation on growth: the exogenous perspective
The neoclassical model of exogenous growth set the analytical framework
of reference for growth theory and established the first formal relationship
between innovation and growth (Aghion and Howitt, 2010, p. 19). As noted
by Aghion and Howitt (1998, p. 11): “the most basic proposition of growth
theory is that in order to sustain a positive growth rate of output per capita in
the long run, there must be continual advances in technological knowledge
in the form of new goods, new markets, or new processes.” Solow (1956) and
Swan (1956) were among the first scholars to formalize this proposition in
their neoclassical model of economic growth.8 They pointed out that dimin-
ishing returns imply constant technological progress to sustain economic
growth in the long term (Aghion and Howitt, 1998, p. 11). Their model was
particularly appealing because it described the growth process by relying on
a limited number of equations that gradually integrated capital (K), popula-
tion growth (L) and technological change (g).
The Solow–Swan model started with an aggregate production function
with constant returns in labor and reproducible capital in which output (Y)
was a function of capital (K) alone (Aghion and Howitt, 1998, p. 11).9
Y = F(K) (1)

An important feature of this model is that it postulated diminishing returns

to the accumulation of capital (or decreasing marginal productivity of
capital, meaning the more the quantity of capital increases, the more the
productivity rise associated with each new unit decreases). Redundancy
is often cited as the main cause of loss in efficiency linked with capital
augmentation.
Because population growth and innovation were not taken into account
in the first step, the only source of growth was therefore capital accumu-
lation. Solow and Swan formalized this relationship by suggesting that a
constant fraction (s) of people’s gross income (Y) was placed in savings and
that a constant fraction (δ) of capital stock vanished annually as the result
of depreciation (Aghion and Howitt, 1998, p. 12). The net rate of increase of
.
the capital stock (K) can therefore be noted as the difference between the rate
of new capital accumulation (sY or s F(K) as output is a function of capital)
and the rate of old capital disappearance (δK):
.
K = sF(K) – δ K (2)
This equation became the cornerstone of neoclassical growth theory (Aghion

and Howitt, 1998, p. 12). Figure 2.2 illustrates this relationship.
As emphasized, the depreciation line (δK) exhibits a straight relationship
between depreciation and capital stock of slope δ and the saving line (s F(K))
depicts how the gross flow of new investment depends on capital stock
Saving,
depreciation δK
s F(K)
dk
dt
0 K0 K* Capital stock
Figure 2.2 The Solow–Swan model of growth with no population growth and no
technological change
Source: Personal elaboration based on Aghion and Howitt (1998, p. 13).

(Aghion and Howitt, 1998, p. 12). Because of diminishing returns to the

accumulation of capital, the saving line has a positive but decreasing slope.10
As a consequence, the rate of increase of capital stock is the distance between
the saving line and the depreciation line (dK/dt). As far as the saving line lies
above the depreciation line (for example in K0), the stock of capital rises until
the point of convergence between the two schedules is reached in K*. This
last point represents a unique and stable stationary state of the economy in
the long run.
As underlined by Aghion and Howitt (1998, p. 12), the economic rational
of this dynamic is pretty straightforward: “When capital is scarce it is very
productive, so national income will be large in relation to the capital stock,
and this will induce people to save more than enough to offset the wear
and tear on existing capital. Thus, the capital stock K will rise, and hence
national income F(K) will rise. But because of diminishing returns, national
income will not grow as fast as depreciation. Eventually depreciation will
catch up with saving, and at that point the capital stock will stop rising.”
Without population growth and innovation, decreasing marginal produc-
tivity of capital impedes economic growth and leads the economy into a
stationary stance in the long run. According to this model, economic growth
was therefore only seen as a temporary phenomenon.
In a second step, Solow and Swan internalized population growth to their
basic setup. Unfortunately, they reached the same pessimistic conclusion
about long-term economic growth. In order to demonstrate this fact, the
authors added labor (L) to their initial production function:
Y = F (K, L) (3)
Output (Y) was then a function of capital (K) and labor (L). As technology
was still supposed to be fixed, constant returns to scale production were
assumed (for instance, if K and L double, Y consequently doubles). The
model supposed full employment, making L equivalent to the population,
and a constant growth of the population at the rate of n per year. Under
these assumptions, gross income per capita y ≡ Y/L is therefore dependent
on the capital stock per person k ≡ K/L. This relationship can be simplified
by using a classic Cobb-Douglas production function in which = L1– α Kα,
where 0 < α < 1.11 As a consequence, the production function per person can
be expressed as:
y = f(k) = kα (4)
.
and the net rate of increase of capital per person (K) as:
.
K = sf(k) – (n + δ)k = skα – (n + δ )k (5)

.
where K is positively influenced by the rate of savings per person (sy which
can be respectively written s f(k) and skα) and negatively associated with
capital depreciation per person (δk) and population growth (nk). Population
growth constitutes a new depreciation factor as it “dilutes” capital over a
larger pool of people. Figure 2.3 illustrates this relationship.
Similarly to the previous construct, diminishing returns set a maximal level
of capital per person. As noted by Aghion and Howitt (1998, p. 15), a point
of “steady-state” is reached in the long run in k* where the total of people’s
savings is necessary to counterbalance capital depreciation and population
growth. This equilibrium impedes output and capital from growing at a
faster pace than the rate of population growth and implies a cessation of the
growth of output per person.
Based on these conclusions, Solow and Swan found in technological
change the only force which could annihilate the negative effects of dimin-
ishing returns on long-term growth in output per person. Therefore, in a
third step, they internalized technological change by inserting a produc-
tivity variable A to their production function which reflects the current state
of technological knowledge:
Y = (AL)1–α Kα (6)
However, following the same mathematical logic as previously, this function

would plunge the economy into a steady state again. Indeed, population L
has only been replaced by a factor describing the “effective” population
Saving per person/

depreciation and (n+δ)k
dilution per person
s f(k)
dk
dt
0 K0 K* Capital per person
Figure 2.3 The Solow–Swan model of growth with population growth but no tech-
nological change
Source: Personal elaboration based on Aghion and Howitt (1998, p. 15).

AL. In the long run, the capital per “effective” person K/AL will tend to a
steady state in which Y and K will grow at the same rate n as the effective
population AL (Aghion and Howitt, 1998, p. 16). It was in this setup that
Solow and Swan further assumed that their productivity parameter A was
growing at an exogenous rate g. The effective population AL was therefore
not growing at rate n but at rate n + g. As a consequence, “as capital accumu-
lates, the tendency for the output/capital ratio to fall because of diminishing
returns to capital is continually offset by technological progress” (Aghion
and Howitt, 1998, p. 16). In other words, the exogenous rate of techno-
logical progress g was the only parameter allowing a sustained growth in
the long run.
It is necessary to stress that Solow–Swan’s construct suffers from certain
limitations. As put forward by Guellec and Ralle (2003, p. 37), the major issue
remains the exogeneity of the technological progress. Under this assump-
tion, technological progress is given to the actors and they have no influ-
ence on its level. The outcome of the model therefore anticipates a growth
rate equal to the rate of technological progress which is determined outside
of the model. As a consequence, the model does not explain growth but
describes an adjustment mechanism of variables along a fixed growth path.
The scope of the model is therefore relatively limited and has little explana-
tory power regarding the long-term trends of the economy.
Despite these limitations, the pioneer neoclassical model of exogenous
growth developed by Solow and Swan provided an optimistic vision of
growth in the long run and has been further extended by several economists
(Aghion and Howitt, 2010, p. 28ss.). For instance, Koopmans (1965) elabo-
rated a model of growth based on the original contribution of Ramsey (1928)
in which the rate of saving was endogenous, Sidrauski (1967) developed an
extension of the framework by including money and inflation, Brock and
Mirman (1972) analyzed the model in an uncertain future and Blanchard
(1985) presented a model with a finite horizon allowing him to analyze
the impact of government expenses, debt and deficits (Aghion and Howitt,
2010, p. 35).12
2.2.2 Towards a formalized model assessing the impact of

innovation on growth: the endogenous perspective
As put forward in the previous section, the neoclassical model consid-
ered technological progress as an exogenous variable determined by
non-economic forces. However, economists have always been aware
that technological progress was inherently rooted in economic activity
(Abraham-Frois, 1995, p. 540; Guellec and Ralle, 2003, p. 40). It results
from innovations developed by firms aiming at maximizing their profits
and is stimulated by expenses in science, R&D, capital or other economic
activities. Technology is therefore an intrinsically endogenous variable
determined within the economic system (Aghion and Howitt, 2010, p. 43).

In response to the limits of the neoclassical model of growth, a new stream

of research trying to endogenize technological progress started to emerge
and progressively set up what is now known as the endogenous growth
theory or the new growth theory.
AK models were the first growth models to offer an endogenous perspec-
tive of technological progress.13 They were based on Kaldor’s (1957) and
Arrow’s (1962) famous concept of “learning by doing” which defines techno-
logical progress as an involuntary consequence of the production and use of
new capital goods (Aghion and Howitt, 2010, p. 44). AK models assume that
the accumulation of capital coupled with the propensity of people to learn
from their actions induces technological progress which, in turn, increases
the marginal productivity of capital. This mechanism sets off the decreasing
marginal productivity observed when technology is supposed to be constant.
By assuming that the marginal productivity of capital does not vanish when
capital stock increases, the endogenous growth theory calls into question
one of the main properties of the neoclassical production function.
One of the simplest versions of the AK model has been formulated by
Rebelo (1991) and consists of one production function (1) and one saving
equation (2):
Y = AK (1)
.
K = sY (2)
in which Y is the output, K the capital, s the saving rate and A a fixed coef-
ficient. One of the main features of this model is that capital (K) is seen as
a composite factor – for instance, considering workforce as human capital.
Based on equations (1) and (2), the growth rate can be noted as:
.
K/K = sA (3)
In this model, growth is therefore self-sustained and its rate strictly dependent
on the saving rate and the marginal productivity of capital (Guellec and
Ralle, 2003, p. 41). In other words, changing the interpretation of only one
variable in the Solow–Swan model allows the capture of the intrinsic nature
of endogenous growth. Reducing growth to this model would, however, be
too shallow and withdraw much of the richness associated with the endog-
enous vision of growth. Several other versions of the AK model have been
further developed by growth theorists. Aghion and Howitt (1998, p. 24ss.)
present some of them, such as the early and often cited variant of Harrod
and Domar or the Frankel-Romer alternative.
Unlike neoclassical theory, which restrained sources of growth to capital
accumulation and exogenous technological progress, the endogenous growth
theory identifies a wider scope of potential growth’s triggers and formalized

them through different models (Guellec and Ralle, 2003, p. 47ss.). Table 2.1
gives an overview of the main types of capital which have been identified
and internalized as growth factors in endogenous models.
Similarly to exogenous perspectives, technological progress nevertheless
remained the cornerstone and the main engine of growth identified in the
endogenous analysis (Guellec and Ralle, 2003, p. 47). However, unlike their
predecessors, these new theories viewed technological progress as inher-
ently embedded in the economic activity and documented and modeled its
intrinsic features in a better way. The key role of knowledge and techno-
logical progress in economic growth mainly results from its partially public
nature. Public goods (or “collective consumption goods”) have been defined
by Samuelson in a pioneer article published in 1954 (p. 387) as the goods
Table 2.1 Main sources of capital influencing growth in the endogenous theory
Physical capital Investment in physical capital has been identified as a source of

growth both in neoclassical and endogenous theory. Nevertheless,
unlike the neoclassical vision that assumes decreasing marginal
productivity, the endogenous perspective postulates constant
returns thus allowing a self-sustained growth of the economy
through a “learning by doing” process. Romer (1986) formalized
this relationship by demonstrating the positive impact of inter-
firm externalities on growth. According to which, each firm’s
investment not only increases its own productivity but also the
productivity of other firms through technological externalities.
Human capital Although human capital has also been addressed in neoclassical
theory, the endogenous perspective focuses on the analysis of
the economics of human capital. According to Becker (1964),
education is an inter-temporal trade-off between its current cost
and future, potentially superior, remuneration. Human capital
has three main features: (1) it is rival – an individual cannot be
simultaneously employed in two activities, (2) it is excludable –
individuals own their skills, and (3) it generates externalities –
the knowledge of one individual increases that of others. Lucas
(1988) and Mankiw et al. (1992) studied the role of human capital
in economic growth. They developed growth models in which
knowledge was incorporated into the labor factor and in which
individuals allocated their time between work and education (as
in human capital accumulation), positively influencing growth.
Public capital Public capital includes all infrastructure and services owned and
offered by public authorities such as transport, communication,
energy, security and education. Barro (1990) analyzed the benefits
of public capital on growth. He demonstrated the positive effects
of government spending on infrastructure on capital and labor
productivity and on growth. Further empirical studies, such as
that of Egert et al. (2009) for the OECD, confirmed this positive
impact.
Source: Based on Guellec and Ralle (2003, p. 47ss.) and Deiss and Gugler (2012, p. 189ss.).

“which all enjoy in common in the sense that each individual’s consumption
of such a good leads to no subtraction from any other individual’s consump-
tion of that good, so that Xn + j = Xni + j simultaneously for each and every i th
individual and each collective consumptive good”. Through this definition,
Samuelson shed light on the non-rival and non-excludable characteristic of
public goods.
As put forward by Mankiw and Taylor (2010, p. 208) a public good is non-
rival because “one person’s use of a public good does not reduce another
person’s ability to use it” and non-excludable because “people cannot be
prevented from using a public good”. With these characteristics, knowledge
and technological progress are generally considered as partial public goods.
On the one hand, knowledge is, to some extent, non-rival. Its transmission
cost is far lower than its production cost and it can be used simultaneously by
an undetermined number of people. The example of the discovery of a new
chemical formula as the basis of a new drug is particularly illustrative here.
While it could have taken years and cost millions of dollars in R&D, once
publicly available it can be used globally and reproduced at a negligible cost
(the cost of a simple photocopy can sometimes be enough). On the other
hand, knowledge is also only partially excludable. Unlike the majority of
goods, the non-rival characteristic of knowledge makes it difficult to appro-
priate (Guellec and Ralle, 2003, p. 62ss.). The use of specific knowledge by
one person does not exclude its use by another. Property rights of immaterial
goods are therefore much more complicated to implement than for material
goods. Moreover, in addition to their non-rival and non-excludable charac-
teristics, knowledge and technology are also cumulative. Each new discovery
relies on previous knowledge and technology and contributes to increasing
the stock of knowledge available to the research community.
These unique characteristics of knowledge have been formalized in endog-
enous models of growth based on technology through the following equa-
tion: a = f(A), where a is the number of discoveries per researcher within
a certain period of time, A the total stock of knowledge available and f an
increasing function (Guellec and Ralle, 2003, p. 64; Aghion and Howitt,
1992). The growth rate of the stock of knowledge can also be expressed
.
as a function of the number of researchers: A /A = g(H), in which g is an
increasing function and H the number of researchers (Guellec and Ralle,
2003, p. 64). These models rely on the assumption that researchers have a
perfect comprehension of the current state of knowledge, that they benefit
from full access to all past discoveries which can be used simultaneously
by all researchers. As every new discovery increases the stock of knowledge
and is directly available to the research community, this mechanism unveils
an externality at the core of the growth process. Every researcher contrib-
utes to increasing the productivity of his colleagues and this externality is
even inter-temporal, as today’s discoveries benefit tomorrow’s researchers
(Guellec and Ralle, 2003, p. 64).

Although the social return from an innovation or a new knowledge tends

to be higher than its private return and thus represents a typical example of
a positive externality, the scope of the non-rival, non-excludable and cumu-
lative nature of knowledge has to be tempered (Guellec and Ralle, 2003,
p. 64ss.; Feldman, 2004, p. 6). First, the access cost to knowledge is rarely free.
For instance, knowing that the chemical formula of aspirin is C9H8O4 does
not make an individual an expert in pharmaceutical sciences. Interpreting
and using this formula implies the study and acquisition of specific upstream
knowledge and this process can be particularly costly. Furthermore, much
of the knowledge mobilized in basic research is often mastered – or even
known – by only a small number of scientists. As a consequence, knowledge
should be defined as a local public good subject to entry cost. Nevertheless,
although access cost to knowledge can be high and the number of people
using it rather small, it can still be considered as a public good since scien-
tists involved in the research process do not have to repeat the enitre effort
of their colleagues and can build their research on previous discoveries. Tacit
and uncodified knowledge, which cannot be transmitted through words and
formula but through direct interactions and learning by doing processes, do
not however really embrace the characteristics of public goods. They do not
directly contribute to the stock of knowledge and instead are associated with
human capital.
Second, although implementing clear property rights on knowledge is
relatively challenging due to its idiosyncratic nature, protecting innovators
is a critical condition to sustaining innovation and increasing the standard
of living in the long run (Guellec and Ralle, 2003, p. 66). In a world without
intellectual property protection, innovators would not be rewarded for their
discovery or able to safeguard their interests against copycats. As a conse-
quence, research effort would be discouraged and the pace of innovation
would slow down rapidly. In order to avoid such a situation, specific legal
frameworks have been designed to prevent intellectual property theft. For
instance, patents are one of the most common legal instruments to protect
inventions. As it will be put forward in more detail in the next chapter,
patents ensure their owners a temporary monopoly over their inventions
and allow them to derive value from them (OECD, 2009b, p. 21ss.). While
neoclassical models assumed perfect competition, new growth theories
rely on a logic of monopolistic competition in which firms can set a price
higher than the marginal cost in order to cover their research expenses.
Knowledge and technological progress cannot therefore be considered as
totally non-excludable.
Finally, the hypothesis stating that knowledge is cumulative is also ques-
tionable. On the one hand, a gap of several years between the discovery of
an invention and its incorporation into the public stock of knowledge may
be observed (Caballero and Jaffe, 1993). This discrepancy can be explained
by the fact that firms often prefer to keep their inventions secret rather than

demanding a patent and thus sharing their discoveries with competitors.

On the other hand, each new discovery does not always extend the stock
of knowledge. New knowledge often substitutes for old knowledge, making
it obsolete. This point not only raises a question about how to estimate the
contribution and weight of each particular innovation to the stock of knowl-
edge but also the very existence of such a stock.
To sum up, endogenous models are characterized by a wide array of identi-
fied sources of growth: physical capital, human capital, public capital and
technological progress. Although these sources had already been identified
by classic authors such as Smith (1776), endogenous theories were the first
to formalize them through models (Guellec and Ralle, 2003, pp. 47, 87). It
is worth noting that these sources of growth are not mutually exclusive but
interdependent and they interact simultaneously to stimulate growth. This
interdependence had already been pointed out by Smith (1776/1863, p. 2ss.)
through his example of the division of labor. As mentioned by Guellec
and Ralle (2003, p. 79), division of labor is enhanced both by technolog-
ical progress, which diversifies the scope of activities, and by the growth
of human capital, which becomes increasingly specialized. The quality of
human capital also relies on technological progress which fosters learning
incentives and, in turn, human capital (researchers or engineers) contrib-
utes to the development of new technologies. Technological progress is then
partially reflected in the commercialization of new machinery and equip-
ment resulting from investments in physical capital.
By documenting more carefully the various sources of growth and recog-
nizing that innovation and technological progress result from multiple inter-
actions occurring within the economic system itself, endogenous theories
internalize the complex features of innovation and technological progress
in the growth process in a better way. They clearly stated that while innova-
tion is important to the performance of countries, harnessing the potential
of innovation is in the microeconomic domain. Two main types of model
based on innovation complemented the AK vision to form what is now
known as the new growth theory: models of expanding varieties based on
horizontal differentiation and neo-Schumpeterian models based on vertical
differentiation.
Models of expanding varieties assume that innovation increases produc-
tivity through the creation of new varieties of goods, even if these goods do
not extend the technological frontier (Aghion and Howitt, 2010, p. 61). The
logic behind these models is that a wider choice allows each producer to
find the most suitable equipment/machine/tool to execute their activity and
therefore become more productive (Guellec and Ralle, 2003, p. 71). In other
words, diversity increases productivity. If we take the example of a house
painter, the more paintbrushes he has, the more productive he becomes
since he possesses the most suitable paintbrush for each task. The model

of expanding varieties has been formalized by Romer (1990) and relies on a

Dixit and Stiglitz (1977) production function:
Nt
Yt = ∑K
i=0
α
it
in which each Nt different variety is produced by using Kit units of capital.
As each variety is treated symmetrically, the aggregated stock of capital Kt
will be divided in equal share between the Nt different varieties (Aghion
and Howitt, 2010, p. 62). The production function can therefore be
rewritten as:
Yt = Nt1−α Ktα
Following this equation, the number of different varieties Nt represents the

aggregated productivity of the economy and its rate of growth corresponds
to the long-term growth rate of output per capita. In this model, growth is
therefore sustained in the long run as output is constantly produced with
a larger set of input, which outweighs diminishing returns to aggregated
capital (Aghion and Howitt, 2010, p. 62). Enterprises and innovators operate
in a Chamberlin-type of competition (monopolistic competition) in which
diversification and the development of new varieties procure monopoly
rents. This analytical framework has been further extended by authors such
as Grossman and Helpman (1991a, b), Rivera-Batiz and Romer (1991) or
Acemoglu and Zilibotti (2001).14
The second type of endogenous growth model based on innovation has
been developed by Segerstrom, Anant and Dinopoulos (1990), Corriveau
(1991), Grossman and Helpman (1991a), and Aghion and Howitt (1992;
1998) and relies on the modern theory of industrial organization which
considers innovation as the main engine of industrial competition (Aghion
and Howitt, 2010, p. 75). These models have been commonly referred to as
“Schumpeterian models of growth” because innovations tend to make old
technologies or products obsolete (Aghion and Howitt, 1998, p. 53ss.). The
famous concept of “creative destruction” developed by Schumpeter is at the
core of these models of vertical differentiation.
The logic of these models can be illustrated by describing the model of
Grossman and Helpman (1991a). As put forward by Guellec and Ralle (2003,
p. 73), Grossman and Helpman (1991a) represented the economy by a fixed
vector of different goods, each responding to specific consumer needs and
indexed by level of quality. Quality improvement was reflected in the model
by lower price. Quality was defined relatively intuitively and measured in
terms of additional utility generated by innovation. For example, digital
boards (or uniboards), increasingly installed in classrooms and auditoriums

to facilitate teaching, are an improved version of overhead projectors or

blackboards. These three types of products nevertheless fulfill the same
goal – supporting knowledge transfer within a determined space (the class-
room) – and can therefore be considered as substitutable. In their model,
Grossman and Helpman (1991a) assumed that each good was independently
produced by one unique producer monopolizing the necessary production
technology and that consumers opted for the good which offered the best
value for money. The optimal price behavior of each competing producer
therefore gives the advantage to the innovator. As a consequence, the quality
of goods consumed gradually increases over time. As innovations continually
supplant old technologies, growth is sustained by the constant improvement
in the quality of goods resulting from the process of creative destruction, a
process mathematically formalized by Aghion and Howitt (1992).
Although models of horizontal and vertical differentiation represent a
significant step forward in the formalization of the role of technological
progress and innovation in the growth process, they do not capture all the
complex features of innovation (Herrera, 2000). As noted by historians such
as Gille (1978) or Mokyr (1990), technological progress is not the simple
addition of equivalent discoveries developed within and emerging from
a common stock of knowledge (Guellec and Ralle, 2003, p. 75). On the
one hand, some discoveries are more important than others, for example,
Schumpeter distinguished radical innovations from incremental innovations
(Schumpeter, 1939, p. 101). On the other hand, discoveries tend to be linked
by commonalities and to concentrate in certain sectors, geographical loca-
tions and time periods. Schumpeter used the term “cluster” to describe this
process (Schumpeter, 1939, p. 212ss.). As analyzed in detail in the second part
of this thesis, innovation is a cognitive and particularly complex and uncer-
tain process implying many interactions between a wide array of different
actors. Because of the simplistic vision offered by models of differentiation,
scholars started to develop models of a higher analytical complexity which
tried to better integrate the intrinsic features of innovation in the growth
process. The works of Young (1993a, b) or Bresnahan and Trajtenberg (1992)
can be highlighted here.
Despite these attempts, new growth theories suffer from some limitations
(Guellec and Ralle, 2003, p. 87ss.; Arestis et al., 2007, p. 1; Setterfield, 2010,
p. 1; Galor, 2011; p. 3). First, no general model internalizing all the identi-
fied sources of growth, the different forms of technological progress and
their interactions in the growth process has been developed (Guellec and
Ralle, 2003, p. 88). Although the conceptualization of such a model would
presumably be impossible because of the complexity of the reality, it never-
theless restrains the scope of the results of endogenous models. None of these
models gives a complete picture of all the variables interacting in the growth
process. They only give partial visions and ignore many interactions and
forms of technological progress at the root of growth. Second, the modeling

of behaviors of agents is questionable and does not reflect the complexity

of relations between actors involved in the innovation process (Guellec
and Ralle, 2003, p. 88; Galor, 2011, p. 3). It is difficult to make hypotheses
such as perfect anticipations or total rationality compatible with an endog-
enous vision of growth. While new growth theories argue that growth and
technological progress are inherently rooted within the economic sphere,
endogenous models do not internalize the intrinsic nature of innova-
tion, namely that the innovation process is highly uncertain, disorderly
and often unpredictable (Kline and Rosenberg, 1986, p. 275). Innovation
and technological progress are anything but rational. Third, coordination
modes are poorly reflected in endogenous models (Guellec and Ralle, 2003,
p. 88). While interactions between enterprises, governments, special agen-
cies, professional associations or other institutions directly influence tech-
nological progress and innovation in economic reality, their effects have
been partially ignored in endogenous models. Fourth, the success of endog-
enous growth theories overshadowed other valuable theories of economic
growth that complemented traditional thinking (Setterfield, 2010, p. 1).
However, a new stream of research has recently started to investigate these
alternative theories in more detail and to extend the state of knowledge
about economic growth (i.a. Hagemann and Seiter, 2003; Arestis et al., 2007;
Setterfield, 2010; Galor, 2011).
Although new growth theories are somewhat stylized and do not totally
internalize the essence of Schumpeter’s thoughts about innovation and
economic development, they nevertheless represent a significant advance
compared to neoclassical models, which just acknowledge growth without
really explaining it (Guellec and Ralle, 2003, p. 87). For instance, endog-
enous growth models formalize some of Schumpeter’s ideas in a frame-
work of general equilibrium and give rigor to his intuition by defining
the hypotheses necessary to their representation (Guellec and Ralle, 2003,
p. 75). Similarly to Schumpeter’s theses, they also depict growth trajecto-
ries explained by technological progress and agents’ behaviors (Guellec and
Ralle, 2003, p. 75).
2.3 Competitiveness as a unifying concept in the

evaluation of the economic impact of innovation
Although the relationship between innovation and economic growth has

received particular attention, scholars have also studied the impact of inno-
vation on other economic variables (Fagerberg et al., 2005, p. 486). Among
these, catching-up and employment, for instance, have been the focus of
several analyzes and this section will therefore briefly survey the main find-
ings emerging from the empirical literature on these subjects.
However, the notion of competitiveness has recently become increas-
ingly popular at both policy and firm levels. In a relatively unstable world

economy, restoring competitiveness is currently one of the main concerns for

many developed economies and this challenge can only be taken up if policy
makers and business leaders embrace a common vision (Porter and Rivkin,
2012, Internet source). This section will emphasize how advances in the
study of competitiveness offer a unique perspective on the economic signifi-
cance of innovation. By departing from the complex constructs developed in
growth theories, the concept of competitiveness provides a unifying frame-
work to assess concretely the primacy of innovation in today’s economy.
Without going into too much detail, because Parts II and III will investigate
thoroughly the main drivers of competitiveness, this section presents some
preliminary remarks on the crucial role of innovation in competitiveness.
2.3.1 Innovation and economic development (catching-up)

While the difference in income and productivity per capita between the
most advanced and the least developed economies has never been so large,15
history is full of examples of backward countries or regions that have taken
up the slack, narrowed the gap and even outstripped the economic and
technological leaders of the time (Fagerberg and Godinho, 2005, p. 514).
Innovation has always been one of the main engines of this catching-up
process (Fagerberg and Godinho, 2005, p. 515). For example, if we go
back to the beginning of the 19th century, the UK was the world’s most
developed economy and recorded a GDP per capita 50 percent above the
average of other leading capitalist economies (Fagerberg and Godinho, 2005,
p. 515). Nevertheless, during the second part of the 19th century, the US and
Germany both began to catch up. The US implemented new systems based
on mass production and economies of scale and Germany developed new
organizational methods of production (Freeman and Soete, 1997; Freeman
and Louça, 2001). In other words, neither the US nor Germany boosted their
economies by imitating products or processes already established in the UK,
but by innovating and developing more efficient ways of organizing produc-
tion and their entire economic system. A similar pattern has been observed
in describing the rapid growth of Japan some years later (Freeman, 1987;
Aoki, 1988).
Although catch-up may seem relatively close to what has been defined as
economic growth in the previous section, it is more associated with struc-
tural evolution, which tends to be the necessary foundation for a country,
region or firm to generate higher value-added activities (Feldman, 2004,
p. 9). Moreover, and as put forward by Feldman (2004, p. 9), “causality
between economic growth and economic development is uni-directional:
while economic development likely leads to economic growth, continued
economic growth does not necessarily imply economic development”. Veblen
(1915) and Gerschenkron (1962) may be cited as among the first authors
interested in the study of catch-up. They particularly focused their analyses
on the German catch-up with the UK prior to World War I (Fagerberg and

Godinho, 2005, p. 516). Two main catching-up patterns have been derived
from their works. On the one hand, Veblen (1915) considered catch-up as
a relatively easy process largely dependent on pecuniary inducement. His
argument resulted from his observation of the evolution of technology at
the time. He noted that while technology had previously been more tacit
and directly embodied in people, the rise of machines as the main source
of productivity improvement made technology more codified and more
easily transmittable. On the other hand, Gerschenkron (1962) elaborated a
totally opposed vision. He noticed that technological progress required deep
institutional adaptations, that it was constantly becoming more complex
and that it always involved more stakeholders. According to Gerschenkron
(1962), market forces were therefore not sufficient for successful catch-up to
take place. It required the commitment of other actors, such as governments
or private organizations (Fagerberg and Godinho, 2005, p. 517).
The literature on innovation and economic development gained a new
breadth with the rise of Asian economies on the international economic
stage from the second half of the 20th century (Fagerberg and Godinho,
2005, p. 518). While the World Bank (1993) adopted a Veblen-type of frame-
work to analyze the rapid catch-up of Asian countries, most of the research
(i.a. Johnson, 1982; Amsden, 1989; Wade, 1990; Shin, 1996) was articulated
around Gerschenkron’s perspective. For instance, the rapid growth of the
Japanese economy attracted a large amount of research in the 1990s (Beasley,
1990). From the Meiji restoration in 1868, which laid the groundwork for a
system oriented towards the strengthening of the economy, to the modern-
ization process launched after World War II by the Japanese government
hand in hand with the private sector to reform the majority of the economy
(education, research, legal system, physical infrastructure, and so on), Japan
experienced a particularly fast but organized catching-up process based on
profound structural change and the support of specific sectors (identified
as strategically important), which progressively led many industries (steel,
ship-building, car or electronic) to the productivity frontier (Fagerberg and
Godinho, 2005, p. 519). The success of the Japanese economy inspired
many other developing countries, especially Asian ones such as South Korea,
Singapore, Taiwan, and more recently China (Fagerberg and Godinho, 2005,
p. 520). Although they developed their own catching-up pattern, they all
undertook profound reforms of their economic systems and this process
embodied a wide array of different actors and required many innovations of
all types and at all levels.
Finally, a third strand of the literature – with Abramovitz (1986, 1994) as
a leading figure – took a macroeconomic perspective to analyze the rela-
tionship between innovation and economic development (Fagerberg and
Godinho, 2005, p. 523). Abramovitz noticed that differences in growth
between countries might be explained by two main concepts: technological
congruence and social capability (Fagerberg and Godinho, 2005, p. 523). The

former refers to the similarities between leader and follower countries and
the latter points to the various structural changes that have to be undertaken
by backward economies to catch up (improving education, infrastructure
or technological capacity). His argument can be illustrated by the example
of Western Europe in the second half of the 20th century. In order to catch
up with the US, Western European countries first developed a more inte-
grated market, which facilitated the application of American scale-intensive
technologies, and second, undertook significant structural reforms to stim-
ulate their business environment (Fagerberg and Godinho, 2005, p. 523).
Moreover, economists such as Nelson (1968), Gomulka (1971), Cornwall
(1977), or Baumol et al. (1989) developed testable models of cross-country
divergence in growth and productivity performance which internalized the
potential for catch-up as an explanatory factor. Fagerberg (1994) and Temple
(1999) provide reviews of this literature.
2.3.2 Innovation and employment

Among the subsequent number of studies investigating the complex
and sometimes unpredictable relationship between innovation and
employment,16 two types of research can be emphasized: those focusing
on the impact of innovation on the quantity of employment, investigating
whether innovation tends to create or destroy jobs; and those analyzing the
impact of innovation on the quality of employment or whether innovation
tends to modify the workforce’s skill-structure (Pianta, 2005, p. 568).
Regarding the former type, research has been conducted at different levels
of analysis. First, authors such as Machin and Wadhwani (1991), Brouwer
et al. (1993), Meghir et al. (1996), Van Reenen (1997), Smolny (1998), or
Greenan and Guellec (2000) studied the effects of different types of inno-
vation on employment at the firm level.17 The results emerging from this
literature tend to support a relatively positive relationship between inno-
vation and employment (Pianta, 2005, p. 576). For instance, Van Reenen
(1997) and Machin and Wadhwani (1991) found a positive impact of inno-
vation on the number of jobs created in a sample of UK firms. However,
firm-level studies do not give any indication about whether or not the rise of
employment in innovating firms has happened at the expense of other firms
(Pianta, 2005, p. 576). Another strand of the literature has therefore analyzed
the relationship between innovation and employment at industry level.18
The results of these studies are less consistent. While innovation tends to
have a positive effect on employment in industries oriented towards product
innovation and facing high demand growth, process innovations tend to
cause job losses. For instance, in a study based on an innovation survey
covering 30 manufacturing sectors in Italy, Vivarelli et al. (1996) found a
negative impact for process innovation and a positive impact for product
innovation on employment. Similarly, although Pianta (2000; 2001), who

conducted a cross-sector analysis in 21 manufacturing industries across

five EU countries, and Antonucci and Pianta (2002), who ran a cross-sector
study in eight EU countries, found overall negative effects of innovation on
employment at the industry level, they both pointed out significant positive
effects of product innovation. The last approach assesses the relationship
between innovation and employment at the macroeconomic level (Pianta,
2005, p. 580). Although this vision may be the most comprehensive as it
can account for indirect effects such as compensation mechanisms,19 the
complexity of the conception of these models limits their scope (Pianta, 2005,
p. 582). Nevertheless, these studies put forward that the effect of innovation
on employment is highly dependent on a country’s specific macroeconomic
conditions and institutional environment (Pianta, 2005, p. 582). Moreover,
it also seems that the relationship tends to be positive in economies in which
product innovation, investment in innovative activities and effect of price
reductions on demand-increase are higher (Pianta, 2005, p. 582). Studies
by Layard and Nickell (1985), Vivarelli (1995), Simonetti et al. (2000), or
Simonetti and Tancioni (2002) can be cited here.
The second type of research focused on the effect of innovation on the
quality of employment. It evaluated whether or not innovation had an
impact on workforce skills. Although subsequent literature (reviewed by
Acemoglu, 2002) identified a technological bias towards skilled workers –
arguing that innovation tends to replace unskilled labor and increase wage
inequality – many studies also pointed out that this bias was not always
evident (Pianta, 2005, p. 584). For instance, in research analyzing the link
between computerization, upskilling and wage inequality, Howell (1996)
found that while a significant skill increase could have been observed
between 1973 and 1983, at the beginning of the computerization of the US
economy, this trend was not confirmed afterwards. Similarly, Howell and
Wolff (1992) discovered that the bias was also less clear when measures of
skill were refined and not just limited to blue- or white-collar jobs or years of
schooling. Analogous studies have been conducted by Machin (1996), Doms
et al. (1997) and Bresnahan et al. (2002) at the firm level and by Berman
et al. (1994), Autor et al. (1998) and Machin and Van Reenen (1998) at the
industry level. Other studies analyzed the effects of technological change on
wages. They also tended to moderate the polarization impact of innovation
on wages. For instance, in an analysis of over 70 empirical studies Chennells
and Van Reenen (1999) found that modern computing technologies did not
really contribute to increasing wage dispersion. Similar results have been put
forward by Casavola et al. (1996), Sanders and ter Weel (2000), Addison and
Teixeira (2001). Pianta (2005, p. 588) perfectly summarized the complexity
of the analysis of innovation on employment by stating: “Although there is
little doubt that, in the long term, technological change is associated with
improvements in the skills and wages of some workers, the specific effects

of innovation on employment in particular countries and periods reflect the

operation of many other factors, including economic structures, the strat-
egies of firms, the operation of labor markets rules and institutions, and
national economic policies.”
2.3.3 Innovation and competitiveness
As mentioned previously, competitiveness represents a particularly suit-
able concept for understanding the crucial role of innovation on economic
performance and to unify the various developments presented throughout
this second chapter.
The relationship between innovation and competitiveness has attracted a
lot of research over the last two decades. Whereas the issue of competitive-
ness at the national level has witnessed a renewed interest,20 a growing litera-
ture has also emerged on competitiveness at the level of regions, industries
and firms (Krugman, 1996; Porter, 1998a; Cantwell, 2005, p. 543–544).21 This
recent attention, resulting from the globalization of competition and the
consequent need to increasingly compare performance with that of competi-
tors, has led – especially in media and politics – to a misleading interpretation
of the notion of competitiveness (Cantwell, 2005, p. 544). As pointed out by
Krugman (1994, p. 29), competitiveness is not about damaging one another
but should be understood as a benchmark for how well each participant
performs in building capacity for innovation and growth. Cantwell (2005,
p. 544) suggested the following definition: “Competitiveness ... mean[s] the
possession of the capabilities needed for sustained economic growth in an
internationally competitive selection environment, in which environment
there are others (countries, clusters, or individual firms, depending on the
level of analysis) that have an equivalent but differentiated set of capabili-
ties of their own.” In other words, competitiveness concerns just as many
enterprises as governments, and both business leaders and policy makers are
inherently intertwined in the enhancement of competitiveness.
The determinants of competitiveness are complex and have long captured
the attention of economists (WEF, 2009, p. 4). Nevertheless, the Global
Competitiveness Report (GCR) identified 12 pillars that have a particularly
strong impact on competitiveness (WEF, 2012, p. 4–8).22 Among these pillars,
innovation plays a crucial role in enhancing economic growth and stand-
ards of living in the long run (WEF, 2012, p. 7). Figure 2.4 illustrates the link
between innovation and competitiveness.
As suggested in Figure 2.4, it is now well established in the literature that
the prosperity of an economy depends on its competitiveness and that
competitiveness reflects the capacity of an economy to maintain a sustain-
able growth of productivity over time (i.a. Lewis, 2004; Berger, 2006; Farrell
and Klemperer, 2006; McKinsey, 2006a, b; Vietor, 2006; Rodrik, 2007; Gugler
et al., 2010). Productivity in turn depends not only on the value of goods

Prosperity
Productivity Competitiveness
Innovative capacity
Figure 2.4 Innovation and competitiveness

Source: Adapted from WEF (2008, p. 45) and Council on Competitiveness (2001, p. 14).
and services produced by an economy but also on the prices that can be fixed
in open markets and the efficiency with which these goods and services are
produced (WEF, 2008, p. 45). As a consequence, productivity has a direct
impact on wages and returns on investments, which are two of the main
variables reflecting the value created by an economy. Finally, high levels of
prosperity, productivity and wages can only be sustained by the capacity of
an economy to innovate. In other words, innovation is the engine of produc-
tivity growth, competitiveness and prosperity and a sine qua non condition
for maintaining high standards of living in the long run.
By giving innovation a central role in the stimulation of productivity and
the enhancement of prosperity, recent advances in the study of competi-
tiveness offer a particularly interesting framework for understanding the
economic significance of innovation and to confederate the main findings
presented in previous sections. As emphasized by Sala-I-Martin et al. (2012,
p. 4): “[Competitiveness] drive[s] productivity enhancements that support
high incomes by ensuring that the mechanisms enabling solid economic
performance are in place.” In other words, innovation has a direct influ-
ence on employment, economic development and growth and contributes
therefore to sustaining high levels of competitiveness and prosperity for
both firms and countries. As the link between innovation and competitive-
ness is central to this research, it will be developed further in the following
chapters.
As put forward throughout this chapter, the study of the economic impact
of innovation has been a progressive endeavor. Although early economic
thinkers always had a feeling that novelty, technological change or

innovation might have a certain impact on the evolution of the economy,

innovation did not enter mainstream economics before the middle of
the 20th century. Schumpeter was the first author to really pinpoint the
crucial role of innovation in economic growth. Through his famous, and
still often cited, concept of “creative destruction,” he departed from the
mechanical and rigid neoclassical vision of the economy by arguing that
innovation was the source of energy that would constantly disrupt any
possible equilibrium.
Despite his pertinent insights, Schumpeter’s analysis was too disruptive
and descriptive to have the expected impact on economic thought at the
time. His influence nevertheless inspired many economists and prompted
the development of a more rigorous analysis of the relationship between
innovation and economic performance, in which growth theorists played
a decisive role. Although neoclassical models established the first formal
link between innovation and growth, the fact that technological progress
was described as an exogenous variable determined by non-economic forces
largely reduced the scope of their analysis. A determinant step forward was
made by new growth theorists who developed endogenous models in which
innovation was generated within the economic system itself. By formally
placing innovation as the main engine of growth, their contributions defi-
nitely established innovation as an unavoidable field of economic studies
and sparked new research on the effect of innovation on other economic
variables, such as employment or economic development. More recently,
however, the study of competitiveness provided new tools for understanding
the crucial economic importance of innovation by departing from the rigid
models developed by growth theorists and integrating in a unifying frame-
work the main lessons from previous theories.
While it is now well established that innovation is critical in enhancing
economic growth and standards of living in the long run, the recent
economic downturn has once again shed light on the crucial role of inno-
vation in today’s knowledge-driven economy. As emphasized by the OECD
(2010a, p. 9), many countries have recently “seen reduced potential output
growth, increased unemployment and soaring public debt”. In this partic-
ularly volatile environment in which some traditional sources of growth,
such as investment in physical capital, are declining in importance and in
which stagnating populations tend to reduce the role of labor in long-term
economic growth, both governments and firms have understood that inno-
vation will increasingly be needed to drive growth and employment and to
improve living standards (OECD, 2010a, p. 10). Building an environment
conducive to innovation is therefore a priority for every government and
firm wishing to sustain and develop a competitive edge in today’s globalized
economy. A recent declaration by US President Barack Obama perfectly

reflects this new economic reality and the understanding of the primacy of
innovation by political leaders (USA Today, 2011, Internet source): “Cutting
the deficit by gutting our investments in innovation and education is like
lightening an overloaded airplane by removing its engine. It may make you
feel like you’re flying high at first, but it won’t take long before you feel the
impact.”

3
The Measurement of Innovation
While it is beyond dispute that innovation is the main driver of the
continual increase in standards of living (Verspagen, 2005, p. 487), meas-
uring innovation is complicated by the fact that it is a continuous process
involving some kind of novelty original and qualitative changes and that it
tends to generate positive spillover effects far beyond its industry of origin
(Kline and Rosenberg, 1986, p. 279; Carter, 2007, p. 18). As posited in the
previous chapter, the high-profile literature on growth avoided the meas-
urement issue by developing complex theoretical models without empirical
evidence (Carter, 2007, p. 15). As measurement is a sine qua non condition
for a wider acceptance of the economic significance of innovation to society
and to scientific progress in the field, economists and government organi-
zations have bypassed the problem by developing measures that captured
some aspects of innovation in the process (Carter, 2007, p. 15). A large debt
is owed to the work of the OECD from the 1960s and economists such as
Schmookler (1950, 1954) and Price (1961, 1963), who directed the atten-
tion of scholars to the measurement of science and technology (Godin,
2002a, p. 4). Nevertheless, it is essential to underline that the complexity
of the notion of innovation, as emphasized in Chapters 1 and 2, makes it
particularly challenging to measure.
As illustrated in Figure 3.1, innovation indicators developed by intergov-
ernmental organizations, such as the OECD, were elaborated upon a model
of inputs and outputs. The general idea behind this conceptual framework
is that different kinds of input interact to stimulate a complex and uncer-
tain innovation process (often seen as a “black box”), presumably leading to
innovation outputs likely to have a positive influence on economic growth.
The first interpretation of this input/output model was much less nuanced.
It relied on a linear vision of the innovation process in which basic research
prompted applied research, development, production and diffusion (cf.
Chapter 4). In other words, inputs (seen as investment in research activity)
automatically generated innovation outputs (Godin, 2002a, p. 6). As empha-
sized in the next chapter, subsequent research on innovation nevertheless
52

The Measurement of Innovation 53
Innovation input Innovation output
Innovation input Innovation Innovation output
process
Innovation input Innovation output
Figure 3.1 Conceptual foundations of innovation indicators

Source: Personal elaboration based on OECD (1993), Godin (2002a), and Smith (2005).
revealed the much more complex nature of the innovation process and
pointed out the difficulty in measuring innovation effectively (Kline and
Rosenberg, 1986, p. 285).
It is worth noting that finding an adequate measure of innovation is still
an ongoing process and a major concern within the economic community.
As noted by Griliches (1990, p. 14): “The dream of getting hold of an output
indicator of inventive activity is one of the strong motivating forces for
economic research in this area.” Despite the fact that the available measures
do not capture all the subtleties of innovation, the aim of this chapter is to
present the main indicators that have been developed to evaluate innova-
tion. In the literature on measurement in science, technology and innova-
tion (STI), two main groups of indicators can be identified and will define the
structure of this chapter: input measures of innovation and output measures
of innovation. A special emphasis will be put on the latter and especially on
patent-based indicators since patents are at the core of the empirical investi-
gation carried out in Part III.
3.1 Input measures of innovation
R&D indicators are the most widely used measure of innovation input and
proxy for the level of innovative effort (Rogers, 1998a, p. 12; Potters, 2009,
p. 7). As noted by Smith (2005, p. 153), the popularity of this indicator is
explained by the long-standing tradition of data collection on R&D activity.
In 1963 the OECD produced the first Frascati Manual, using data collected
since the 1950s, and establishing standard practice for surveys on research
and experimental development (R&D). In its seventh and most recent
edition, the OECD (2002, p. 30) defines R&D as “creative work undertaken
on a systematic basis in order to increase the stock of knowledge, including

knowledge of man, culture and society, and the use of this stock of knowl-
edge to devise new applications”.
R&D encompasses three different types of activity broken down by their
distance from application: basic research, applied research and experimental
development (OECD, 2002, p. 76ss.). Basic research refers to pure research
that aims for a better understanding of observable phenomena without any
particular objectives in terms of application (OECD, 2002, p. 77). Applied
research is also devoted to acquiring new knowledge but with a more prac-
tical purpose. Experimental development outlines systematic work based on
existing knowledge acquired from research and/or practical experience with
the objective of improving or producing new processes, systems or services
(OECD, 2002, pp. 78–79). R&D does not include some science/technology-
related activities. For instance, according to the OECD guidelines, R&D
excludes education and training activities (except research at PhD level) or
other related activities such as the collection or coding of scientific and tech-
nical information (OECD, 2002, p. 30).1
Although the boundaries between R&D and related scientific and tech-
nological activities are not always easily discernible, the basic criterion to
distinguish between them is “the presence in R&D of an appreciable element
of novelty and the resolution of scientific and/or technological uncertainty,
i.e. when the solution to a problem is not readily apparent to someone
familiar with the basic stock of common knowledge and techniques for the
area concerned” (OECD, 2002, p. 34). Besides being classified according to
the distance from application, R&D indicators are also broken down into five
main sectors (business enterprise, government, private non-profit, higher
education and abroad) and are generally measured in terms of expenditure
(as a percentage of total sales at firm level, of business expenditure [BERD] at
industry level or of gross expenditure [GERD] at country level) or personnel
(as a percentage of total employment in firm, industry or country) (OECD,
2002, p. 51ss.; Kleinknecht et al., 2002, p. 110).2
R&D statistics do have evident drawbacks in the measurement of inno-
vation, despite obvious advantages related to their availability over long
time periods at different aggregated levels that allow for inter-country,
inter-industry and inter-firm comparisons. First, R&D is an input measure of
innovation estimating a certain knowledge potential but there is no reason
to believe that: (a) it will be used and allocated efficiently; (b) it will generate
effective innovation (in the sense of a new product or process being intro-
duced to the market) (Rogers, 1998a, p. 13; Kleinknecht et al., 2002, p. 110).
Although, regarding point (b), no consensus has emerged in the literature yet.
While it seems clear that the ratio of innovation to R&D expenses tends to
be relatively low (i.a. Acs and Audretsch, 1988; Farrell, 2005; Nussbam et al.,
2005),3 several studies (at various levels of analysis) have shown that R&D
investments are positively associated with innovation and that investing
in R&D is critical for sustaining growth in the long term (i.a. Mansfield,

1984; Balachandra and Friar, 1997; Van der Panne et al., 2003; Astebro, 2004;
Bilbao-Osorio and Rodriguez-Pose, 2004; Negassi, 2004; Ulku, 2007). Second,
although R&D is the most commonly used measure of innovation effort, it
is only one of many inputs to innovation (Potters, 2009, p. 7). As empha-
sized by Kleinknecht et al. (2002, p. 111), non-R&D inputs, such as design,
trial production, market study, staff training or investment in assets that
foster innovation, are examples of other types of input interacting in the
innovation process. Felder et al. (1996) provided an interesting analysis of
the role of non-R&D inputs in German manufacturing industries. Similarly,
Brouwer and Kleinknecht (1997) showed that product- and service-related
R&D was only about one quarter of the total product innovation expendi-
ture in Dutch manufacturing and service industries in 1992. Interestingly,
they also found that the share of R&D in total innovation expenditure was
higher in manufacturing than service industries, confirming a “manufac-
turing bias” already detected in case studies. This result explains to a large
extent the long neglect of innovation in service industries, at both policy and
research levels (Kleinknecht et al., 2002, p. 111). Third, R&D surveys have
largely been designed on the basis of a linear vision of innovation in which
basic research was the (necessary) starting point to the innovation process
(Kleinknecht et al., 2002, p. 111). As a consequence, R&D measures tend
to severely underestimate R&D activities in small and medium enterprises
(SMEs), which do not necessarily have the means or the resources to conduct
formal basic research (Kleinknecht et al., 2002, p. 111). Furthermore, survey
questions have often been formulated to identify systematically organized
R&D activity and are therefore complicated for SMEs to answer precisely
(Kleinknecht et al., 2002, p. 111). As a result, SMEs often report none of
their small-scale or informal R&D activity (Kleinknecht et al., 2002, p. 111).
This primacy of R&D indicators and the efforts devoted to the collection of
R&D data have also negatively influenced the gathering process of non-R&D
input data on innovation, which explains the current lack of reliable data on
non-R&D inputs of innovation. Fourth, the secret nature of a firm’s research
activities also tends to weaken the accuracy of R&D measures (Kleinknecht
et al., 2002, p. 111). This issue is particularly problematic in small economies
in which R&D data cannot be revealed at a sufficiently low level of sectoral
aggregation because of data protection. For example, if a particularly innova-
tive enterprise were located in a small region in which no other significant
player was active, it would be too evident (to competitors) to link the R&D
performance of the region to that firm. Finally, the disaggregation of R&D
data at regional level also tends to be biased as some firms (especially multi-
plant or multinational firms) can report their R&D activity as within a single
holding company, whereas the R&D effort is executed in multiple plants
scattered throughout the territory (Kleinknecht et al., 2002, p. 112).
Despite limitations on the use of R&D as a proxy for innovation, the litera-
ture tends to reveal significant evidence of positive returns on investment in

R&D (Dowrick, 2003). This issue is of particular interest to firm managers,

policy makers and economists in general since R&D expenses are often
important and it is therefore crucial to know whether or not they lead to
positive returns and, if they do, how to allocate them to maximize their
outcome. As put forward by Hall et al. (2010, p. 1035), while policy makers
are more interested in social or economy-wide returns on R&D investment
(because they can be greater than the private returns to individual firms),
managers are more interested in private returns to justify the amount invested
in research activity. It is important to note that “returns” are highly sensi-
tive to complex and unpredictable interactions between factors such as firm
strategy, competitor strategy and the idiosyncrasies of the macroeconomic
environment (Hall et al., 2010, p. 1035). In other words, return patterns are
highly specific and cannot be easily generalizable from one case to another.
(Hall et al., 2010, p. 1035).
Many econometric studies have tried to evaluate returns on R&D. The
majority have relied on production functions in which the output of a firm, a
sector or an economy is related to its stock of R&D or knowledge capital (Hall
et al., 2010, p. 1036). As put forward by Hall et al. (2010, p. 1037), a general
consensus reflecting strong positive R&D rates of return (usually higher than
those on ordinary capital) tends to emanate from these studies. On the whole,
private returns on R&D in developed economies during the past half-century
reached 20–30 percent on average, with peaks at 75 percent, or 10–20 percent
depending on whether the estimates were based on production functions
or on cost/profit functions (Hall et al., 2010, p. 1052ss.).4 Furthermore, as
R&D carried out in one firm/sector/country can affect the productivity in
other firms/sectors/countries by unveiling new research opportunities or
new applications, many studies have also focused on the assessment of R&D
spillovers and the social returns on R&D. Although empirical evidence on
social returns tends to be more variable, they are almost always estimated as
greater than private returns (Hall et al., 2010, p. 1065).
Although econometric studies tend to show a relatively high correlation
between R&D, innovation and rates of return, which justifies the use of R&D
data as a measure of innovation to some extent, they essentially focus on
measuring the impact of R&D on productivity (Griffith et al., 2000, p. 2;
Dowrick, 2003). As noted by Smith (2005, p. 154), this approach is limited in
two ways: it implies that R&D is the main engine of productivity growth and
innovation; it fails to exploit the richness of available R&D data.
3.2 Output measures of innovation
Science policies were developed over two main periods in the second half
of the 20th century (Godin, 2002b, p. 2). First, they were concentrated on
the funding of science activities and on creating scientific communities

and research infrastructures (Godin, 2002b, p. 2). Second, they were

concerned with how to allocate scarce resources efficiently and how to
foster selected socio-economic objectives (Godin, 2002b, p. 2). These two
periods influenced the development of two different sets of innovation
indicators (Godin, 2002b, p. 2). Until the mid-seventies, as discussed in the
previous section, most indicators focused on input measures of innovation.
This was in line with a certain linear vision of innovation in which basic
research was the natural starting point to the innovation process. As stated
by Godin (2002b, p. 21): “Input indicators went hand in hand with early
science policies that were devoted to funding research for its own sake.”
Input measures were therefore designed to justify the amount spent by
governments on research and the OECD’s Frascati manual is particularly
characteristic of this period.
It is only in the late 1970s and early 1980s that output indicators started
to be collected systematically (Godin, 2002b, p. 6). In line with the second
period of science and technology measurement, the aim of these indicators
was to evaluate science and technology and the outcome of government
spending on research activities. As noted by Rogers (1998a, p. 10), the ulti-
mate measure of innovation output is the success of the firm, which can be
assessed by measuring profits, revenue growth, share performance, market
capitalization or productivity. Nevertheless, as analyzed by Gow and Kells
(1998) and Rogers (1998b, p. 10), these indicators do not directly reflect the
level of innovativeness and can be the result of interactions between a wide
array of different factors. As a consequence, specific measures for capturing
the outcome of the innovation process have been developed. Although
indicators of the technological balance of payments or for high technology
trade were designed by the OECD in the 1980s, they never established them-
selves as legitimate output indicators of innovation because of several limi-
tations (Godin, 2002b, p. 4). Two main types of output indicators shape the
current set of measures available for evaluating the outcome of the inno-
vation process: indicators of intermediate outputs such as patent counts;
and citations and indicators of final innovative outputs such as innovation
counts.5
3.2.1 Patent data as an intermediate measure of the

innovation process
As defined by Hall (2008, Internet source) in the online version of the New
Palgrave Dictionary of Economics, “A patent is the legal right of an inventor
to exclude others from making or using a particular invention. This right
is sometimes termed an ‘intellectual property right’ and is viewed as an
encouragement for innovation.” Patents are a legal tool used by individuals,
firms or institutions to protect an invention and are, as such, an indicator
of invention rather than an indicator of innovation (OECD, 2009b, p. 18).

This distinction is crucial. Although some kind of invention is necessary in

the innovation process, an invention requires further entrepreneurial efforts
(development, manufacturing, marketing) to reach the innovation stage
(OECD, 2009b, p. 12). It is nevertheless worth noting that a high level of
inventiveness tends to reflect a potentially high level of innovativeness and
a dynamic economic environment (Griliches, 1990).
The patent system is far from being new and some early designs of patents
protecting inventions and administrating some kind of legal monopoly to its
owner can be traced back to the 15th century (Hall, 2008, Internet source). As
noted by Hall (2008, Internet source), Brunelleschi, one of the most promi-
nent Italian architects and engineers of the Renaissance, received a patent
for a boat specially conceived to convey marble up the Arno in Florence in
1421. Although similar examples could be emphasized in other European
countries since the 15th century onwards, the appearance of modern types
of patent systems started to emerge in the 18th century in the UK and in the
US before progressively becoming universal during the 20th century (Hall,
2008, Internet source).
The implementation of a formal patent system led to the conception of
patent statistics to assess science and technology activities since the 1950s
(OECD, 2009b, 12). The pioneer works of Scherer (1965) and Schmookler
(1950, 1954, 1966) who used patent data as an indicator for innova-
tion output in the economic analysis of technological change are here of
particular significance (OECD, 2009b, p. 12).6 The use of patent statistics
as indicators of innovation output and measures of science and technology
activities increased with the computerization of society (OECD, 2009b,
p. 12). Griliches published a groundbreaking paper in 1990 which assessed
the use of patent statistics as economic indicators and definitely set patent
data as “a unique resource for the study of technical change” (Griliches,
1990, Abstract). Following these new evidences, the OECD released its first
patent manual in 1994 which established guidelines in the collection of
patent data and standards in the use of patent indicators (OECD, 1994). At
the same time, national and regional patent offices increased their efforts to
harmonize patent data and to offer electronically available database (OECD,
2009b, p. 12). Today, patents are a key indicator of science and technology
activities and almost every report on innovation devotes a section to patents
(OECD, 2009b, p. 14).
In order to appropriately use and interpret patent indicators, it is neces-
sary to understand the legal and economic logic standing behind the patent
system. On the one hand, patents are legal titles attributed to protect inven-
tions (OECD, 2009b, p. 18). Although patents can be granted in every tech-
nological field, laws of nature, natural phenomena and abstract ideas are
generally not patentable (OECD, 2009b, p. 19; Sterckx and Cockbain, 2012).
At the international level, the legal foundations of patents are rooted in the
Agreement on Trade-Related Intellectual Property Rights (TRIPS) decreed by

the World Trade Organization (WTO) in the frame of the Uruguay Round
of the General Agreement on Tariffs and Trade (GATT) in 1994. The rights
conferred by patents are specified in article 28 of the agreement:
1. A patent shall confer on its owner the following exclusive rights:
(a) where the subject matter of a patent is a product, to prevent third
parties not having the owner’s consent from the acts of: making,
using, offering for sale, selling, or importing for these purposes that
product;
(b) where the subject matter of a patent is a process, to prevent third parties
not having the owner’s consent from the act of using the process, and
from the acts of: using, offering for sale, selling, or importing for these
purposes at least the product obtained directly by that process.
2. Patent owners shall also have the right to assign, or transfer by succession,
the patent and to conclude licensing contracts.
As stipulated in article 33: “the term of protection available shall not end
before the expiration of a period of twenty years counted from the filing date”.
As a consequence, patents can be defined as legal instruments providing
a set of temporary exclusive rights offering their owner(s) a competitive
advantage and allowing them to derive value from their invention (OECD,
2009b, p. 19).7 Although patent legislation can vary from one country/
region to another, the TRIPS agreement establishes minimum standards
among the 153 countries currently members of the WTO. Patents never-
theless remain territorial rights and only offer protection in the country/
region in which they have been granted (OECD, 2009b, p. 19). For example,
a patent granted by the Swiss Federal Institute of Intellectual Property has
no restrictive forces in the US except preventing the patenting of the same
invention, as worldwide novelty is a necessary condition to apply for a
patent (OECD, 2009b, p. 19).
Different administrative routes can be chosen when applying for a patent:
the national route, the international route or the regional route (OECD,
2009b, pp. 19–21). The choice between these routes depends on the busi-
ness strategy of the inventor (OECD, 2009b, p. 19). Usually, inventors start
by filing an application at a national patent office. The date of application
corresponds to the priority date and coincides to the beginning of a thor-
ough and particularly demanding examination process conducted by the
patent office to check whether the application fulfills the necessary legal
and technical criteria to be granted (OECD, 2009b, p. 19). In order to be
accorded, an invention must be “i.e. directed to patentable subject matter,
novel, inventive (“non-obvious to persons skilled in the art”) and capable of
industrial application” (OECD, 2009b, p. 19). The application is published
18 months after its demand and the time lag until the grant or the refusal
varies between two and eight years (OECD, 2009b, p. 19). Inventors also

have the possibility to protect their invention internationally. The most

common procedure is through the Patent Cooperation Treaty (PCT) which
has been institutionalized by the World Intellectual Property Organization
(WIPO) in 1978 and which allows inventors to file an unified international
application up to the end of the thirtieth months after the priority date
(OECD, 2009b, pp. 19–20). The last way to apply for a patent is the regional
way. Applicants can submit a demand to a regional patent office such as
the Eurasian office, the African Regional Intellectual Property Organization
(ARIPO) or the European Patent Office (EPO). A regional patent confers its
owner protection and exclusivity over its invention within the region in
question (OECD, 2009b, p. 20).
On the other hand, it is also necessary to emphasize the economic foun-
dations of patents. The ultimate goal of the patent system is to encourage
invention and technical progress by providing a temporary protection over
inventions (OECD, 2009b, p. 21). As emphasized in the previous chapter,
without an appropriate legal framework allowing inventors to derive value
from their inventions, the partially public nature of knowledge and its
non-excludable and non-rival characteristics would tend to discourage
investments in research activities. By conferring exclusive rights to inven-
tors, patents make knowledge excludable and allow inventors to decide
under which conditions their invention can be used (OECD, 2009b, p. 21).
It is worth noting that patents are not the only way to protect intellec-
tual assets. As put forward by Levin et al. (1987), Cohen et al. (2000), or
Blind et al. (2006), secrecy, short product development cycles or a time lead
on competitors can be alternative ways to appropriate the returns of R&D
activities.
By keeping knowledge non-rival, patents nevertheless encourage inventive-
ness in two main regards (Scotchmer, 2004; Guellec and van Pottelsberghe,
2007; OECD, 2009b, p. 21). First, because patents are publicly available, they
unveil knowledge that would have probably been kept secret (OECD, 2009b,
p. 21). This disclosure process allows inventors to build their research on
new knowledge held in patents and prevents unnecessary investments and
efforts in R&D activities (OECD, 2009b, p. 21). The patent system is therefore
likely to orient research towards cutting-edge areas (OECD, 2009b, p. 21).
Second, as patents are tradable legal titles, they have set up “technology
markets” which have improved the allocation of resources between inven-
tors and developers (OECD, 2009b, p. 21). As noted by the OECD (2009b,
p. 21): “Patent rights allow the most efficient users to implement inventions
(e.g. through licensing for instance) even if they did not necessarily invent
them or to exchange technologies needed for further innovations.” Smith
(2005, p. 158) can here be cited as a summary of the economic logic of the
patent system: “the patent system is designed as an incentive-mechanism for
the creation of new economically valuable knowledge and as a knowledge-
dissemination mechanism to spread this information”.

Besides the legal and economic foundations of patents, it is necessary

to emphasize their strengths and weaknesses in the assessment of inven-
tive activities. On the one hand, patents present striking advantages in
the analysis of the invention process and its outcome. First, and as already
mentioned previously, patents are closely related to inventions (OECD,
2009b, p. 27). Although not every invention is patented, each patent applica-
tion directly reflects the outcome of an invention process. Second, as patents
must demonstrate non-obvious progress with the current state of the art
and be susceptible of commercial application to be granted, patents (should)
reflect inventions with innovation promise (Smith, 2005, p. 159). Third, the
patent system covers a unique range of technologies (OECD, 2009b, p. 27).
This broad coverage allows not only to monitor the inventive dynamism of
existing technologies but also to identify the emergence of new technolo-
gies. For example, few other sources of data could have better documented
the rise of biotechnology or nanotechnology as new promising research
areas these last years. Fourth, patent data offer an incomparable spatial and
temporal coverage (OECD, 2009b, p. 27). Almost all countries currently have
a patent system and some are already established for more than two centu-
ries. Moreover, these long time series have only been marginally altered by
changes in patent laws (Kleinknecht et al., 2002, p. 112). Fifth, patent data
are free, publicly available and increasingly computerized (Kleinknecht et al.,
2002, p. 112; Smith, 2005, p. 159). Although the cleaning process of patent
databases can be time consuming, the marginal cost of using patent data
for researcher is much lower than conducting in-depth innovation survey
(OECD, 2009b, p. 27). Sixth, patent documents offer a unique set of infor-
mation about the invention process. Besides a detailed description of the
invention, each patent document contains information about the date of
filing, the date of publication, the technical field of the invention, the name
and the address of the inventor(s) and of the applicant(s) (owner), citations
to previous patents or bibliographic references (OECD, 2009b, p. 27).
On the other hand, patent data also have drawbacks in the evaluation of
technological activity. First, patents are an indicator of invention and not an
indicator of innovation (Smith, 2005, p. 160). In other words, they reflect the
discovery of new technical principles but do not imply any direct commer-
cial application. Second, not all inventions and innovations are patented
(OECD, 2009b, p. 28; Kleinknecht et al., 2002, p. 112). Although some rough
estimations related principally in press articles put forward figures such as
99.9 percent of inventions/patents fail to reach the innovation stage and be
commercially viable (BusinessWeek, 2005, Internet source), these statements
miss the big picture. Although it is true that a large majority of inventions/
patents does not have any commercial application and does not succeed
commercially, they all contribute to some extent to increase the stock of
knowledge, stimulate the innovative activity and set the foundations on
which future successful inventions are built. Rather than citing approximate

Patented
Inventions
innovations
Innovations Patented
inventions
Figure 3.2 Illustration of the relationship invention, patent and innovation

Source: Personal elaboration based on OECD (2006, p. 162).
figures, it is better to illustrate the situation. As pointed out in the Venn

diagram in Figure 3.2, within the scope of inventions, only a share of inven-
tions is patented and an even smaller share of innovations is patented.
While invention is a necessary step in the innovation process, inventions
and innovations are not automatically patented and patent data therefore do
not cover the whole scope of inventions (and, by consequence, innovations)
(Pavitt, 1988, p. 509ss.). On the one hand, not every invention justifies the
cost of patenting (OECD, 2009b, p. 27). If the commercial perspective of an
invention is weak or if it only contributes marginally to the current state of
the art, an inventor could decide not to apply for a patent. Moreover, some
inventions do not fulfill the legal requirement of patenting. On the other
hand, patents are a trade-off between the cost of the disclosure of the inven-
tion and the benefit of the temporary monopoly granted by the state (Smith,
2005, p. 158; De Rassenfosse, 2010, p. 7). If costs outweigh benefits, firms
could therefore either decide, for example, to keep their invention secret or
to keep qualified people (inventors) in the firm rather than apply for a patent
(Levin et al., 1987; Cohen et al., 2000; Cohen et al., 2002; Kleinknecht et al.,
2002, p. 112). Third, the value of patents largely varies from one patent to
another (OECD, 2009b, p. 28). While a large share of patents does not have
any industrial application or only represents minor improvement, only a
small share has a very high value (OECD, 2009b, p. 28). Patents are also the
result of strategic considerations (Kleinknecht et al., 2002, p. 113). Some
patents are demanded only to prevent competitors to patent the same inven-
tion or to use the invention. In an analysis of German patents, Scherer and
Harhoff (2000) found out for instance that 10 percent of the most valuable

patents accounted for more than 80 percent of the total value of all the
patents. Pakes and Schankerman (1986) or Gambardella et al. (2008) offer
detailed analyzes of the skewed distribution of patents’ value. It is never-
theless worth noting that, again, even if all patents do not have the same
value they all tend to contribute to some extent to the stock of knowledge.
Moreover, the number of citations can be a way to assess the value of patents.
As each patent document records former patents on which the invention
relates, the number of citations received can be used as an indicator of the
value of a patent – the more citations, the more value (i.a. Harhoff et al., 1999;
Frost, 2001; Harhoff et Reitzig, 2002; Duflos, 2005). Fourth, the propensity to
patent differs significantly between industrial sectors (OECD, 2009b, p. 28).
As mentioned by Kleinknecht et al. (2002, p. 113), sectoral differences tend
to be influenced by the relative costs of innovation versus imitation. If imita-
tion is relatively easy, firms have a strong incentive to protect their inven-
tions and apply for patents (and conversely if imitation is complicated and
costly) (Kleinknecht et al., 2002, p. 113). The pharmaceutical sector is a good
example of sector in which imitation costs are relatively low and in which
the propensity to patent is high (Kleinknecht et al., 2002, p. 113). Generic
drugs are representative of this situation. While the R&D costs of a drug are
extremely high, once the protection over the invention ends the drug is
easily reproducible at relatively low costs. The electronics/semiconductors
industry is another industry in which the propensity to patent is high. As
emphasized by the OECD (2009b, p. 28), a patented invention in the semi-
conductors industry is often followed by a flow of other patent applications
that aims to protect incremental variation of the initial invention in order
to prevent the entry of new competitors and to sell the rights to use the
inventions. As a consequence, strategic considerations may generate “patent
flooding” in certain industries. Moreover, the propensity to patent tends also
to vary according to the size of enterprises (OECD, 2009b, p. 28). New, SMEs
or companies that do not have the necessary large-scale production capaci-
ties to cover the costs of patenting tend to record less patents than large
firms (OECD, 2009b, p. 28). Brouwer and Kleinknecht (1999) analyzed in
more details the firms’ propensity to patent. They showed that small firms
have a threshold problem. As the first patent is particularly expensive in
terms of information costs, small firms tend to have a lower probability to
apply for at least one patent but once they have demanded their first patent
they tend to apply for a proportionally higher number of patents. They also
found out that firms that collaborate on R&D are patenting more intensively
than non-collaborators and that firms in so-called high technological sectors
have a higher propensity to patent than firms in low technological sectors.
Although mixed results have emerged from the literature, it nevertheless
seems that the propensity to patent increases with the size of the firm as
larger firms can spread fixed costs of patent over a large number of patents
(Arundel and Kabla, 1998; Cohen et al., 2000; Arundel, 2001; Arora et al.,

Table 3.1 Main strengths and weaknesses of patent data in the assessment of
technological activity
Strengths Weaknesses
● Patents are closely related to invention. ● Patents are an indicator of
● Patents (should) reflect inventions with invention and not of innovation.
innovation promise. ● Not all inventions and
● Patents cover a unique range of innovations are patented.
technologies. ● The value of patents largely
● Patents offer an incomparable spatial and varies from one patent to
temporal coverage. another.
● ● The propensity to patent differs
Patent data are free, publicly available and
increasingly computerized. significantly between industrial
● Patent documents offer a unique set of sectors and firms.
● Patent data are complex.
information about the invention process.
Source: Personal elaboration based on Section 3.2.1.
2008; Nagaoka et al., 2010).8 Fifth, patent data are complex. As the patent
system is based on legal and economic considerations, patent statistics have
to be interpreted carefully (OECD, 2009b, p. 28). Table 3.1 below summarizes
the main strengths and weaknesses of patent data in the evaluation of tech-
nological activity.
As noted by Archibugi (1992, p. 366): “Patents are a fascinating indicator
because they lead the analyst into the process of invention and innovation.”
Despite the limitations presented above, patent data are widely acknowl-
edged in the literature as a good index of inventive activity (Griliches, 1990).
Most difficulties that arise in the use of patent statistics can be overcome
by interpreting them carefully and by applying appropriate methodologies
(Griliches, 1990, p. 1; OECD, 2009b, p. 29). As a consequence and thanks to
the unique information contained in patent documents about the invention
process, patent data have been extensively used by researchers to address a
broad range of issues (Smith, 2005, p. 160; OECD, 2009b, p. 30).
Among the most common topics addressed in the vast literature using
patent data, numerous studies have focused on the relationship between
patents and: (i) economic performance (i.a. Griliches, 1998; Ernst, 2001;
Porter, 2003a; OECD, 2004); (ii) technological performance (i.a. Griliches
et al., 1987; Tong and Davidson Frame, 1994; Hagedoorn and Cloodt, 2003);
(iii) innovation (Trajtenberg, 1990a; Brouwer and Kleinknecht, 1999; Acs
et al., 2002; Bottazzi and Peri, 2003); (iv) knowledge diffusion (i.a. Almeida,
1996; Jaffe and Trajtenberg, 1999; Stolpe, 2002); (v) geography of invention
(i.a. Jaffe et al., 1993; Audretsch and Feldman, 1996; Lamoreaux and Sokoloff,
2000; Paci and Usai, 2000; Co, 2003); (vi) globalization of R&D activities
(i.a. Archibugi and Michie, 1995; Cantwell, 1999; Cantwell and Janne, 2000;
Le Bas and Sierra, 2002; Picci, 2010); (vii) social network and mobility of
researchers (i.a. Breschi and Lissoni, 2003; Balconi et al., 2004; Sternitzke

et al., 2008; Agarwal et al., 2009); (viii) new technologies (i.a. Basberg, 1987;
Daim et al., 2006; Bengisu and Nekhili, 2006; Kim et al., 2008); (ix) the value
of inventions (i.a. Jaffe, 1986; Hall et al., 2001; Hall et al., 2005); (x) the role
of universities (i.a. Acs et al., 1992; Jaffe and Trajtenberg, 1996; Trajtenberg
et al., 1997); (xi) patenting strategies by companies (i.a. Cohen et al., 2000;
Hall and Ziedonis, 2001; Ziedonis, 2004). Although this list is not exhaustive
and some research topics tend to overlap, it gives an overview of some of
the main issues that have been studied with patent data and underlines the
importance of patents in the evaluation of technical change and innovative
output in a world economy in which the role of knowledge is increasingly
seen as the main driver of innovation and economic growth. A special focus
on the empirical literature using patents to evaluate the geography of inven-
tion and the globalization of R&D activity will be made in the second and
third part of this book.
3.2.2 Innovation counts as a final measure of

the innovation process
Although patents are widely acknowledged in the literature as a relatively
good indicator of the inventive activity, they do not directly reflect the
outcome of the innovation process. As emphasized in the previous section,
before an invention becomes an innovation, further entrepreneurial efforts
are required to develop, manufacture and market it (OECD, 2009b, p. 12). As
put forward by Fargerberg (2005, p. 5), while invention is the first occurrence
of an idea, innovation is the first attempt to apply it into practice. Moreover,
the strict principles ruling the patent system tend to conceal certain aspects
of the subtle relationship between innovation and novelty. For example,
as patents must present non-obvious progress with the current state of the
art to be granted, patented innovations tend to neglect small-scale or incre-
mental innovations, which can be important intermediary steps towards
cutting-edge innovations. As a consequence and under the growing pressure
of the scholarly community, new indicators of innovation started to emerge
in the 1990s (Arrow, 1984; Griliches, 1987).
The aim of these new indicators was to better capture the intrinsic nature
of innovation. They resulted from a better understanding of the innova-
tion process. As it will be developed in more details in Chapter 4, scholars
progressively departed from the traditional linear vision of the innovation
process and recognized that innovation was among the most complex proc-
esses, both technically and socially (Kline and Rosenberg, 1986). It was
increasingly clear in the literature that innovation was the result of the
combination of many different types of knowledge, capabilities, skills and
resources and that this cognitive nature made the innovation process highly
uncertain, disorderly and often unpredictable (Kline and Rosenberg, 1986;
Pavitt, 2005). The work of Rosenberg (1976, 1982) and Kline and Rosenberg
(1986) has been decisive in the reorientation of the thinking about innova-
tion and in the conceptual foundation of new innovation indicators. These

early academic initiatives, such as that of DeBresson (1996) who conducted

surveys of establishments to identify their innovation activity by directly
questioning individuals involved in the innovation process and counting
innovations, paved the way for more ambitious and comprehensive data
gathering (Carter, 2007, p. 20).
The most important development has been the emergence of large-scale
survey-based indicators focusing directly on innovation (Smith, 2005,
p. 160). These new innovation indicators have been built around two
different approaches: the “object” approach and the “subject” approach
(Smith, 2005, p. 160). The former focuses on the objective output of the
innovation process such as technological innovations as identified by experts
or announced in trade journals and the latter is concerned with the inno-
vating agent and the documentation of innovation inputs (both R&D and
non-R&D activity) and outputs (mainly product innovations) at the firm
level (Smith, 2005, p. 161; Archibugi and Pianta, 1996). In terms of expendi-
ture, the object approach records total expenditure for specific innovations
during a given period of time and the subject approach stores information
about total expenditure on all innovation activities (implemented, potential
and abandoned innovation) during a given period of time (OECD, 2005,
p. 20). Although both approaches adopted the same definition of innovation
(i.e. new and commercialized) and explore some aspects of the innovation
process, the object approach tends to focus on significantly new products,
while the subject approach tend to capture also incremental innovations
(Smith, 2005, p. 162).
Two examples of databases developed through an object approach can be
cited: the SPRU database and the US Small Business Administration database.
The former has been elaborated by the Science Policy Research Unit at the
University of Sussex and is a pioneering effort to directly identify significant
innovations (Tether et al., 1997). The final database records information
on 4,378 major technical innovations in the UK between 1945 and 1983.
The latter has been developed by the US Small Business Administration and
offers innovation output indicator on 8,074 innovations introduced into the
US in 1982 (Acs et al., 2002). Both of these databases have been extensively
used in empirical studies (i.a. Pavitt, 1983, 1984; Robson et al., 1988; Acs and
Audretsch, 1990; Geroski, 1994). The subject approach is the approach that
has been adopted by the OECD in the frame of its Oslo Manual (OECD, 2005).
The first version of the Oslo Manual has been issued in 1992 and is the first
attempt of the OECD to provide guidelines and best practices for the collec-
tion of survey-based innovation data (OECD, 2005, p. 10). With the Frascati
Manual and the Patent Statistics Manual, the Oslo Manual forms the main
analytical framework of the OECD to assess innovation activities. It led to
the Community Innovation Survey (CIS) which is a large-scale survey imple-
mented by the European Commission to collect internationally comparable
direct measures of innovation outputs (Smith, 2005, p. 164). Many studies

have also used data of the CIS to explore multiple facets of the innovation
process and its effects (i.a. Cox et al., 2002; Evangelista and Savona, 2002;
Kleinknecht et al., 2002; Hinloopen, 2003; Lööf and Heshmati, 2006).
Like R&D and patent data, innovation surveys have strengths and weak-
nesses in the evaluation of the innovation process. On the one hand, they
represent a significant breakthrough (Carter, 2007, p. 22). By focusing
directly on innovation and effectively counting and reporting innovations,
they depart from indirect indicators such as patent data that do not directly
capture innovations but are a measure of invention. To that extent, innova-
tion surveys provide new primary information and are an essential basis for
new insights on the innovation process such as for example innovation in
the service sector (Carter, 2007, p. 22). By directly sending questionnaires to
firms, innovation surveys are a unique source of information on the innova-
tion process at the firm level. They can identify not only the types of inno-
vation that firms implement, the kinds of innovation activity they engage
in or their motives and obstacles to innovation but also the innovation as a
system by investigating firms’ linkages with other actors in the innovation
process (OECD, 2005, p. 10). Innovation surveys therefore provide impor-
tant information to feed the policy debate and develop policies that appro-
priately support innovation (OECD, 2005, p. 10).
On the other hand, innovation surveys also have limitations. As innova-
tion is self-reported through questionnaires, it implies value judgments on
the part of firms (Carter, 2007, p. 22). It is therefore hard to really distinguish
between invention, innovation and diffusion, for a firm to know in advance
whether an innovation will succeed and, as knowledge is often local, to
know whether the change in question is really new (Carter, 2007, p. 22).
Innovation surveys are also not exhaustive. They cover only the firms that
have taken part to the survey. The spatial and temporal coverage of innova-
tion surveys as well as the volume of innovation data is therefore incom-
parable to that of R&D data or patent data for example. Similarly, while
the patent system is a well-established procedure, the design of innovation
surveys is still an ongoing process (Smith, 2005, p. 169). Finally, unlike
patents, innovation surveys are particularly expensive and although they
bypass the intrinsic measurement problem of innovation, they do not solve
it (Carter, 2007, p. 22). Innovation is a continuous and uncertain process
that is particularly difficult to measure even through innovation surveys
(OECD, 2005, p. 10ss.).
As put forward in Chapter 2, it has been now long understood that inno-
vation is fundamental to enhance economic growth and standards of
living in the long run. The management and the monitoring of innovation
have become even more essential as the world have entered the era of the

“knowledge economy” in which economies, and especially advanced econo-

mies, are increasingly dependent on knowledge, information and high skill
workers (OECD, 2005, p. 10; Carter, 2007, p. 13). It is therefore particularly
important to provide policy makers with relevant information about many
aspects of the innovation process and to offer them sophisticated tools to
develop the most suitable policies to promote innovation.
Measurement is an essential step in this process. As declared by Lord Kelvin
in 1883 (famous British mathematical physicist and engineer of the 19th
century cited by Nagaoka et al., 2010, p. 1085): “When you cannot measure
it, when you cannot express it in numbers, your knowledge is of a meager
and unsatisfactory kind.” Measuring innovation has caught the imagination
of scholars and international organization for almost a century. As illustrated
in this chapter, two main types of measures have been developed to assess
the innovation process yet: input measures of innovation and output meas-
ures of innovation. The elaboration of these indicators has been made in
parallel with the understanding of the innovation process. As innovation
was initially viewed as a linear process starting with basic research, R&D
measures were the first indicators of the innovation process. The need to
justify the amount spent in R&D activities triggered then the development
of output measures of innovation such as patent indicators and the better
understanding of the complexity of the innovation process led recently to
the creation of survey-based indicators exploring innovation directly at the
firm level.
Although these indicators have greatly enhanced our comprehension of
innovation activities and their economic impact, they are still inadequate to
capture the multi-dimensionality of innovation (Ratanawaraha and Polenske,
2007, p. 31). As stated by Rogers (1998a, p. 5), these indicators offer partial
measures of innovation and they all possess strengths and weaknesses in the
assessment of the innovation process. Although the development of better
indicators is still an on going process, the current measures are nevertheless
the source of precious insight to understand several critical aspects of inno-
vation. As it will be put forward thoroughly in the third part of this book,
patent data are for example particularly useful to assess the geography of the
invention process and its evolution in a globalizing economy.

Conclusion to Part I
Although the term innovation has a tendency to be used loosely and largely
in the public debate and in the press, its inherent subtleties are still relatively
poorly embedded in the common wisdom. Chapter 1 therefore contributed
to carefully expose the main concepts and definitions surrounding the
notion of innovation. Besides defining innovation, exploring the often-mis-
understood distinction between invention and innovation and introducing
the different types of innovation, Chapter 1 also put an emphasis on the
main actors of the implementation process of innovation. As business enter-
prises play a key role in the development of innovation, the concept of the
value chain has been introduced to analyze the place of innovation in their
internal structure and will be particularly useful in the remainder of this
book.
Chapter 2 was then concerned with the relationship between innovation
and economic performance and enlightened why the word “innovation” is
currently on everybody’s lips (Fagerberg and Verspagen, 2009, p. 218). As
stressed in this second chapter, it is now well established that innovation is
critical in enhancing economic growth and standards of living in the long
run. However, innovation did not enter mainstream economics before the
middle of the 20th century. Although early economic thinkers had a feeling
that novelty and technological change might have an impact on the evolu-
tion of the economy, we had to wait on the pioneering work of Schumpeter
and especially on the contribution of growth theorists to formally set the
impact of innovation on economic performance. Besides the crucial role of
innovation on economic growth, Chapter 2 also emphasized the effect of
innovation on employment and catch-up and pointed out how the recent
developments in the field of competitiveness can be a unifying framework
in the assessment of the economic impact of innovation.
Although the high-profile literature on growth greatly contributed to a
better understanding of the economics of innovation, it largely eluded the
measurement issue. Innovation is particularly complicated to measure because
it is a continuous process involving novelty and change (Carter, 2007, p. 15).
69

Despite these conceptual difficulties, measuring innovation is nevertheless

essential to provide policy makers with suitable analytical tools and to assure
the implementation of policies supporting innovation appropriately (OECD,
2005, p. 10ss). As a consequence, economists and governmental organiza-
tion bypassed the problem of measuring change by developing various indi-
cators capturing some aspects of the innovation process. As put forward in
Chapter 3, R&D, patent and, more recently, survey-based indicators are the
three main types of measures that have been developed to assess innovation.
Although the perfect measure of innovation has not been found yet, these
indicators already provide precious insights on the innovation process.
While this first part has answered many questions about the economics
of innovation and set the necessary background to move towards the rest
of the study, it has also left open a large number of unanswered questions.
Among the scope of issues that could be further developed, the second part
of this book will focus on the geography of innovation and especially on the
specific characteristics of innovation that make it cluster geographically. As
it will be emphasized within the next three chapters, the tendency of inno-
vation to concentrate in specific locations has deep competitiveness implica-
tions both at the firm level, at the regional level and at the country level.

Part II
The Nature of the Innovation
Process and the New Geography
of Innovation
Introduction to Part II
As we argued in the previous part of this book, while the study of innovation
as an independent field of research only really started in the 1960s, it is now
well established that innovation is critical in enhancing economic growth
and standards of living in the long run (i.a. Romer, 1990; Grossman and
Helpman, 1991; Fagerberg, 2005). In today’s “knowledge economy,” compa-
nies, and especially those from the world’s most developed economies,
cannot sustain a competitive edge without continuously developing new
products or processes (Sala-I-Martin et al., 2009, p. 7). The last decades have
nevertheless witnessed an array of crucial evolutions that have profoundly
altered the innovation process and the geography of innovation (Dunning,
1998, p. 45; Sölvell, 2002, p. 2; Dunning, 2008, p. 83). On the one hand, the
globalization of the world economy has had a tremendous impact on the
nature of competition and has unveiled many new opportunities for firms
to take advantage of the specific profile of different regions (Ketels, 2008,
p. 124; Miron, 2010, p. 2; Mudambi and Swift, 2012, p. 1). On the other
hand, despite an undeniable “flattening” of the world economy, economic
and innovative activities have shown a marked tendency to concentrate in
certain locations and to create what has been called “clusters” (Porter, 1998b,
p. 78; Karlsson, 2008, p. 3; Miron, 2010, p. 2). In order to better understand
the new challenges of innovation, the aim of this second part is to respond
to three main pairs of questions:
● How does innovation occur and what are the main characteristics of the
innovation process?
● What is the role of location in the innovation process and to what extent
can clusters, or the spatial concentration of actors linked by commonali-
ties and complementarities, influence innovation?
71

● To what extent have the globalization of the economy and the emergence
of multinational enterprises (MNEs) modified the geography of innova-
tion and what is the relationship that MNEs maintain with clusters in the
frame of their global innovation strategy?
In order to answer to these questions and to build a progressive analysis of
the importance of clusters in the global innovation process of MNEs, this
second part has been articulated around three main chapters. Chapter 4
thoroughly analyzes the characteristics – and the cognitive nature – of the
innovation process. While the previous part of this book clearly established
the key role of innovation in economic growth, it did not say anything
about how innovation really occurs. A better understanding of the inno-
vation process is, however, crucial to stress the geographical features of
innovation (Feldman, 1994, p. 14; Breschi, 2008, p. 167). Based on these
developments and by constantly referring to the notion of the value chain,
Chapter 5 focuses in more detail on the tendency of innovative activities
to cluster spatially. The goal of this chapter is to shed light on both the
role of external sources of knowledge in the innovation process and the
agglomeration of economic activities on innovation and competitiveness
(McCann, 2008, p. 24; Simmie, 2008, p. 23). Finally, Chapter 6 explores
the geography of innovation in a globalized economy. After reviewing the
new deal set by the emergence of MNEs in the management of geographi-
cally dispersed activities and the increasing internationalization of R&D
activity, this chapter offers a fresh look at the role of clusters in the global
knowledge-enhancing process of MNEs by providing an original analytical
framework with which to describe this relationship.

4
The Cognitive Nature of the
Innovation Process
The first part of this book unveiled four main findings. First, innovation is
a subtle concept. Even if everybody has a broad idea of what innovation
is, when we start digging, innovation appears to be a particularly complex
notion. Second, innovation is mainly performed in firms. Although individ-
uals or other types of organization, such as universities, research institutions,
and hospitals, participate to a large extent in the innovation effort and can be
the source of important innovations, the vast majority of innovations are in
fact implemented by private firms. Third, innovation is crucial to economic
growth and standards of living in the long run. In today’s globalized economy
in which knowledge is crucial, innovation plays a key role in sustaining and
developing competitive edge. Fourth, innovation is difficult to measure. As
innovation is a continuous process involving some kind of novelty and qual-
itative change, it complicates its own measurement.
Although these findings contribute to a large extent to a better under-
standing of the economics of innovation, what particularly matters both from
an economic perspective and for the purpose of this study is to understand
how innovation occurs. On the one hand, as innovation is the main engine
of economic growth, it is crucial to explore the mechanisms of the innova-
tion process (Rothwell, 1992a, p. 73; Lindqvist et al., 2000, p. 95; Basadur
and Gelade, 2006, p. 45; Bernstein and Singh, 2006, p. 561). A better under-
standing of the innovation process will not only allow policy makers to imple-
ment the most suitable policies to support innovation but also enable firms or
any other organizations to manage innovation in the most appropriate way. It
should be noted that the intrinsic nature of the innovation process has deep
geographical implications. As stated by Feldman (1994, p. 21): “Innovation, at
a fundamental level, may be viewed as a communication process that bridges
different disciplines with distinct vocabularies and unique motives. While
information may be easily transmitted across great distance, translating infor-
mation into useable knowledge is a more complex [ ... ] process.”
The aim of this chapter is therefore to explore the cognitive nature of the
innovation process. It focuses on the internal mechanisms of the innovation
73

process at the level of the innovative entity, whether it is a firm or any other
type of organization. This emphasis is a necessary intermediate step in
the process of building a comprehensive examination of the geographical
features of the management of innovation, which will be done in Chapters 5
and 6. To that end, this chapter is divided into two main sections. The first
section introduces the complexity of the innovation process and explains
why its study has long been neglected. The second section presents the main
models that have been proposed to depict the innovation process from the
first conceptual idea to the commercialization of the innovation. By putting
forward the cognitive nature of the innovation process, this chapter unveils
the characteristics that explain why innovation tends to be spatially concen-
trated and therefore provides the necessary basis for the more detailed anal-
ysis of the clustering of innovative activity that will be found in Chapter 5.
4.1 Entering the black box: innovation in the process
Although economists have devoted much energy to studying the factors that
stimulate innovation (innovation inputs) and to measuring their resulting
outcomes (innovation outputs) or the diffusion of already-developed inno-
vations (Rogers, 1995), they have, until recently, dedicated much less atten-
tion to the analysis of the innovation process itself (Pavitt, 2005, p. 87). The
reason why it has long been partially neglected and seen as a “black box” in
economics is because an explanation of how innovations occur was seen as
impossible to formulate, and innovation was commonly looked at as a random
phenomenon (Fagerberg, 2005, p. 9). For a long time, the link between, on
the one hand, engineers and technologists, who are directly involved in
the technological process occurring inside that box, and, on the other, the
market forces and institutional environment required for successful inno-
vation was missing (Rosenberg, 1994, p. 9ss.). Kline and Rosenberg (1986,
p. 276) explained this disjunction by the fact that the innovation process is
among the most complex processes both technically and socially. Indeed, an
innovation is the outcome of the combination of different types of knowl-
edge, capabilities, skills, and resources, making the innovation process highly
uncertain, disorderly and often unpredictable (Tidd and Bessant, 2009, p. 19).
Van de Ven and his co-authors (1999) defined the innovation process as a
“journey into the unknown” because it varies regarding the economic sector,
field of knowledge, type of innovation, historical period, country concerned,
size of the firm, and its corporate strategy or its prior experience with innova-
tion (Pavitt, 2005, p. 86). In other words, the conditions for successful inno-
vation greatly differ from case to case.
Schumpeter played a pioneering role in the study of the innovation
process by being the first scholar to depart from theories which viewed
innovation as a “manna from heaven” (Fagerberg, 2005, p. 9). He identified
three main aspects of the innovation process: its inherent uncertainty, the

The Cognitive Nature of the Innovation Process 75
need to act quickly (despite uncertainty) in order to reap potential economic

rewards, and the forces of habit (resistance or inertia) that can challenge
initiatives and rise up against the diffusion of inventions (Schumpeter, 1934,
p. 128ss.). While in his early work (often referred to as “Schumpeter Mark
I”) Schumpeter attributed the responsibility for overcoming the resistance to
change to individual entrepreneurs, in his later work (“Schumpeter Mark II”)
he acknowledged that “[ ... ] the entrepreneurial function may be and often is
filled co-operatively. With the development of the largest-scale corporations
this evidently becomes of major importance: aptitudes that no single indi-
vidual combines can thus be built into a corporate personality” (Schumpeter,
1949, p. 261). Although the literature on firms’ innovation processes has
been slow to grow since, the last three decades have recorded an increasing
number of theoretical and empirical (mainly in case-study style) contribu-
tions into the field (i.a. Nelson and Winter, 1982; Nonaka and Takeuchi,
1995; Van de Ven et al., 1999; Pavitt, 2005; Lam, 2005).
As put forward by Kline and Rosenberg (1986, p. 275) in an article that
became a reference, the innovation process is driven by two countervailing
forces, which interact in a subtle and unpredictable way: market forces and
technological incentives. These two forces have been individually studied in
the literature and often labeled as “market pull” and “technology push”. One
strand of the literature, initiated by Schmookler (1966) and carried on by
Clark (1985), von Hippel (1988), and Christensen (1997), suggested that tech-
nological change was prompted by the external requirements of the market.
The other, developed by Dosi (1982) and followed up by authors such as Sahal
(1985) and Helfat (1997), viewed the activities and internal capabilities of
firms as the main drivers of innovation (Adner and Levinthal, 2001, p. 611).
In their classical contribution, Mowery and Rosenberg (1979, p. 103ss.) stated
that, although these two approaches, taken individually, stress critical features
of technological development, the greatest insight derives from their joint
perspective. In other words, as successful innovations are characterized by the
appropriate combination of market knowledge and technological know-how,
the main task of the management of the innovation process is to find the
right balance between market needs and technological possibilities (Mowery
and Rosenberg, 1979, p. 232; Howells, 1997, p. 1210).
Unfortunately, these two forces do not often act in the same direction,
which makes the outcome of the innovation process highly uncertain and
contingent (Pavitt, 2005, p. 88). On the one hand, the market may show
some interest in innovations that cannot be implemented with the current
state of technology or are blocked by the workings of nature. As put forward
in Chapter 1, teleportation would certainly have some commercial potential
but the current state of knowledge and technology does not yet allow its
implementation. On the other hand, engineers or technologists are likely to
focus exclusively on performance criteria. If we left any cost considerations
aside, we could imagine, for example, a vast number of technically feasible

alternatives for increasing the performances of electric cars or the speed

of airplanes. Generally speaking, higher performance can often be attain-
able at higher costs (Kline and Rosenberg, 1986, p. 276). Such a strategy
can nevertheless be economically disastrous. The aircraft industry provides
a particularly illustrative example of an innovation that did not unite the
technical realm and the market reality: Concorde. As underlined by Kline
and Rosenberg (1986, p. 277), although this supersonic passenger airliner
was unanimously recognized as a technological marvel and a brilliant engi-
neering achievement, it has also become one of the most infamous and
costly commercial failures of all times. Even though it could fly between
Europe and the United States twice as fast as a classical airliner, its fuel costs
per passenger mile were more than 15 times higher (Kline and Rosenberg,
1986, p. 277). This example demonstrates that consumers may not attach
sufficient value to the superior performance of new technologies. In the case
of Concorde, the number of passengers inclined to pay several hundreds of
dollars more for shortening their transatlantic flight turned out to be rather
small (Kline and Rosenberg, 1986, p. 277).
Technical success is thus considered only a necessary and not a sufficient
condition in defining economic usefulness (Kline and Rosenberg, 1986,
p. 278). As emphasized in this section, a thorough monitoring of technolog-
ical and economic considerations is therefore critical to reduce the inherent
uncertainty of the innovation process.
4.2 Analyzing the innovation process: from the linear

perspective to the “chain-linked” type of model
In order to better understand the innovation process and to establish a

reliable basis for the implementation of innovation policies, a significant
number of conceptual frameworks have been proposed to model the path
toward the commercialization of innovations (Buijs, 2003, p. 76). One of
the first models elaborated to sketch the relationship between science, tech-
nology and economy was the “linear model of innovation” (Edquist and
Hommen, 1999, p. 64). As illustrated in Figure 4.1, the linear model postulates
that innovation starts with basic research, which leads to applied research,
development, and finally to production and diffusion (Godin, 2006, p. 4).
In other words, it depicts the innovation process as a smooth, well-behaved,
unidirectional flow from basic scientific research to commercial applications
(Edquist and Hommen, 1999, p. 64).
Basic Applied Production

Development
research research and diffusion
Figure 4.1 The linear model of innovation

Source: Personal elaboration based on Godin (2006, p. 4).

Although this model does not represent the reality and the complexity of
the innovation process, it has been particularly influential and still remains
widely used because it offers a(n) (over)simplified description of the innova-
tion process and allows spokesmen for the economic and scientific commu-
nities to communicate their thoughts to the general public and policy makers
in an understandable (though flawed) way (Stokes, 1997; Edgerton, 2004).
For instance, economists, as advisors to policy makers, or universities and
research institutions, as lobbyists for research funds, have frequently used
this model to justify government support to science (Fleck, 2004, p. 229ss.).
As a consequence, the innovation process is still largely considered as a linear
process in the conventional wisdom (Godin, 2006, p. 4).
Although the linear model as illustrated above has often been attributed to
Bush (1945), Godin (2006, p. 5) demonstrated that it was rather the outcome
of a gradual process, which can be broken down into three main steps. First,
from the beginning of the 20th century to the end of World War II, scholars
were mainly concerned with the two initial blocks of the model, namely
the connection between basic research and applied research (Godin, 2006,
p. 5). In a period characterized by the ideal of pure science, scholars began
building an argument for a causal link between basic research and applied
research (Godin, 2006, p. 5). As emphasized by Carty (1916, p. 8), pure
science was seen as “the seed of future great inventions which will increase
the comfort and convenience and alleviate the suffering of mankind.” It was
in this context that Bush (1945, p. 19) established his proposal for science
policy, which stated that “basic research [ ... ] creates the fund from which
the practical applications of knowledge must be drawn”. Bush, however,
never really extended its thoughts further (Godin, 2006, p. 5).
Second, from circa 1934 to 1960, scholars progressively focused their
attention on the third building block of the linear model, namely devel-
opment. While the potential benefits of research on economic perform-
ance were increasingly acknowledged, scholars noticed that the internal
reality of firms did not really reflect their theoretical insights: there was
often little basic research, some applied research, and a lot of development
(Godin, 2006, p. 5). Until the 1940s, there were few separate departments
for research (Mees and Leermakers, 1950). Both development and research
were frequently conducted in the same department by the same people
(Reich, 1983). As already described by Mees in 1920 (p. 79), development
was usually a small-scale manufacturing department devoted to elaborating
“a new process or product to the stage where it is ready for manufacture
on a large scale”. As stressed by Godin (2006, p. 5), a growing number of
models of innovation integrating development gradually emerged in the
1940s. For example, Stevens (1941) developed a model that included stages
such as “test-tube/bench research” and “pilot plant”. Bichowsky (1942) clas-
sified industrial activities in a “flow sheet chart,” identifying stages such as
research, engineering, and development. Similarly, Furnas (1948) presented

a framework that organized exploratory research and fundamental research

activities at one level, and applied research, development, and production at
another. All these contributions progressively strengthened the implementa-
tion of a three-stage model of innovation articulated around basic research,
applied research, and development.
It was only from the 1950s onward that scholars really extended the linear
model to non-specific R&D activities such as production and diffusion (Godin,
2006, p. 5). Many authors, such as Ames (1961), Mansfield (1968), and Myers
and Marquis (1969), elaborated frameworks that modeled the innovation
process as a sequence from research or invention to commercialization and
diffusion. One of the most cited contributions is that of Utterback (1974),
who proposed a structure composed of the following blocks: generation of
an idea, problem-solving or development, and implementation and diffusion.
Two strands of the literature particularly contributed to the addition of the last
building block of the linear model as presented in Figure 4.1. The sociological
literature, led by Rogers (1995, first edited in 1962), and the theory of the
product life cycle, developed by Vernon (1966) and Utterback and Abernathy
(1975), extensively contributed to the comprehension of the process of diffu-
sion of innovations. As concluded by Godin (2006, p. 33), it was all these efforts
that led to the linear model of innovation as we know it today (Figure 4.1).
Despite its intuitive and progressive structure, which is particularly simple
to communicate, the linear model has been extensively criticized because
it imperfectly represents the complex nature of the innovation process
(Edquist and Hommen, 1999, p. 64). As emphasized above, the innovation
process is neither linear, nor smooth; nor is it often well behaved (Kline
and Rosenberg, 1986, p. 285). Its cognitive nature makes its outcome highly
uncertain, contextual, and dependent on the ability to bridge knowledge
from different backgrounds. Two main criticisms may thus be formulated
against the linear model (Gulbrandsen, 2009).
First, and as illustrated in Figure 4.1, there is no feedback between the
different building blocks of the linear model. Feedback is, however, the life
and blood of innovation. As the innovation process is a collective effort
connecting knowledge, skills, capacities, and people from different hori-
zons, feedback is crucial to the success of the innovation process. It allows a
constant evaluation and adaptation of each sub-process (preferred to “stage,”
which implies a certain linearity) of the innovation process by constantly
challenging and questioning its rationale. As a consequence, feedback not
only improves the overall performance of each sub-process but also helps
to reduce the inherent uncertainty of the innovation process by lessening
the potential discrepancy between the technological and market realms. The
literature on “users as innovators” is particularly illustrative of the crucial
importance of interaction and customer feedback in the success of the
innovation process (i.a. Usher, 1954; von Hippel, 1988; Van de Ven et al.,
1999; Garud, 1997). As emphasized by Garud and Lampel (1997, p. 114),

neglecting customer feedback and learning-by-using processes within firms

may result in a disastrous mismatch between what a company creates and
what customers value. In his analysis of the success factors of the innova-
tion process, Rothwell (1992b) states that the degree of collaboration and
feedback between product design and other corporate functions, especially
manufacturing and marketing within the firm, is one of the most important
factors differentiating successful from unsuccessful innovation.
The second criticism that can be leveled against the linear model is that
research is rarely the starting point of the innovation process. As empha-
sized by Nussbaum et al. (2005, p. 72), despite the significant sums spent
on R&D, most corporations have relatively low levels of innovation produc-
tivity. Similarly, Farrell (2005, p. 110) pointed out that much R&D spending
does not result in what customers really desire. Although these evidences
do not mean that returns on investment in R&D are low or that the long-
term impact of R&D is weak (see Section 3.1), they nevertheless suggest that
investments in R&D do not automatically generate innovations.
As emphasized by several authors, such as Kline and Rosenberg (1986),
Buijs (2003), and Kyffin and Gardien (2009), design, rather than science or
research, is regularly the trigger for the innovation process. An initial design
is fundamental to spawn an innovation and, as stated above, feedback and
subsequent redesigning and testing activities are then crucial to ensure the
success of the innovation process. Problems encountered throughout the
design process often prompt new research and scientific progress. The case of
the electric light bulb is particularly illustrative of this phenomenon (Kane
and Sell, 2002). For instance, although the first electric light bulb, developed
by Swan in 1860, represented a ground-breaking innovation, it presented,
like the first version of virtually all significant innovations, several weak-
nesses: it did not provide a sufficient light level, had a short lifetime, and
blackened the glass of the bulb. It was, however, these limitations that trig-
gered new research and the improvement of filament technology: in 1880,
Edison invented a bamboo fiber filament that allowed the light bulb to last
more than a thousand hours; in 1903, Whitnew developed a metal-coaling
for the carbon filament that prevented the inside of the bulb from being
blackened by sooty residue; and in 1906, General Electric patented a way
of producing filaments from tungsten, an excellent candidate metal still in
common use today, which had been impossible to manufacture some years
ago (Pollard, 1995; Kane and Sell, 2002). Similarly, many advances in mate-
rials were, and still are, the result of problems faced during the development
process of new devices such as steam turbines, semiconductors, or solar cells
(Kline and Rosenberg, 1986, p. 281). In other words, demand for innovation
is rather the source of scientific progress rather than science being the source
of innovation. Indeed, most innovations are the result of new combinations
of existing capabilities, knowledge, products, or processes with other infor-
mation readily accessible to people in the organization. The linear model

ignores this relationship and the importance of working experience and

learning or improving by doing in the innovation process.
Although the fact that innovation initiated by research is wrong most of
the time, science is by no means unimportant. When the state of knowledge
does not allow a firm to overcome a problem, research and science are crucial
to extend the frontier of knowledge. Moreover, the few innovations that
are directly the fruit of research and science, such as genetic developments,
biotech solutions, or nanotechnology’s outcomes, are often revolutionary –
even though they also passed through certain design stages and responded
to certain market needs. In their defense of the linear model, Balconi et al.
(2008) underlined that a linear perception of the innovation process can
still be a helpful conceptual tool in the analysis of the most innovative and
knowledge-intensive sectors such as life sciences. They nevertheless acknowl-
edged that a model describing innovation in the pharmaceutical industry as
a pipeline leading from fundamental research to marketing would oversim-
plify the reality. For instance, they pointed out that the discovery of new
drugs is rather a serendipitous process, guided by trial and error, and largely
pragmatic and experimental in nature rather than strictly scientific. They
also added that pharmaceutical research implies much denser feedback than
the simple pipeline model suggests and that the range of actors participating
in the R&D process is much larger than simply universities and firms, also
being composed of many biotech companies acting as intermediate agents
between academia and large pharmaceutical companies.
4.3 Toward a more accurate representation of the

innovation process: the “chain-linked” type of model
A first step toward a better understanding of the innovation process would

therefore be to acknowledge that there are as many potential successful inno-
vation processes as there are innovations. As pointed out by Pavitt (2005,
p. 87), there is no magic formula or widely accepted theory that integrates the
organizational and economic dimensions of innovation processes. Kline and
Rosenberg (1986, p. 280) underlined three main characteristics that make the
innovation process hard to generalize: first, the idiosyncrasies of the market
and the constraints that have to be overcome differ significantly from one
industry to another. For instance, while innovation in biotech is strongly
science based and requires detailed scientific knowledge, innovation in manu-
facturing industries may be based more on cumulative work experiences or
practical skills (Khilji et al., 2006). Second, the state of knowledge varies from
industry to industry and from firm to firm. Each firm possesses its own field
of expertise and a unique knowledge portfolio built upon its previous experi-
ences and current commitments. As a result and third, the way the innovation
process is organized differs significantly from firm to firm. For instance, if the
same innovation inputs were injected in randomly selected firms of the same
industry, it is highly unlikely that the innovation outputs would be the same.

Because of the inherent characteristics of the innovation process and the

criticisms formulated against the linear model, a thorough analysis of the
innovation process cannot do anything but abandon a linear perspective.
Although every attempt at generalization must be made with caution, new
frameworks have been progressively elaborated to model the innovation
process in a more accurate way. Kline and Rosenberg’s “chain-linked model,”
presented in Figure 4.3, is representative of this new wave of models and is
one of the most cited in the literature (i.a. Feldman, 1994, p. 16; Fagerberg,
2005, p. 8; Munoz, 2009).
In this model, the unidirectional flow of the innovation process depicted by
the linear model has been replaced by five alternative paths of activity. The
first path is represented by the central chain of innovation (“C” in Figure 4.3).
Instead of beginning with research, it starts with the detection of a market
need and an initial design and ends up with the commercialization of the
innovation. This first path is immediately complemented by feedback links
(second path, noted “F” in the figure) between the constituting sub-processes
of the central chain of innovation and from the market to each sub-process.
These feedback links permit not only a constant re-evaluation of each action
and a stronger cohesion between people involved in the innovation process
but also a continual assessment of market needs in order to make sure that
consumer requests will be satisfied in the next round of design. This model
thus renders obsolete the debate between “market pull” and “technology
push” by constantly combining market realm and technological possibilities.
As emphasized by Kline and Rosenberg (1986, p. 289), “a perceived market
need will be filled only if the technical problems can be solved, and a perceived
R R Science/ R
3 3 Research 3
D K K Knowledge K S
1 2 1 2 1 2
C C C
Invent and/or C
produce Detailed Redesign Distribute
Potential
analytic design and and
market
design and test produce market
F F F F
F
F F
Figure 4.2 Kline and Rosenberg’s “Chain-Linked Model”

Notes: C = Central chain of innovation; F = Feedback links; D = Direct link to and from research;
K-R = Links through knowledge to research and return path (if problem solved at node K, link 1
and 2; if not, link 3 to R and return); S = Support of innovation to science.
Source: Adapted from Kline and Rosenberg (1986, p. 290).

performance gain will be put into use only if there is a realizable market use”.
In other words, the model advocates a thorough monitoring of market needs
throughout the innovation process in order to reduce the uncertainty associ-
ated with the introduction of a new product or service in the market.
As already noted, innovation is the fruit of new combinations of existing
capacities nurtured by working experiences, shared knowledge, and
common values rather than the result of path-breaking scientific discoveries.
Nevertheless, problems encountered during the development and creation
process often reveal the need for new research and scientific progress. As a
result, Kline and Rosenberg (1986, p. 290ss.) set the linkage from science to
innovation not solely at the beginning of the process but rather all through
the central chain of innovation. They visualized science as lying alongside
the development process, acting as a supportive activity of the innovation
process. The linkages between shared knowledge, research, and science are
denoted “D” and “K-R” in Figure 4.3 and represent the third and fourth paths
of the model. This representation of knowledge and research and science
above the central chain of innovation reflected a meticulous analysis of the
innovation process in firms. Kline and Rosenberg (1986, p. 291) noticed that
when employees engaged in the innovation process encounter a problem,
they first call on known science and stored knowledge within the firm. This
action is represented in Figure 4.3 by path “1” linking the central chain of
innovation with knowledge (node “K”). If the problem can be solved with
stored knowledge within the firm, the innovation process can then continue
(path “2”). It is only when all stages fail to supply the needed information
that new research and scientific progress are demanded (path “3”).
The types of research and science demanded by the various sub-processes
of the chain of innovation are obviously different. While more basic research
is needed in the invention/analytical design stage, more process research (e.g.
research on how particular components can be manufactured) is required at
the production stage. It is worth noting that Kline and Rosenberg did not
neglect the probability of the occurrence of radical innovations. Arrow “D”
represents not only the constant link with science throughout the innovation
process but also innovations directly generated by research and science.
Porter's value chain model, introduced in Chapter 1 and illustrated in
Figure 5.4, shares this new vision of innovation. It does not view technology
development as the start of the value chain but as an activity supporting
all the value activities performed by a firm throughout the value chain.
Innovation does not occur in a vacuum. It results from the embeddedness of
technology development within the value chain and the interaction between
and the coordination of the different value activities performed by a firm.
This thorough monitoring of all value activities is crucial to the success of
the innovation process and the firm in general.
The last path of the chain-linked model is represented by the letter “S” in
Figure 4.3 and symbolizes the impact of innovation on research and science.

Since by nature research and science seek to extend the frontiers of knowl-
edge, researchers and scientists have to constantly be aware of and master
the last technologies and new scientific advances. For example, without
the microscope, Pasteur would not have been able to conclude his pioneer
researches in microbiology.
Although Kline and Rosenberg’s model gives a far more accurate over-
view of the mechanism behind the innovation process, it does not have the
pretension to illustrate the whole variety of possible innovation processes
(Kline and Rosenberg, 1986, p. 294). Based on this contribution, many other
relatively similar models appeared to replace the linear model and to provide
a sequential vision of the innovation process in which innovation is the
result of a succession of different inventions. The works of Rothwell (1992b),
Roozenburg and Eekels (1995), and Howells (2005) may here be cited. Buijs
(2003) and Munoz (2009) review some of these attempts.
Despite the greater scientific value of this type of model in the analysis of
the innovation process, it has never really supplanted the linear vision of
innovation in the conventional wisdom. Godin (2006, p. 33) underlined two
main reasons for this. First, unlike the linear model, which proposes a logical
and easily communicable evolution of the innovation process, the Kline and
Rosenberg type of model, with its multiple arrows and feedback loops, looks
more like a modern art work or a “plate of spaghetti and meatballs” than a
practical analytical framework. Second, as Godin (2006, p. 35) argues, the
long survival of the linear model despite relentless criticisms is due to statis-
tics. As noted by this latter and already put forward in Chapter 3, during
the period 1920–1950, statisticians developed a definition and a classifica-
tion of research made up of three components of the linear model – basic
research, applied research, and development. In its particularly influential
Frascati manual (first published in 1963), which aimed to provide meth-
odological conventions for measuring innovation in order to allow inter-
national comparisons between industrialized countries, the OECD drew its
guidelines on the basis of the linear perception of innovation in force at
the time. Since then and as a consequence, most statistics on innovation
accumulated by countries were based on this linear vision of innovation.
As efforts to measure the new interactive models of innovation have not
yet been fruitful, they have never succeeded in establishing themselves as
mainstream models in the analysis of the innovation process. More recently,
however, new models have been approaching the innovation process in a
systemic perspective by putting a special emphasis on the necessary environ-
ment conducive to innovation (i.a. Freeman, 1987; Asheim, 1996; Cooke,
1992/2001; Asheim and Gertler, 2005; Galanakis, 2006). This systemic view
will be developed in Chapter 5, as it is of great interest in the analysis of the
spatial features of innovation.
Furthermore, despite their great relevance and accuracy in the analysis of
the internal mechanisms of the innovation process of any innovation entity,

the focus of chain-link models on in-house interactions and knowledge

transfers may lead firms to overlook “bottleneck” issues in the innovation
process (Rosenberg, 1982; Hughes, 1983). Regarding the innovation process,
bottleneck phenomena occur when the performance or the potential of an
innovation process is limited by the reliance on too few resources. The litera-
ture on evolutionary economics has reflected this issue through two main
concepts: “path dependency” and “organizational memory” (Fagerberg,
2005, pp. 10–11). The former expresses the selection by an innovation entity
of a specific innovation path – thought to be the most appropriate to insure
the success of the innovation process (Arthur, 1994). If this strategy appears
to be judicious, the innovation entity in question may benefit from a “first
mover” advantage, develop a competitive edge over its rivals and reap the
fruits of its innovation. Sticking to a particular innovation strategy may
nevertheless also lead a firm to overlook alternative and potentially more
efficient innovation paths and drive the innovation entity into a “locked-in”
stance. In such a situation, competitors may seize the opportunity to ration-
alize the innovation process and steal a march on the early mover, which is
stuck in its innovation strategy and cannot reorient it because of cost consid-
erations or simply because it is too late.
“Organizational memory” refers to the set of “routines” developed by an
organization in the execution of its daily activities (Nelson and Winter, 1982).
Although the use of certain types of tacit code or formal procedure plays an
important role in structuring and optimizing the internal, day-to-day opera-
tion of any organization, it may also constrain the innovation process by
weakening the organization’s absorptive capacities (Cohen and Levinthal,
1990). As noted in Chapter 2, Schumpeter (1934, p. 86) already identified at
the beginning of the 20th century that the force of habits tends to rise up
against the implementation of new projects. Routines can therefore compro-
mise the success of the innovation process – especially when new knowledge
particularly challenges the existing internal organization of the innovation
entity (Tushman and Anderson, 1986; Fagerberg, 2005, p. 11). As noted by
Fagerberg (2005, p. 10), “openness” to new ideas and solutions is therefore
crucial to avoid being stuck on a particular innovation path and increases
the probability of success of the innovation process.
Although the Kline and Rosenberg type of model emphasizes the impor-
tance of feedback between the different sub-processes of the innovation
process and feedback from customers outside the innovation entity to reduce
the inherent uncertainty of the innovation process, it does not focus on the
primacy of external sources of knowledge in the success of the innovation
process. As will be put forward in more detail in Chapter 5, firms are not
closed systems operating in isolation but benefit largely from interactions
with external sources (Fagerberg, 2005, p. 11).

As has been emphasized throughout this chapter, innovation is a cogni-

tive process relying on the combination of different types of knowledge,
capabilities, skills, and resources (Kline and Rosenberg, 1986, p. 276). As a
consequence, the many variables influencing the innovation process make
its outcome highly uncertain, disorderly and often unpredictable (Tidd and
Bessant, 2009, p. 19). Because of this complexity and the fact that the inno-
vation process is constantly torn between two antagonistic forces (techno-
logical and market forces), the study of the innovation process has long been
overlooked and seen as a “black box” in economics.
However, the entry of innovation in mainstream economics and the better
understanding of the crucial role of innovation in economic growth have
prompted new research on the mechanisms of the innovation process. How
innovation occurs has increasingly become a key issue both at the policy
level and at the managerial level. As emphasized in the second section of
this chapter, scholars first adopted a linear vision to describe the innova-
tion process. This early representation resulted from the widespread belief
that basic research was the natural starting point of the innovation process.
However, further research pointed out the weaknesses of this type of models
and triggered the development of more accurate conceptual frameworks
that better capture the intrinsic nature of the innovation process. As stated
by Steve Jobs (CNN Money, 1998, Internet source), co-founder and former
chairman and CEO of Apple, Inc.: “Innovation has nothing to do with how
many R&D dollars you have. When Apple came up with the Mac, IBM was
spending at least 100 times more on R&D. It’s not about money. It’s about
the people you have, how you’re led, and how much you ‘get it’.”
Kline and Rosenberg’s chain-linked model is particularly representative of
this new stream of constructs and representations of the innovation process.
Although it does not thoroughly describe the importance of external sources
of knowledge in the success of the innovation process, it largely contrib-
uted to a better understanding of the internal mechanism of the innova-
tion process by departing from the primacy of basic research as the natural
starting point of any innovative activity and by stressing the crucial impor-
tance of feedback in the cognitive process that is innovation.
Regarding the objectives pursued by this book, this chapter has under-
scored the inherently interactive nature of the innovation process. As will
be investigated in more detail in Chapter 5, this unique characteristic has
deep geographical implications. By providing a progressive and original
evaluation of the main challenges of the internal management of the inno-
vation process faced by any innovative entity, this chapter has set the neces-
sary foundations for a move toward the analysis of the spatial features of
innovation.

5
The Clustering of
Innovative Activity
As put forward by Fagerberg (2005, p. 180): “A central finding in innovation

research is that firms seldom innovate in isolation.” The external environ-
ment and interactions with customers, suppliers, service providers, firms in
related industries, competitors, or other private and public organizations
(e.g. universities, research institutions, business associations) are particularly
important to avoid bottleneck issues, stimulate innovation, and increase the
success of the innovation process (Feldman, 1994, p. 2; Porter, 2000, p. 253;
Fagerberg, 2005, p. 180; Audretsch and Aldridge, 2008, p. 67).
The understanding of the importance of external sources of knowledge in
the innovation process has been the result of a progressive analysis of the
intrinsic nature of innovation and the potential benefits of the spatial concen-
tration of economic activity (McCann, 2008, pp. 24–25). As put forward in
Chapter 4, the Kline and Rosenberg type of model unveiled the importance
of external knowledge by stressing the constant necessity to evaluate market
needs in order to lessen discrepancies between the technological and market
realms and reduce the inherent uncertainty of the innovation process. In
other words, besides co-ordinating and managing innovation internally, this
type of model identified the necessity for any innovation entity to monitor
the external environment to increase the probability of success of the inno-
vation process.
Although these constructs were an important step forward in the under-
standing of the importance of external knowledge in the innovation process,
they did not capture all the ins and outs of the role of the external environ-
ment. On the one hand, integrating external sources of knowledge increases
the complexity of the innovation process. In addition to managing and
piecing together the different knowledge and capabilities held within an
innovation entity, the success of the innovation process also largely depends
on how the innovation entity internalizes external sources of knowledge
and gets embedded within its external environment. On the other hand, by
stimulating interactions and providing new sources of knowledge and capa-
bilities that would otherwise probably not have been identified, the external
86

The Clustering of Innovative Activity 87
environment tends to increase the probability of success of the innovation

process and to extend its scope.
The aim of Chapter 5 is therefore to evaluate the effect of location and
external sources of knowledge on the innovation process and to stress the
role of the spatial concentration of economic activity on innovation and
competitiveness. Three sections shape the structure of this chapter. The first
section introduces the traditional contributions to the field of economic
geography and puts special emphasis on the notion of cluster as diffused
by Porter (1994, 1998a, b) since the 1990s and the effects of this on the
stimulation of innovation. Based on the rising awareness of the collec-
tive nature of the innovation process and the insights from the economic
geography literature stressing the potential benefits of agglomeration, the
innovation literature started to thoroughly study the impact of location
and external knowledge on the innovation process (Freeman, 1987; Cooke,
1992). The second section therefore emphasizes the role of spatial concen-
tration on innovation activity and focuses on what has been labeled “the
systemic nature of innovation”. Finally, section three reviews some of the
main empirical contributions that have assessed the spatial features of
innovation.
5.1 The role of location on innovation and competitiveness:

the emergence of the cluster perspective
Rapid advances in communication and transportation technology coupled

with the greater integration of the world economy, the emergence of new
countries on the international economic stage, and the development of new
methods of production have contributed to the widespread conclusion that
the role of the local environment is progressively fading in today’s economy
(i.a. Porter, 1994; Malmberg et al., 1996; Dunning, 2008). Some authors,
echoed on a daily basis in the plethora of press articles on the challenges
of globalization, have helped to fuel this perspective by proclaiming –
through eye-catching turns of phrase such as “the world is flat,” “the death
of distance” or “a bigger world” – that geography is no longer relevant (i.a.
Cairncross, 2000; Friedman, 2005; The Economist, 2008). Although the
globalization of the world economy has widened the locational choices
of firms and deeply altered the configuration of the spatial landscape of
economic activity, location still matters and arguably will play an even
more important role in the years to come (Porter, 1994; Malmberg et al.,
1996; Belleflamme et al., 1999; Morgan, 2004; Audretsch and Aldridge,
2008; Dunning, 2008; Karlsson, 2008; Gugler et al., 2011a). As noted by
Stiglitz (2007, pp. 56–57): “there have been dramatic changes in the global
economy [ ... ] in some directions, the world is much flatter than it has ever
been, [ ... ] but the world is not flat [ ... ]. Not only the world is not flat: in
many ways it has been getting less flat”.

Porter (1994, p. 35) thoroughly documented the uneven distribution of

economic and innovative activity across the world. He and his team stressed
that among the hundreds of industries investigated, the leading international
competitors were often located in just a few and sometimes only one nation
or region (Porter, 1994, p. 35). Markusen (1996, p. 293) nicely imaged this
phenomenon as “sticky places in slippery space.” This location paradox in
a globalizing economy and the resurgence of interest in geographical issues
both result from a new vision of the mechanisms of global competition and
the sources of competitive advantage and from a reappraisal of classic contri-
butions on spatial growth (Gordon and McCann, 2000, p. 514; Porter, 1994,
p. 36; McCann, 2008, pp. 23–25).
Competition has traditionally been analyzed under the precepts of trade
theories (Porter, 1994, p. 35; Brülhart and Torstensson, 1996; Miron, 2010,
p. 3). According to these theories, location choices were mainly the result of
cost considerations (Krugman, 1990, p. 3; Krugman, 1998, p. 164). A firm
decided to select a particular location because it gave access to specific inputs
such as land, labor, capital, or energy at the lowest cost (Porter, 1994, p. 35;
Ottaviano, 2001, p. 51; Johansson and Forslund, 2008, p. 39; Mossay, 2012,
p. 1). Such an input cost minimization framework has, however, tended to
overlook the role of location as a factor of competitiveness (Porter, 1994,
p. 35). The old paradigm directing international competition was articulated
around static efficiency (Porter, 1994, p. 36). Competitive firms were those
with the lowest input costs and/or the greatest economies of scale (Porter,
1994, p. 36; Malmberg et al., 2000, p. 306). As the world economy was less
integrated, the inherent characteristics of the home market were much more
important to the achievement of a competitive advantage.
Technological advances and the globalization of competition have never-
theless set a new deal (Porter, 1994, p. 36; Dunning, 2000; Buckley and
Ghauri, 2004, p. 82). Firms can now relatively easily decrease the cost of their
inputs by, for example, producing in low-income countries or overcome the
size of their home economy by penetrating foreign markets. In other words,
globalization has neutralized some of the traditional bases of competitive
advantage (Porter, 1994, p. 36; Hitt et al., 1998, p. 22; Kotabe and Murray,
2004, p. 7). As a consequence, the analysis of the sources of competitive
advantage progressively departed from static efficiency and started to be
approached in a more dynamic perspective (Porter, 1994, p. 37). Although
preferential access to specialized inputs and economies of scale still matter,
competitiveness now relies more on the capacity of firms to constantly inno-
vate, enhance their technological assets, and acquire new skills (Porter, 1994,
p. 37; Clark and Guy, 1998, p. 369; Carneiro, 2000, p. 88). This new form
of competition has therefore profoundly changed the role of location and
prompted a new analysis of the foundation of competitiveness.
Based on these observations, Porter et al. (2008) developed an integrative
overall framework capturing the sources of productivity and competitiveness

Macroeconomic competitiveness Quality of the business environment: The

diamond model
Social infrastructure
Macroeconomic
and political
policies
institutions Government
Political Rule of Monetary
Fiscal
institutions law policy policy
Basic human
Context for firm
capacity
strategy and
rivalry
Microeconomic competitiveness
Factor (input) Demand

Sophistication Quality of the conditions conditions
of company microeconomic
operations and business
strategy environment
Related and
supporting
industries
State of cluster
development
Chance
Endowments
Figure 5.1 A new integrative framework capturing the sources of productivity and
competitiveness
Source: Personal elaboration based on Porter et al. (2008, pp. 45–49) and Porter (1998a, p. 167).
in response to the new reality of the world economy.1 As put forward in

Section 2.3, the prosperity of an economy is the reflection of its productivity,
which is, in turn, a measure of its competitiveness (see Figure 2.5 illustrating
the link between innovation, productivity, prosperity, and competitiveness)
(Porter et al., 2008, p. 44). In other words, the more productive an economy,
the higher the wages, the stronger the currency, the more attractive the
returns on capital, and thus the greater the standard of living (Porter et al.,
2008, p. 44). Identifying the specific drivers of productivity is crucial to the
maintenance of high levels of competitiveness and prosperity in the long
run. Figure 5.1 presents Porter et al.’s integrative framework.
As illustrated on the left side of Figure 5.1, the causes of productivity are
broken down into three building blocks: endowments, macroeconomic
competitiveness, and microeconomic competitiveness (Porter et al., 2008,
p. 45). First, endowments represent natural resources, geographic location,
and the size of the home market. Although these “inherited” advantages can
have a direct impact on competitiveness, they do not, in themselves, guar-
antee a high level of prosperity. The empirical literature has even tended to
point to a negative correlation between an abundance of natural resources
and prosperity (Porter et al., 2008, p. 45; Sachs and Warner, 1999, 2001;
Papyrakis and Gerlagh, 2004). This counterintuitive relationship has often
been referred to as a “resource curse” (Porter et al., 2008, p. 45). Many coun-
tries or regions particularly well endowed in natural resources such as oil or
diamonds demonstrate great difficulties in deriving sustainable economic

development from the wealth generated by their inherited resources

(Gylfason et al., 1997; Arezki and van der Ploeg, 2007).
Second, the macroeconomic environment has an indirect impact on
competitiveness (Sölvell et al., 2003, p. 21; Porter et al., 2008, p. 46). By
setting framework conditions, an efficient, reliable, and solid macroeco-
nomic, political, social, and legal context stimulates and increases value
creation opportunities, but does not generate, in itself, a single penny of
wealth (Gugler et al., 2010, p. 108). For example, while tax breaks may
encourage investment, they do not directly create more value (Gugler et al.,
2010, p. 108). It depends on how firms take advantage of the opportunities
created by tax break policies (Gugler et al., 2010, p. 108). In other terms,
macroeconomic factors influence the productivity of firms by setting the
environment in which economic activity takes place. An effective macr-
oeconomic environment is therefore necessary to sustain competitiveness,
but not sufficient for higher productivity (Snowdon and Stonehouse, 2006,
p. 165; Porter et al., 2008, p. 46).
The main engine of competitiveness stands at the microeconomic level
and it is at this level that value is created (Ketels, 2006, p. 119; Porter et al.,
2008, pp. 47–48; Gugler et al., 2010, p. 108). While many countries present
relatively similar macroeconomic, political, social, and legal conditions,
they record very different results in terms of GDP per capita or competitive-
ness as measured by indexes such as the GCR (Ketels and Sölvell, 2006, p. 7;
Gugler et al., 2010, p. 108; WEF, 2011, p. 4). This observation is even more
obvious at the regional level (Gugler et al., 2010, p. 108). To take the example
of Switzerland: although many macroeconomic factors are relatively similar
between cantons because decided at federal level, the cantons show marked
differences in terms of economic performance (Gugler et al., 2010, p. 108).
As illustrated in Figure 5.1, Porter et al. (2008, p. 48) identify three
broad sources of microeconomic competitiveness: (1) the sophistication of
company operations and strategy; (2) the quality of the microeconomic busi-
ness environment, which goes hand in hand with (3) the state of cluster
development. First, despite having been largely neglected in growth theo-
ries, company sophistication is crucial to sustain a high level of produc-
tivity, competitiveness, and standard of living (Sölvell et al., 2003, p. 23;
Porter et al., 2008, p. 48). The productivity of a country or a region, meas-
ured through indicators such as GDP per capita, is intrinsically linked to
the productivity of its companies (Furman et al., 2002, p. 900; Porter et al.,
2008, p. 48). As noted by Porter et al. (2008, p. 48): “An economy cannot
be competitive unless companies operating there are competitive.”2 To that
extent, innovation capacities – considered in a broad perspective (distinct
strategy, unique product, new production process, innovative service, etc.) –
are particularly important to sustain prosperity (Gugler et al., 2010, p. 108).
Companies cannot be competitive in today’s economy if they do not imple-
ment the most sophisticated strategies.

Second, firms’ productivity is also influenced by the quality of the micro-

economic business environment (Snowdon and Stonehouse, 2006, p. 164;
Porter et al., 2008, p. 48). Globally competitive firms require educated
and skilled people, efficient administrative and physical infrastructures,
competitive suppliers and service providers, top-class research and academic
institutions, and intense regional competition to sustain and develop a
competitive edge in a world economy characterized by global competition
(Porter et al., 2008, p. 48). As illustrated on the right side of Figure 5.1, the
quality of the business environment can be assessed by Porter’s diamond
model (1990, p. 72).
According to Porter’s framework, the business environment can be evalu-
ated through a system of four interrelated elements: factor (input) condi-
tions, context for firm strategy and rivalry, demand conditions, and related
and supporting industries (Porter, 1990, p. 72; Porter et al., 2008, pp. 48–49).
Factor (input) conditions influence firms’ productivity by providing the
necessary inputs to produce world-leading goods or services (Porter et al.,
2008, pp. 48–49; Gugler et al., 2010, p. 110). They include human resources
(quantity and quality of the workforce), natural resources, level of tech-
nological development, capital availability (for example, venture capital),
and the reliability and the state of infrastructures (roads, railroads, airports,
electricity, water, telecommunication, etc.) (Hodgetts, 1993, p. 42; Gugler
et al., 2010, p. 110). Context for firm strategy and rivalry refers to the
effect of competition on economic efficiency (Curran, 2000, p. 401; Gugler
et al., 2010, p. 110). An intense level of competition tends to have a posi-
tive impact on firms’ productivity by prompting them to rationalize strat-
egies and constantly encourage innovation and the development of new
varieties of products and services (Gugler et al., 2010, p. 110). Demand
conditions affect competitiveness by influencing the standards of goods
and services produced within an economy (Hodgetts, 1993, p. 42; Gugler
et al., 2010, p. 111). A sophisticated local demand resulting, for instance,
from high consumer expectations, strict state regulation, or the existence
of quality labels orients firms’ production choices and the quality of their
services (Gugler et al., 2010, p. 111). Finally, firms’ productivity also depends
on the competitiveness of related and supporting industries (Jacobs and
de Jong, 1992, p. 234; Gugler et al., 2010, p. 110). The presence of world-
class suppliers, academic and research institutions, business associations, or
scientific centers affects the efficiency with which firms conduct their busi-
ness (Gugler et al., 2010, p. 111). An efficient and complementary business
environment is critical for a high level of productivity (Porter et al., 2008,
pp. 48–49; Gugler et al., 2010, p. 111). As illustrated in Porter’s diamond
model, government and chance also have an impact on competitiveness. On
the one hand, government has an important role as it can either positively
or negatively affect any element of the diamond (Lee and Chan-Olmsted,
2004, p. 656). While governmental decisions supporting the construction

of new and sophisticated infrastructures or policies strengthening competi-

tion, education, quality standards, or research conditions may strengthen
competitiveness, bad governmental decisions such as the implementation of
barriers to productivity can have the opposite effect (Lee and Chan-Olmsted,
2004, p. 656; Gugler et al., 2010, p. 112). Similarly, chance, such as historical
context, wars, natural disasters, or any uncontrollable phenomenon can
have a positive or negative influence on the quality of the business environ-
ment (Gugler et al., 2010, p. 112).
As put forward in Porter et al.’s (2008, pp. 45–49) integrative framework,
competitiveness in today’s economy has to be approached from a systemic
perspective and is the result of the combination of multiple factors. However,
while endowments can be the source of competitive advantages and an effi-
cient macroeconomic environment is necessary to set the conditions for
competitiveness, the microeconomic environment, and especially private
firms, is the main engine of value creation. As illustrated in the diamond
model, interactions between the different actors of a given business envi-
ronment are critical to the maintenance of and increases in productivity,
competitiveness, and standards of living in the long run. Each element of
the diamond model can have a positive or negative influence on the quality
of the business environment and therefore on the productivity and competi-
tiveness of any firm or region. For example, the presence of academic or
research institutions (related and supporting industries) may lead to the
development of new technologies (factor conditions) (Gugler et al., 2010,
p. 111). Conversely, poor intellectual property rights or competition laws
(context for firm strategy and rivalry/government) can have a negative
impact on innovation and the diffusion of new technologies (factor condi-
tions) (Gugler et al., 2010, p. 111).
It is in this context that Porter (1990, 1994, 1998a, 1998b, 2000) devel-
oped his famous concept of cluster.3 As an evolutionary phenomenon of
economic geography (Sölvell, 2008, p. 5; Keller, 2009, p. 11), clusters can be
described as a “non-random spatial concentration of economic activities”
(Karlsson, 2008, p. 2). Although conceptually distinct in Figure 5.1, clus-
ters are closely related to the state of the microeconomic business environ-
ment (Porter et al., 2008, p. 48). In fact, clusters are “an intermediate unit of
productivity drivers between the general business environment quality and
firm level sophistication” (Porter et al., 2008, p. 50).
While Porter brought the notion of cluster to the forefront of the economic
stage in the 1990s, economists have long been aware of the potential bene-
fits of agglomeration on economic performances (i.a. Harrison et al., 1996;
Malmberg et al., 1996, p. 86; Gordon and McCann, 2000, p. 513; Martin
and Sunley, 2003, p. 5; McCann, 2008, p. 24). Although it would be beyond
the scope of this chapter to pay full tribute to all the theories which have
sketched the contours and inspired the development of cluster theory, it is
nevertheless necessary to stress some essential contributions.4 The uneven

spatial distribution of economic activity and the potential benefits of

geographic concentration already captured the interest of scholars in the 19th
century. Authors such as von Thünen (1826), Weber (1909/1929), Hotelling
(1929), Ohlin (1933), Hoover (1937), Beckmann (1958), and Ullman (1958)
all contributed to the study of spatial phenomena in economics. The work
of Marshall (1890/1916) has nevertheless been particularly influential with
regard to cluster theory and recent work adding a spatial dimension to
economic theory (Feldman, 1994, p. 3; Porter, 1998, p. 206). Marshall was
the first economist to really emphasize and analyze the benefits of spatial
concentration and the importance of agglomeration in the organization of
industrial activity (Feldman, 1994, p. 3; Malmberg et al., 1996, p. 88; Porter,
1998a, p. 206; Gordon and McCann, 2000, p. 516; Atherton and Johnston,
2008, p. 94; McCann, 2008, p. 26). As he noted in his famous book “Principles
of Economics” (Marshall, 1890/1916, p. 271):
When an industry has chosen a locality for itself, it is likely to stay there
long; so great are the advantages which people following the same skilled
trade get from near neighborhood to one another. The mysteries of the
trade become no mysteries; but are as it were in the air, and children learn
many of them unconsciously. Good work is appreciated, inventions and
improvements in machinery, in processes and the general organization
of the business have their merits promptly discussed; if one man starts a
new idea, it is taken up by other and combined with suggestions of their
own; and thus it becomes the source of further new ideas. And presently
subsidiary trades grow up in the neighborhood, supplying it with imple-
ments and materials, organizing its traffic, and in many ways conducing
to the economy of its material.
On the basis of Smith’s initial analysis of labor specialization, Marshall

realized that the advantages of spatial concentration such as the creation
of a specialized local labor pool or the rapid flow of information between
the different actors in a regional milieu are likely to make an industry stay
and grow in a particular location for a long time (Blaug, 1985; Gordon and
McCann, 2000, p. 516).
Despite these early contributions, spatial issues broadly disappeared from
the economic landscape during the second half of the 20th century and
the heyday of neoclassical thought (Porter, 1998a, p. 206; Karlsson, 2008,
p. 1). Nevertheless, the enduring observations of spatial concentration of
economic activities in a globalizing economy and the growing intuition of
a link between location and economic performance prompted geographical
questions to re-enter mainstream economics in the 1990s (De Beule et al.,
2008, p. 219; Karlsson, 2008, p. 1). Beside the pivotal contributions of
Christopherson and Storper (1986), Porter (1990, 1998a), Saxenian (1990,
1994), and Scott (2000), the work of Krugman (1991a, b) – by rejuvenating

Industry:
- Buyers
- Suppliers
- Related industries
- SMEs
- Services
University:
- Colleges
- Tech transfer offices
- Laboratories
- Technology parks
Finance:
- Banks
- Venture capital
- Business angels
Organizations for Collaboration: Public bodies: Media

- Formal and informal networks - Regional authorities
- Trade associations - Agencies
- Cluster organizations
Figure 5.2 The cluster effect – relationship between the different actors in a cluster
Source: Personal elaboration based on Sölvell (2008, p. 11).
trade theories under the new challenges of spatial allocation in what is now
referred to as the “New Economic Geography” (Helpman and Krugman,
1985; Venables, 1995) – has also been decisive in restoring the place of geog-
raphy in economics.5
Specifically, Porter (1998a, pp. 197–198) defined clusters as “geographic
concentrations of interconnected companies, specialized suppliers, service
providers, firms in related industries, and associated institutions (for example,
universities, standards agencies, and trade associations) in particular fields
that compete but also cooperate”. Silicon Valley, located in the San Francisco
area in Northern California (USA) and home of a multitude of technology-
related firms, start-up companies, universities, research institutions, and
venture capitalists, is often cited as one of the most representative examples
of cluster. Figure 5.2 illustrates the relationships between the different actors
in a cluster and the resulting “cluster effect.”
As pointed out in this figure, clusters represent a new form of spatial
organization of economic activity that encourages both competition and
collaboration (Porter, 1998b, p. 79; Rees, 2005, p. 298). On the one hand,
intense competition is crucial to the success of a cluster (Polenske, 2004,
p. 1031). It pressures its members to constantly get better by developing new
ideas and improving their products or services in order to remain competi-
tive. On the other hand, co-operation between cluster members offers many

advantages in terms of efficiency, effectiveness, and flexibility (Porter, 1998b,

pp. 79–80; Newlands, 2003, p. 521). The emerging plastics cluster of the
Fribourg region in Switzerland provides a particularly striking example of
one potential benefit of collaboration. As noted by Tinguely (2006), because
many firms were too small to afford the cost of a specific molding software,
they decided to purchase it together and to share its use proportionally to
their financial contribution.
The proximity between the different actors in a cluster and the relationship
they forge create a climate of trust conducive to better co-ordination (Porter,
1998b, p. 80; Oinas, 2002, p. 65). Vigorous competition and repeated interac-
tions between cluster participants generate a stimulating and dynamic envi-
ronment that is difficult for firms based elsewhere to match (Gugler et al.,
2011a, p. 3). According to Porter (1998b, p. 80), clusters have three broad
effects on competition. First, clusters positively impact firms’ productivity
(Porter, 1998b, p. 81; Delgado et al., 2010a, p. 5; Martin et al., 2011, p. 182).
The co-location of activities linked by commonalities and complementari-
ties facilitates access to skilled employees and specialized suppliers by respec-
tively reducing the search and transaction costs in recruiting and improving
the ancillary and support services of suppliers (Porter, 1998b, p. 81; Pitelis
and Pseiridis, 2006, p. 22). More frequent interactions and personal rela-
tionships between cluster participants also foster trust and allow a better
flow of information and access to specialized knowledge accumulated within
clusters (Porter, 1998b, p. 81; Martin and Sunley, 2003, p. 6). Similarly,
improved access to institutions and targeted investments by governments
or private firms in education, training programs, infrastructures, or research
laboratories contribute to increased productivity (Porter, 1998b, p. 83; Pitelis
and Pseiridis, 2006, p. 22). Furthermore, competitive pressure within clus-
ters is highly motivating and continually spurs firms to outdo one another
(Porter, 1998b, p. 83; Delgado et al., 2010a, p. 5).
Second, in addition to enhancing productivity, clusters stimulate firms’
innovation capacities (Porter, 1998b, p. 83; Baptista, 2001, p. 31; Breschi et al.,
2005, p. 343; Cumbers et al., 2008, p. 302). Indeed, some of the same char-
acteristics that enhance productivity have an even more significant effect on
innovation (Porter, 1998b, p. 83; De Beule et al., 2008, p. 224; Simmie, 2008,
p. 21). Since leading clusters connect firms of the same industry and firms
in related and supporting industries with universities and research centers,
they make opportunities for innovation more visible (Porter, 1998b, p. 83;
Breschi and Malerba, 2005, p. 1; Novelli et al., 2006, p. 1143). For example,
biotech companies located in the Basel (CH) area or semi-conductor firms
established in Silicon Valley usually spot market opportunities earlier than
many firms located elsewhere. The enduring interactions between cluster
actors and face-to-face relationships help firms to stay abreast of the latest
technological improvements and to constantly learn about new product or
process advancements (Porter, 1998b, p. 83; Tan, 2006, p. 846; Breschi et al.,

2005, p. 343). Furthermore, the cluster’s competitive environment rein-

forces all the other advantages for innovation by urging firms to continu-
ally upgrade their existing technological assets (Porter, 1998b, p. 83; Breschi,
2008, p. 167; Isaksen, 2008, p. 205).
Third, clusters are likely to foster new business formation (Porter, 1998b,
p. 84; Scott, 2006, p. 2; Fingleton et al., 2008, p. 101; Delgado et al., 2010b,
p. 13). A variety of reasons have been advanced to explain why start-up
activity tends to be higher in clusters than in isolated locations. The many
interactions between cluster members, the co-location of interrelated activi-
ties and privileged access to specific information make it easier for individual
workers to perceive potential business opportunities that may ultimately
lead to the creation of new enterprises (Porter, 1998b, p. 84; Audretsch et al.,
2005, p. 1113; Feldman, 2008, p. 319). Barriers to entry also tend to be lower
in clusters than in other locations (Porter, 1998b, p. 84; Lundmark and
Power, 2008, p. 219). As specialized inputs, employees, suppliers, or service
providers are often already directly accessible at the cluster location, and
entrepreneurs have more information to monitor the inherent risks involved
in the launch of new businesses (Porter, 1998b, p. 84; Feldman et al., 2005,
p. 131; Mason, 2008, p. 45). Moreover, access to capital is facilitated as finan-
cial institutions such as banks, venture capitalists, and business angels are
integral parts of clusters and their familiarity with cluster activity helps them
to monitor the risk related to potential financial participation (Porter, 1998b,
p. 84; Avnimelech et al., 2008, p. 124; Mason, 2008, p. 45). Finally, clusters
offer a local market that not only provides special opportunities to new firms
but also sends them valuable signals about the relevance of their product or
service (Porter, 1998b, p. 84).
As illustrated in Figure 5.2, the many interactions – within a delimited
spatial area – between the different members of a cluster such as various
types of firm (buyers, suppliers, related industries, SMEs, service providers),
academic and research institutions (universities, tech-transfer offices, labo-
ratories, technology parks), organizations for collaboration (formal and
informal networks, trade associations, cluster organizations), financial insti-
tutions (banks, venture capitalists, business angels), public bodies (local
authorities, specific agencies), and media agencies (which have an impor-
tant role in the promotion of the cluster and the attraction of new valu-
able actors) create a unique business environment conducive to productivity
growth, innovation, and new business formation that is difficult to replicate
in other regions and in which “the whole is greater than the sum of the parts”
(Porter, 1998b, p. 81; Gugler et al., 2011a, p. 3). While many case studies
have thoroughly documented the benefits of clusters on economic variables
(i.a. Saxenian, 1990, 1996; Peters and Hood, 2000; OECD, 2007b; Sölvell,
2008), the empirical literature is still growing (Redding, 2009). Among these
early contributions, the work of Audretsch and Feldman (1996), Baptista and
Swann (1998), Wallsten (2001), Lublinski (2003), Porter (2003a), Bengtsson

and Sölvell (2004), Porter et al. (2004), Ketels and Sölvell (2006), Weterings
and Boschma (2006), Crescenzi et al. (2007), Breschi (2008), Lindqvist et al.
(2008), Martin et al. (2008), Sölvell (2008), and Delgado et al. (2010a, b)
should be mentioned.
5.2 The crucial role of location and external sources of
knowledge in the innovation process: the concept of
systems of innovation
As put forward in the previous section, one of the main findings emerging
from cluster research is that the spatial concentration of economic activi-
ties – and especially the formation of formal clusters – has a key influence
on innovation. These new insights brought by the revival of economic
geography and the development of cluster theory breathed new life into the
innovation literature and prompted innovation theorists to focus in more
detail on the geographic features of the innovation process (i.a. Jaffe, 1989,
p. 957; Acs et al., 1994, p. 336; Mowery and Oxley, 1995, p. 67; Audretsch
and Feldman, 1996, p. 630; Cooke et al., 1997, p. 475; Breschi and Lissoni,
2001, p. 975; Asheim and Isaksen, 2002, p. 77; Carlsson et al., 2002, p. 233;
Freeman, 2002, p. 191; Nelson and Nelson, 2002, p. 265; Asheim and Coenen,
2005, p. 1173; Asheim and Gertler, 2005, p. 299). As emphasized by Asheim
and Gertler (2005, p. 291), innovation scholars made the same observation
than economic geographers: in a globalizing economy, innovative activity
is still particularly unevenly distributed across countries and regions and
this trend toward spatial clustering has even increased over time and espe-
cially in knowledge-intensive industries such as biotechnology, information
technology, and financial services (i.a. Leyshon and Thrift, 1997; Feldman,
2001; Cortright and Mayer, 2002; Morgan, 2004, p. 3; Gertler and Levitte,
2005, p. 488).
The tendency of innovative activity to concentrate spatially is intrinsi-
cally related to the nature of the innovation process (Lissoni, 2001, p. 1480;
Moreno et al., 2005, p. 716). As put forward by Malmberg et al. (1996, p. 89),
referring to Freeman (1991), three characteristics of the innovation process
explain the geographical convergence of innovative activities:6
1. “the need for incremental reduction of technical and economic

uncertainty,
2. the need for continuous interaction between related firms, and
3. the need for face-to-face contacts in the exchange and creation of new
knowledge” (Malmberg et al., 1996, p. 89).
First, innovation is the result of an uncertain process both at the technolog-

ical level and at the market level (i.a. Schmookler, 1966; Freeman, 1982; Kline
and Rosenberg, 1986; Basberg, 1987; Pavitt, 1991; Pearson, 1991; Malmberg

et al., 1996, p. 89). Although completely removing uncertainty is impossible,

innovation theorists have noticed that interactions with external actors help
to reduce the inherent uncertainty of the innovation process. On the one
hand, uncertainty associated with technical aspects is generally dealt with
first by referring to knowledge held within the innovative entity through
processes of trial-and-error testing and revision (Kline and Rosenberg, 1986,
p. 291; Malmberg et al., 1996, p. 90). However, as in-house capacities are
not always sufficient to respond to the challenge of innovation, formal
and informal co-operation with related firms or other private and public
academic or research institutions is often used to work out technical issues
and increase the probability of success of the innovation process (Malmberg
et al., 1996, p. 90). On the other hand, uncertainty related to the intro-
duction of new products or services in the marketplace can also be reduced
by a thorough monitoring of market needs and constant interactions with
external actors throughout the innovation process. Already in the 1980s,
Kline and Rosenberg (1986) pointed out the importance of uniting techno-
logical and market realms in order to increase the chances of success of the
innovation process (see Chapter 4).
Second, the innovation process is characterized by continuous interactions
between related firms (Malmberg et al., 1996, p. 90). Interactions between
related firms occur in the innovation process not only in the interest of the
various advantages in terms of complementarity, but sometimes also because
the original initiator of an innovation is not able to put it into practice (Pavitt,
1984). Similarly, the initial idea for an innovation does not always arise
from the actual manufacturer or provider of the new product or service. As
noted by authors such as von Hippel (1988) or Hakansson (1989), customers
and suppliers are often the source of innovation. Innovation is therefore
an inherently interactive process combining different types of knowledge
held within the innovative entity and by external actors (Dosi, 1988). It is
thus common that innovations are the result of joint development between
various actors (firms, research institutions, universities, suppliers, customers,
etc.) involved in the innovation process (Lundvall, 1988; Morgan, 1995;
Malmberg et al., 1996, p. 90).
Third, despite great improvements in communication means and the possi-
bility of communicating worldwide at low cost via new interactive tools such
as Skype, face-to-face relationships are still particularly important for innova-
tion (i.a. Nohria and Eccles, 1992; Malmberg et al., 1996, p. 90; Asheim and
Gertler, 2005, p. 292). In a world economy in which competitiveness increas-
ingly depends on the capacity of firms to constantly develop new products
and processes, tacit knowledge plays a key role in the success of the innova-
tion process (i.a. Utterback, 1974; Florida, 1995; Cooke and Morgan, 1998;
Lundvall and Maskell, 2000; Asheim, 2001; Pavitt, 2002; Asheim and Gertler,
2005, p. 292). While explicit/codified knowledge has become relatively easily

accessible and transferable across borders, innovation and the development

of unique capacities increasingly rely on tacit (non-tradable/non-codified)
knowledge (Maskell and Malmberg, 1999, p. 172; Asheim and Gertler,
2005, p. 292). In contrast to explicit/codified knowledge, tacit knowledge
is embedded in personal skills, face-to-face relationships, and operational
process and cannot be transcribed through scientific articles or formulae
(Polanyi, 1962; Winter, 1987; Malmberg et al., 1996, p. 90).
As a consequence, the intrinsic characteristics of the innovation process
give innovation a profound geographical nature and tend to make innova-
tive activity cluster in particular locations. On the one hand, knowledge,
and especially tacit knowledge, is particularly challenging to exchange over
distances (i.a. Haldin-Herrgard, 2000, p. 358; Howells, 2002, p. 872; Asheim
and Gertler, 2005, p. 293). As innovation depends on knowledge and knowl-
edge is developed within a specific social and institutional setting, innova-
tion and knowledge creation are likely to be spatially sticky (Gertler, 2003,
p. 75; Asheim and Gertler, 2005, p. 293). As noted by Glaeser et al. (1992,
p. 1127) knowledge and intellectual breakthroughs are expected to traverse
“hallways and streets more easily than oceans and continents”. On the other
hand, the nature of the innovation process has profoundly evolved over
the years. While innovation used to be the result of isolated inspirations,
it has increasingly become the outcome of an interactive process between
various economic entities (i.a. Penn et al., 1999, p. 194; Asheim and Gertler,
2005, p. 293; McCann, 2007, p. 118; Segarra-Blasco and Arauzo-Carod, 2008,
p. 1284; Lundvall, 2009, p. 11). This evolution of the innovation process
towards what has been called “learning through interacting” has definitively
established the importance of location in innovation theories and strength-
ened the role of geography in innovation and growth policy (Enright, 1994;
Lundvall and Johnson, 1994; Asheim and Gertler, 2005, p. 293). It is in this
context that the spatial concentration of economic and innovative activity
has considerable advantages over a more dispersed configuration (Enright,
1994; Malmberg et al., 1996, p. 90).
Based on these observations and in parallel with the rising interest
directed towards cluster theory, innovation theorists successively introduced
the notions of national and regional innovation systems to respond to the
increasingly obvious need to unite technological and territorial dynamics
in innovation research (i.a. Freeman, 1987, 1995; Lundvall, 1988, 1992;
Nelson, 1993; Asheim and Cooke, 1999; Lundvall and Borras, 1999; Asheim,
2000; Fagerberg, 2003; Asheim and Gertler, 2005, p. 299; Edquist, 2005).
The development of this systemic vision of innovation grew in parallel with
progress in innovation research. Initially, innovation scholars started to
analyze in more detail the types of external factor influencing the innova-
tion process. A number of studies were devoted to the analysis of the impact
of factors such as institutional setting, political environment, public research

infrastructure, and financial infrastructure on innovation (i.a. Freeman

et al., 1982; Hughes, 1983; Carlsson and Stankiewicz, 1991; Fagerberg, 2005;
Malerba, 2005). On the basis of these findings, it became increasingly clear
that innovation implies a broader range of actors and knowledge than previ-
ously conceived (Feldman, 1994, p. 2). As pointed out by Dosi (1990), inno-
vation has gradually been described as an uncertain problem-solving process
drawing together two different types of knowledge: private knowledge and
public knowledge – the former developed within the innovation entity and
through interactions with industry associations, scientific and professional
societies or networks of related firms and support services (Nelson, 1990) and
the latter derived from specialized institutions devoted to support innova-
tion such as universities or research institutes (Feldman, 1994, p. 2; Simmie,
2002, p. 889).
The rising awareness of the collective nature of innovation as a process
involving a broad range of different actors and knowledge led scholars to
focus in more detail on the role of interactions between theses different
stakeholders on the innovation process. It is in this context that scholars
started to adopt a systemic vision of the innovation process (i.a. Rothwell,
1994; Edquist and Hommen, 1999; Buijs, 2003; Galanakis, 2006; Gassmann,
2006). They departed from a perception of innovation confined to the sphere
of the individual firm to develop a conception of innovation as part of a
whole system of interconnected actors. The innovation systems literature
has greatly contributed to a better understanding of the reinforcing charac-
teristics of interactions in the success of the innovation process (i.a. Lundvall,
1992; Nelson, 1993; Braczyk, 1998; Asheim and Gertler, 2005; Edquist, 2005;
Lundvall and Borras, 2005). Freeman (1987) was the first to use the term
“national system of innovation” in his evaluation of the innovative environ-
ment of the Japanese economy. He defined a national system of innovation
as “the networks of institutions in the public and private sectors whose activ-
ities and interactions initiate, import, modify and diffuse new technologies”
(Freeman, 1987, p. 4). In other words, the national system of innovation
perspective sees innovative performances as closely related to the interac-
tions between private and public actors involved in the innovation process
and the social, institutional, and political framework of a given geographical
territory, in this case, the country.
Although country-level analysis can be relevant for historical reasons such
as the particular and enduring economic structure of a country or the exist-
ence of shared values such as institutions or culture, innovation systems
cannot be restricted to national borders (i.a. Carlsson and Stankiewicz, 1991;
Cooke et al., 1997; Edquist, 1997; Fagerberg, 2003, p. 142). It is in this context
that the notion of regional innovation system has been developed (i.a.
Asheim and Isaksen, 1997; Cooke, 1992, 1998, 2001; Fritsch, 2002; Agrawal
and Cockburn, 2003; Doloreux and Parto, 2005). The rationale behind the

regional innovation system perspective is similar to the national one but

with a greater appreciation of regional idiosyncrasies and the advantages
of spatial proximity in the stimulation of innovation (i.a. Cook et al., 1997,
p. 475; Cooke, 2001, p. 946; Asheim and Gertler, 2005, p. 299). As noted by
Asheim and Gertler (2005, p. 299): “The regional innovation system can be
thought of as the institutional infrastructure supporting innovation within
the production structure of a region.” The concept of regional innovation
system is particularly close to the notion of cluster as described in the previous
section. Geographical concentration induces team-like relationships and
systemic interactions between the actors involved in the innovation process
and creates an environment conducive to innovation that is difficult to
reproduce by other regions (Cooke, 2001, p. 948; Asheim and Gertler, 2005,
p. 299). The “regional culture” developed in regional innovation systems
through regular face-to-face interactions, trust-based relationships, and the
adoption of specific codes, values, routines, or expectations fosters the circu-
lation of tacit knowledge and creates a unique milieu in which innovation
is constantly stimulated (Asheim and Gertler, 2005, p. 300; Cooke, 2005a).
Box 5.1 presents the nine main characteristics of systems of innovation as
identified by Edquist and Hommen (1999, pp. 65–66).
Edquist and Hommen identified nine characteristics of systems of innova-
tion: (1) They place innovation and learning process at the center of focus;
(2) they adopt a holistic and interdisciplinary perspective; (3) they employ
historical perspectives; (4) they stress the differences between systems, rather
than the optimality of systems; (5) they emphasize interdependence and
non-linearity; (6) they encompass product technologies and organizational
innovations; (7) they emphasize the central role of institutions; (8) they are
still associated with conceptual diffuseness; (9) they are a conceptual frame-
work rather than formal theories.
This new vision of innovation gave birth to new conceptual frameworks
that tried to depict more accurately the systemic nature of the innovation
process. Rothwell (1994), Buijs (2003), and Galanakis (2006) provide inter-
esting reviews of some of these new models. Figure 5.3 gives an example of
these circular representations of the innovation process.
Based on a similar vision of the non-linearity of the innovation process
to that already depicted in the Kline and Rosenberg type of model, the new
models go one step further and adopt a systemic vision in order to take into
account the last advances in innovation theory. As illustrated in Figure 5.3,
the innovation process of a particular company is represented as totally
integrated and embedded in its competitive environment. This new type of
framework witnesses the evolution of research on innovation as presented
throughout the last two chapters and the evolution of the representation
of the innovation process from a linear logic to the “circular chaos” of the
innovation system perspective (Buijs, 2003, p. 76). Openness to new ideas,

Product
launch
Product
development
Strategic
situation
Product of the
design Company company
Search
Design area
brief
Competitive
environment
Figure 5.3 Detailed circular model of the product innovation process

Note: Please refer to Buijs (2003, p. 91) for full figure.Source: Adapted from Buijs (2003, p. 91).
collaborations, and the development of absorptive capacities are therefore

the cornerstones of a successful innovation strategy (Gassmann, 2006).
Based on these recent findings in the innovation literature, the concept of
“smart specialization” developed by Foray et al. (2009) and the preaching
of greater convergence between innovation policies and the reality of the
sectoral structure of a given economy have quickly found success among
European policy makers.7
The importance of embeddedness in the external environment has also
been recognized by Porter in the elaboration of his value chain concept. As
noted by Porter (1995, p. 34), a firm cannot develop and sustain a competi-
tive advantage in isolation. A firm’s performance is intrinsically linked to
its interactions with upstream and downstream partners. For instance, the
suppliers’ value chain directly influences a firm’s productivity through the
quality of their service (Porter, 1995, p. 34). Similarly, the efficiency of the
value chain of channels, which are the intermediate steps that bring a product
to buyers, or the buyers’ value chain itself, which reflects the utility of a
firm’s product in its value chain and determines buyer needs, have a direct

… Supplier Firm Channel Buyer

value chains value chain value chains value chains
Firm infrastructure
ACTIVITIES
SUPPORT
M
Human resource management
Technology development A
Procurement
R
G
Inbound Operations Outbound Marketing Service
logistics logistics & sales I
PRIMARY ACTIVITIES
Figure 5.4 The value system

Source: Personal elaboration based on Porter (1995, pp. 35–37).
impact on the way a firm conducts its business (Porter, 1995, p. 34). A firm’s
competitiveness is therefore inherently related to its level of embeddedness
in the external environment. As illustrated in Figure 5.4, Porter introduced
the term “value system” to stress the importance that a firm’s value chain be
integrated in a broader set of activities (Porter, 1995, p. 34).
Porter’s concepts of the value chain and the value system are particularly
insightful when it comes to innovation and technology management. As
developed throughout this chapter, innovation is an intrinsically interactive
process. Not only innovative activities have to be coordinated internally in
order to efficiently piece together the different types of knowledge and capa-
bilities held within the innovative entity but also externally in order to take
advantage of complementary knowledge generated by external actors such
as universities, research institutions, rival firms, suppliers, and customers.
This dual nature of the innovation process is perfectly reflected in Porter’s
concepts.
On the one hand, the firm’s value chain emphasizes the importance of
coordinating innovative and technological activities internally and inte-
grating them with the other value activities performed within the firm.
On the other hand, the value system stresses the necessity to interact with
external actors and perceives embeddedness in the external environment
as a legitimate source of competitive advantage. Porter’s construct therefore
represents a useful tool for approaching the complexity of the innovation
process, and its emphasis on the role of the external environment will be

particularly suitable for analyzing in more detail (in Chapter 6) how the
establishment of research activities in different locations may benefit the
innovation process of firms.
5.3 Empirical evidence of the concentration of innovation:
a review of the literature
Progress in the understanding of the nature of the innovation process and

continuing evidence of the spatial concentration of innovative activities in
a globalizing economy led scholars to evaluate in a more systematic way
the relationship between innovation and location (Simmie, 2005). Although
an exhaustive review of the empirical literature that has accumulated since
the 1990s would be too ambitious, it is necessary to emphasize some of the
main contributions that have assessed the geographical features of innova-
tive activities.
According to Feldman (2000, p. 373), the empirical literature on innova-
tion and location can be broken down into two types: studies focusing on
the geography of knowledge spillovers (with indicators of innovation as a
dependent variable) and studies adding a geographic dimension to tradi-
tional economic questions such as research on growth or productivity (with
measures of growth or productivity as a dependent variable and innovation
indicators as explanatory variables). The two traditions nevertheless share
a desire to empirically investigate the spatial pattern of innovation in the
light of the new role attributed to location as “a geographic unit over which
interaction and communication is facilitated, search intensity is increased,
and task coordination is enhanced” (Feldman, 2000, p. 373).
The first strand of research deals with the analysis of the spatial character-
istics of knowledge spillovers (i.a. Paci and Usai, 1999; Anselin et al., 2000;
Fischer and Varga, 2003; Iammarino and McCann, 2006). As put forward by
Breschi and Lissoni (2001, p. 975), knowledge spillovers can be defined as “a
prototypical externality, by which one or a few agents investing in research
or technology development will end up facilitating other agents’ innovation
efforts” or “knowledge externalities bounded in space, which allow compa-
nies operating nearby important knowledge sources to introduce innovations
at a faster rate than rival firms located elsewhere”. Research on knowledge
spillovers is derived from the early assumption of the non-rival nature of
knowledge as developed by Nelson (1959) or Arrow (1962) and emphasized
in the second chapter of this thesis.
The first empirical studies to assess the geographical character of knowl-
edge spillovers were based on a revised version of the knowledge production
function as developed by Griliches (1979) (Feldman, 2000, p. 377). In an
early paper, Jaffe (1986) found, for instance, that firms’ productivity was
significantly influenced by other firms’ activity and that firms were there-
fore benefiting from research activities undertaken by other firms. In his

state-level analysis of the effects of academic research in the U.S., Jaffe (1989,
p. 975) confirmed these initial findings by demonstrating that corporate
patenting activity was positively affected by university research. In other
words, he emphasized the tendency for university research to spill over
and stimulate innovative performance of nearby firms (Jaffe, 1989, p. 975).
Feldman (1994, p. 5) adopted a similar approach using data on the market
introduction of commercially viable products from the 1982 U.S. Small
Business Administration innovation survey. She found not only that product
innovations had a marked tendency to concentrate spatially but also that
this geographic-clustering was significantly influenced by the intensity of
university and industry R&D and the presence of related industries and
other business services (Feldman, 1994, pp. 8–9). In line with Jaffe’s find-
ings, Feldman (1994, p. 9; 2000, p. 378) discovered that innovation was
more concentrated in states with greater numbers of knowledge sources,
thus confirming the tendency of knowledge to spill over and benefit nearby
actors. Papers by Adams (2002), Fischer and Varga (2003), and Audretsch
et al. (2005) are further examples of studies that analyzed the spatial charac-
teristics of academic knowledge spillovers.
In another pivotal study, Audretsch and Feldman (1996, p. 633) developed
a method based on an indicator of concentration (the Gini coefficient of
innovative activity) to test whether innovative activity tends to cluster in
regions where the density and diversity of knowledge sources is high and
knowledge spillovers tend to be frequent (Feldman, 2000, p. 378). After
controlling for the concentration of productive activity, they showed that
the propensity of innovative activity to cluster spatially was significantly
influenced by the level of industry R&D, academic research, and qualified
employees (Audretsch and Feldman, 1996, p. 636; Feldman, 2000, p. 379). In
a more recent study, Sölvell (2008, p. 22) directly analyzed the impact of clus-
ters on innovation. Based on data from the European Cluster Observatory,
he found striking evidences of positive correlation between regional speciali-
zation measured through an indicator of degree of clustering and innovative
performance measured through an indicator of patenting activity (Sölvell,
2008, p. 22). In other words, European regions identified as home to clusters
present significantly better innovative performance than European regions
without clusters (Sölvell, 2008, p. 22).
Other studies explored the spatial nature of knowledge spillovers through
the analysis of patent citations. As mentioned by OECD (2009b, p. 106),
“patent citations are the references provided in the search report [of the
patent document] which are used to assess an invention’s patentability and
help to define the legitimacy of the claims of the new patent application.”
Patent citations are a reference to the prior art and, as they leave a trace
of the knowledge and previous patents on which the invention has been
built, they represent a unique indicator to explore the pattern of knowledge
spillovers (OECD, 2009b, p. 106). Jaffe et al. (1993), based on Trajtenberg’s

(1990a) initial work on citing and cited patents, produced a reference article
on the use of patent citations as an indicator of the spatial features of
knowledge spillovers (Feldman, 2000, p. 379). On the basis of a sample of
patents granted in 1975 and 1980 – and their citations – to U.S. universities,
a matching sample of patents granted to U.S. firms and a control sample to
account for the actual distribution of technical activity, Jaffe et al. (1993,
pp. 581, 595) found a statistically significant tendency for citing patents to
cite patents demanded in the same city. Jaffe and Trajtenberg (1996) and
Almeida and Kogut (1997) further extended this strand of research. Other
interesting studies providing additional evidence of the geographically
bounded nature of knowledge spillovers have been developed with data on
“star scientists” and the analysis of ideas embodied in individuals and knowl-
edge spillovers created by the trade of goods (Feldman, 2000, pp. 380–383).
The contributions of Coe and Helpman (1995), Park (1995), Audretsch and
Stephan (1996), Zucker and Darby (1996), Keller (1998), and Zucker et al.
(1998) should be mentioned.
The second strand of the empirical literature sought to add a spatial dimen-
sion to research on growth, investment, and productivity and to derive reflec-
tions on the impact of the concentration of innovative activity (Feldman,
2000, p. 383). Research on agglomeration economies helped to evaluate the
role of location on various economic variables (Rauch, 1991, p. 1; Henderson,
2000, p. 2; Feldman, 2000, p. 383). For instance, Martin and Ottaviano
(2001) developed a model in which geographic agglomeration and growth
were mutually reinforcing. Beeson (1987), Fujita and Thisse (2003), and
Baldwin and Martin (2004) conducted similar studies. Although a uniform
pattern has not emerged from this literature yet, Glaeser et al. (1992) have
provided empirical evidence of the positive influence of economic diversity
on the growth of local economies, Beeson and Montgomery (1992) have
unveiled a positive relationship between the presence of universities and
the employment rate, skill level, and wage level of regions, and Smith and
Florida (1994) have found in an analysis of Japanese investment a tendency
for suppliers to the automobile industry to locate near production subsidi-
aries in order to benefit from industrial-district types of benefits (Feldman,
2000, pp. 384–385).
Other studies focused on the spatial attributes of knowledge. Feldman and
Lichtenberg (1998), for instance, provided evidence that tacit knowledge
tends to influence the centralization of R&D activity. Jaffe and Trajtenberg
(1996), Audretsch and Feldman (1996), and Henderson (1983) all empha-
sized the importance of spatial concentration for knowledge-intensive indus-
tries. Finally, some authors contributed to the development of an empirical
literature on the influence of location on firm characteristics, which assessed
not only the cost of innovation (such as the necessity to develop absorp-
tive capacities or the task of integrating new techniques) but also the poten-
tial benefits of the concentration of economic activities on growth and

innovation (Feldman, 2000, p. 388). Among these studies, the work of Cohen
and Levinthal (1989) and Lerner (1999) should be mentioned.
As noted by Sölvell (2008, p. 10), the empirical literature that has been built
over the years on the concentration of innovative activity and its impact
on various economic variables has contributed to confirm the existence
of knowledge externalities in clusters. Although more research is needed,
the existing contributions have already pointed out the potential benefits
of spatial concentration on innovation and other indicators of economic
performance.
As put forward in this chapter, despite a changing world economy and the
new opportunities offered by globalization, location still matters. Although
spatial issues were partially overlooked during the mid-20th century, enduring
evidence of the geographical concentration of economic and innovative
activities urged scholars to reconsider the role of location in economics.
On the basis of contributions by economists from the early 20th century,
it became increasingly obvious that agglomeration provided unique advan-
tages in terms of economies of scale and network effects fostering national
and regional specialization patterns. It is in this context that the notion
of cluster has been introduced. Built on a reassessment of the sources of
productivity emphasizing the importance of microeconomic competitive-
ness and a new form of spatial organization of economic activity encour-
aging both fierce competition and collaboration, the concept of cluster shed
new light on the role of location in competitiveness. By promoting interac-
tions between a variety of geographically concentrated public and private
actors conducting similar and complementary activities, clusters create a
dynamic business environment conducive to economic growth, innovation,
and entrepreneurship.
As empirical evidence confirmed the tendency of clusters to positively
influence some key economic variables, they progressively became a popular
policy tool for stimulating regional economies and an established notion in
the economic landscape (Capello, 2007; OECD, 2007b; Ketels, 2008; Eckey,
2008). These advances in the economic geography literature led innovation
theorists to focus in more detail on the geographic features of the innovation
process. As was argued in the second section of this chapter, the intrinsic
characteristics of the innovation process represented by the need for reduc-
tion of uncertainty, continuous interactions, and face-to-face relationships
in the knowledge creation process give innovation a profound geographic
nature. In order to better account for the collective and spatial features of the
innovation process, scholars successively introduced the concepts of national
and regional innovation systems. This systemic vision of the innovation
process derived from the advantageous atmosphere of frequent interactions

Cluster X of a country X
localized in a region X
Figure 5.5 Cluster as a unique, geographically concentrated cobweb of interrelationships
Source: Personal elaboration.
and shared trust described in cluster theory definitely departs from the linear
logic of early models and emphasizes the necessity of innovation activities to
be not only coordinated in the internal value chain of the innovation entity
but also embedded in its external environment.
Based on the literature analyzed throughout this chapter, it therefore
seems clear that clusters have a positive influence on economic perform-
ance. Figure 5.5 illustrates the unique characteristics of clusters in today’s
global economy. Despite the widening of locational possibilities, the contin-
uous interactions between clusters’ members (firms, universities, research
institutions, local government agencies, suppliers, etc.) – represented by
the interconnected black dots in the zoom on cluster X in Figure 5.5 –
generate positive endogenous externalities that are not easily transferable
across distance. As a consequence, the cobweb of interrelationships created
by the spatial agglomeration of economic activities linked by similarities
and commonalities sets clusters apart in the economic landscape and makes
them particularly conducive to innovation.

6
The Geography of Innovation in
a Globalized Economy
As was argued in the previous chapter, the world is still relatively spiky.1
Contrary to popular belief, despite the obvious globalization of the economy,
productive and innovative activities continue to be concentrated in certain
locations (i.a. Krugman, 1991a; Feldman, 1994; Florida, 1995; Enright, 1998;
Porter, 1994, 1998a, b; Sölvell, 2002). The greater integration of the world
economy has nevertheless unveiled many new opportunities for firms to
take advantage of the capabilities and competencies of a broader range of
environments (Dunning, 1998, p. 45; Dunning, 2008, p. 83; Ketels, 2008,
p. 124). While until the late 19th century firms used to perform the great
majority of their activities within their home country or even their home
region, improvements in communication, transportation, and storage tech-
niques progressively led them to reassess the role of location in their business
strategy (Dunning and Lundan, 2008, p. 154). This new economic reality
gradually opened up new perspectives for firms to disaggregate their value
chain across different types of location worldwide (Hertner and Jones, 1986;
Moore and Lewis, 1999).
As mentioned by Ketels (2008, p. 120): “The global economy is in the midst
of change process affecting markets, value chains, and access to knowledge
and technology.” Multinational enterprises (MNEs), defined as enterprises
“that engage in foreign direct investment (FDI)2 and own or, in some way,
control value-added activities in more than one country” (Dunning and
Lundan, 2008, p. 3), are widely recognized as the main engine of this globali-
zation process (i.a. Held and McGrew, 2000; Narula and Dunning, 2000;
Kleinert, 2004; Flores and Aguilera, 2007, p. 1187; Rugman and Verbeke,
2004a, p. 3; Rugman and Oh, 2008, p. 1). According to UNCTAD (2012a,
p. 1), in 2011, foreign affiliates of MNEs recorded $28 trillion in sales and
$7 trillion in value added, possessed total assets worth more than $82 tril-
lion, and employed around 69 million workers. In comparison, the world’s
Gross Domestic Product (GDP) in current prices in 2011 was estimated at
$69 trillion (IMF, 2012, Internet source).
109

The new deal sets by the reduction of many barriers to cross border trans-
actions deeply altered the nature of competition. While competition used to
be restricted almost exclusively to Western European, North American, and
Japanese firms only three decades ago, companies now face fierce competi-
tion from firms from a wider range of locations (Ketels, 2008, pp. 120, 124).
As a matter of fact, outward FDI flows by BRIC countries increased from
$5,727 million in 1992 to $146,123 million in 2011 – and it is worth noting
that the 2011 figures were still affected by the 2007 economic downturn
(UNCTAD, 2012b, Internet source).3 In this new context of global competi-
tion, firms have to constantly increase their efficiency in order to remain
competitive, and intellectual capital and innovation have progressively
become the main source of value creation (Zander and Kogut, 1995, p. 76;
Dunning, 1998, p. 47; Argote and Ingram, 2000, p. 150; OECD, 2005, p. 39;
Jensen and Szulanski, 2007, p. 1716; Ketels, 2008, p. 124).
As noted by Sala-I-Martin et al. (2009, p. 7), referring to the pioneering
work of Aghion and Howitt (1992), innovation is even more important
for economies as they reach the frontier of knowledge, and incorporating
exogenous technologies is no longer sufficient. Companies from innova-
tion-driven economies cannot simply adapt existing technologies or make
incremental improvements to increase their productivity (Sala-I-Martin
et al., 2009, p. 7). They have to constantly develop cutting-edge products
and processes to maintain a competitive advantage (Sala-I-Martin et al.,
2009, p. 7). This necessity to innovate and to find new sources of knowl-
edge is reflected in the increasing internationalization of R&D activities,
which is part of the broader process of internationalization of innovation
(Granstrand et al., 1993, p. 414; Chiesa, 1996, p. 7; Cantwell, 1999, p. 72;
Cantwell et al., 2004, p. 58; Criscuolo, 2004, p. 39; Cantwell and Piscitello,
2005, p. 3; OECD, 2008b, p. 20). As emphasized in a special issue of the World
Investment Report (WIR) on the internationalization of R&D, large MNEs
are the main driver in this process too (UNCTAD, 2005, p. xxv). Indeed, the
700 largest R&D spending firms in the world – of which 98 percent were
MNEs – accounted for close to half of the world’s total R&D expenditure and
more than two-thirds of world R&D (UNCTAD, 2005, p. 119).
As R&D is one of the main sources of innovation, the management of
R&D activity is of particular importance (Trajtenberg, 1990b; Lichtenberg,
1992; Gugler and Michel, 2010, p. 2). The pressure to constantly innovate,
intensified by global competition, has therefore prompted MNEs to adapt
their innovation strategy by increasingly establishing their R&D operations
in foreign locations in an attempt to improve their technological assets and
take advantage of the special profiles of different types of business envi-
ronment (Sölvell, 2002, p. 3; Ketels, 2008, p. 124). In this quest toward
new knowledge and capacities, clusters offer evident advantages in terms
of access to tacit knowledge and innovation opportunities. While under-
taking strategic investment in leading clusters is a way for MNEs to enhance

The Geography of Innovation in a Globalized Economy 111
their innovation capacities (by tapping into opportunities and ideas where
they first emerge and leveraging them on a worldwide basis through their
internal networks), there is still surprisingly little detailed research in this
area (i.a. Dunning, 1998, p. 60; Birkinshaw and Sölvell, 2000, p. 3; Asheim
and Gertler, 2005, p. 311; Tavares and Teixeira, 2006, p. 1; Mudambi and
Swift, 2010, p. 463).
The aim of this chapter is therefore to explore the relationship that MNEs
maintain with clusters in the frame of their global innovation strategy and
to propose an original theoretical framework for formalizing it. To that end,
this chapter has been broken down into three main sections. Section 6.1
reviews the main explanations of MNE activity and emphasizes the new
spectrum of organizational relationships created by the emergence of these
entities. Section 6.2 examines from a theoretical point of view the progres-
sive shift toward the internationalization of the R&D process and stresses the
new challenges of the co-ordination of international value chains and the
management of geographically dispersed activities in the global innovation
strategy of MNEs. Finally, Section 6.3 explores the opportunities offered by
clusters in the global knowledge-enhancing process of MNEs and unveils the
theoretical construct that will be empirically analyzed in part III.
6.1 Multinational enterprises and globalization:

a theoretical explanation of multinational enterprise activity
As illustrated in Tables 6.1 and 6.2, the world economy has become increas-
ingly integrated over the last three decades and MNEs have been playing a
pivotal role in this globalization process. These two tables provide a glimpse
of these profound evolutions. As shown in Table 6.1, outward FDI (OFDI)
stock increased from $549,304 million in 1980 to $20,864,846 million in
2010, an increase of almost 3,800 percent. Although developed economies
still account for the large majority of OFDI stock (82 percent in 2010), transi-
tion and developing economies significantly raised their share in total OFDI
stock (from 7 percent in 1990 to almost 18 percent in 2010) and progressively
established themselves as legitimate outward investors. A growing literature
has indeed recently emerged on the implications of outward investment by
investors from transition and developing economies and the fascinating and
rapid growth of countries such as China and India in recent years has partic-
ularly caught the interest of scholars from all over the world (i.a. Zhan, 1995;
Hong and Sun, 2006; Deng, 2007; Buckley et al., 2008; Voss, 2011).
Inward FDI (IFDI) stock figures, presented in Table 6.2, similarly reflect the
growing internationalization of the world economy.4 Although the struc-
ture of IFDI stock has traditionally been less concentrated than that of OFDI
stock because foreign MNEs have long been involved in transition and devel-
oping economies, the significance of IFDI stock relative to GDP in these
economies has constantly increased over the decades (from 3.8 percent in

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Table 6.1 Outward foreign direct investment stock, 1980, 1990, 2000, 2010
1980 1990 2000 2010

in % % in % % in % % in % %
Region/ millions of of millions of of millions of of millions of of
Country USD* total GDP USD total GDP USD total GDP USD total GDP
World 549,304 100 5.0 2,092,927 100 9.6 7,952,878 100 24.8 20,864,846 100 33.4
Developed 477,203 86.9 5.9 1,946,273 93.0 11.2 7,074,435 89.0 28.5 17,144,628 82.2 42.4
economies
France 24,910 4.5 3.6 112,441 5.4 9.0 925,25 11.6 69.7 1,579,839 7.6 61.6
Germany n.a. n.a. n.a. 151,581 7.2 8.8 541,866 6.8 28.7 1,436,480 6.9 43.8
Italy 7,319 1.3 1.6 60,184 2.9 5.3 169,957 2.1 15.5 487,615 2.3 23.8
Japan 19,612 3.6 1.8 201,441 9.6 6.6 278,442 3.5 6.0 831,076 4.0 15.2
Spain 1,931 0.4 0.9 15,652 0.7 3.0 129,194 1.6 22.3 651,322 3.1 46.3
2014-05-25
Switzerland n.a. n.a. n.a. 66,087 3.2 27.6 232,161 2.9 92.0 934,126 4.5 175.2
United 80,434 14.6 14.8 229,307 11.0 22.6 897,845 11.3 60.8 1,626,885 7.8 72.2
Kingdom
United States 215,375 39.2 7.7 731,762 35.0 12.6 2,694,014 33.9 27.0 4,766,730 22.8 32.8
Transition n.a.+ n.a. n.a. 560 0.0 0.1 21,337 0.3 5.6 406,411 1.9 19.8
economies
Russian n.a. n.a n.a. n.a. n.a n.a. 20,141 0.3 7.8 366,301 1.8 24.8
Federation
Developing 72,101 13.1 3.8 146,094 7.0 4.0 857,107 10.8 12.5 3,313,808 15.9 16.6
economies
Brazil 38,545 7.0 20.2 41,044 2.0 10.2 51,946 0.7 8.1 188,637 0.9 9.0
China n.a. n.a. n.a. 4,455 0.2 1.1 27,768 0.3 2.3 298,411 1.4 5.2
India 78 0.0 0.0 124 0.0 0.0 1,733 0.0 0.4 96,421 0.5 5.6
South Africa 5,541 1.0 6.9 15,004 0.7 13.4 32,325 0.4 24.3 89,453 0.4 24.6
Notes: * At current prices and current exchange rates; + Not available.

Source: Personal elaboration based on UNCTAD (2012b, Internet source).

Table 6.2 Inward foreign direct investment stock, 1980, 1990, 2000, 2010
1980 1990 2000 2010

in % % in % % in % % in % %
Region/ millions of of millions of of millions of of millions of of
Country US dollars* total GDP US dollars total GDP US Dollars total GDP US Dollars total GDP
World 698,951 100 5.9 2,081,147 100 9.4 7,450,022 100 23.1 19,906,662 100 31.6
Developed 401,633 57.5 4.9 1,562,296 75.1 8.9 5,653,715 75.9 22.8 12,890,909 64.8 31.9
economies
France 31,688 4.5 4.6 97,814 4.7 7.9 390,953 5.2 29.4 1,045,614 5.3 40.8
Germany n.a. n.a. n.a. 111,231 5.3 6.5 271,613 3.6 14.4 698,203 3.5 21.3
Italy 8,892 1.3 1.9 59,998 2.9 5.3 122,533 1.6 11.2 331,964 1.7 16.2
Japan 3,270 0.5 0.3 9,850 0.5 0.3 50,322 0.7 1.1 214,880 1.1 3.9
Spain 5,141 0.7 2.3 65,916 3.2 12.7 156,348 2.1 26.9 640,806 3.2 45.5
2014-05-25
Switzerland n.a.+ n.a. n.a. 34,245 1.6 14.3 86,804 1.2 34.4 559,333 2.8 104.9
United 63,014 9.0 11.6 203,905 9.8 20.1 438,631 5.9 29.7 1,162,696 5.8 51.6
Kingdom
United States 83,046 11.9 3.0 539,601 25.9 9.3 2,783,235 37.4 27.9 3,397,411 17.1 23.4
Transition n.a. n.a. n.a. 1,652 0.1 0.2 60,820 0.8 15.3 759,687 3.8 35.9
economies
Russian n.a. n.a. n.a. n.a. n.a. n.a. 32,204 0.4 12.4 490,560 2.5 33.2
Federation
Developing 297,319 42.5 11.6 517,200 24.9 13.3 1,735,488 23.3 24.7 6,256,066 31.4 30.5
economies
Brazil 17,480 2.5 9.2 37,143 1.8 9.2 122,250 1.6 19.0 674,764 3.4 32.3
China 1,074 0.2 0.4 20,691 1.0 5.1 193,348 2.6 16.2 587,817 3.0 10.2
India 452 0.1 0.2 1,657 0.1 0.5 16,339 0.2 3.5 204,692 1.0 11.9
South Africa 16,459 2.4 20.4 9,207 0.4 8.2 43,451 0.6 32.7 153,133 0.8 42.1
Notes: * At current prices and current exchange rates; + Not available.

Source: personal elaboration based on UNCTAD (2012c, Internet source).

1980 to 16.6 percent in 2010 for developing economies and from 0.1 percent
in 1990 to 19.8 percent in 2010 for transition economies) (Dunning and
Lundan, 2008, p. 30).
This rapid internationalization of the world economy led by MNE activity
raises the question of the motivations for companies to engage in foreign
value-added activities. As noted by Dunning and Lundan (2008, p. 63),
since the majority of MNEs are private entities, the principal reason for
firms to undertake FDI is to maximize their profits. With this straightfor-
ward argument in mind, four main types of investment have been identified
in the literature to explain MNE activity (Behrman, 1972; Dunning, 1993a;
Dunning and Lundan, 2008, p. 67):
1. Natural resource-seeking investments: The aim of this kind of investment

is to acquire or secure specific resources such as physical resources (coal,
copper, oil, rubber, etc.) or human resources (unskilled or semi-skilled
labor) at a lower cost than that which would have applied in the firm’s
home country (Hart, 1995, p. 986; Rugman and Verbeke, 2001, p. 158;
Wang, 2002, p. 192; Dunning and Lundan, 2008, p 68). Many examples
of companies engaged in natural resource-seeking investments could
here be cited. For instance, and as emphasized by Verbeke (2009, p. 31),
the French oil and gas company Total constantly undertakes various
forms of FDI to expand the range of its reserves in natural resources. In
March 2012, for example, Total acquired interests in the independent
Russian gas company Novatek to consolidate its position in Russia
(Total, 2012, p. 2).
2. Market-seeking investments: This kind of investment is carried out to take
advantage of the outlet opportunities offered by a physical presence in
a foreign economy (Barrell and Pain, 1999, p. 927; Luo, 2003, p. 291;
Dunning and Lundan, 2008, p. 69). These often result from modifica-
tions in market conditions (such as a growing market potential justifying
a local presence or the implementation of trade barriers by host govern-
ments), which make exports or licensing less efficient (Casson, 1979,
p. 3). Examples of market-seeking investments include adaptive invest-
ments (Michel, 2009, p. 43). It is, for example, common for firms in the
food industry to adapt their products to local taste. The Swiss nutritional
and health-related consumer goods company Nestlé, for instance, does
not offer the same products to its Swiss and Chinese consumers (Dicken,
2007, p. 171). This practice is also common in the pharmaceutical
industry. As mentioned by O’Connell (2007, p. 26), the Swiss pharma-
ceutical company Novartis established R&D activity in China to better
understand the special needs of Chinese patients.
3. Efficiency-seeking investments: These investments are performed to ration-
alize the governance of geographically dispersed value-added activity by

taking advantage of the idiosyncratic characteristics of different business

environments (such as differences in demand conditions, factor costs,
tax systems, or interest rates) in order to diversify risks and benefit from
economies of scale and scope (Froot, 1990; Enright, 2000, p. 118; Sethi
et al., 2003, p. 316; Dunning and Lundan, 2008, p. 72; Michel, 2009,
p. 53). Recent examples include the delocalization of administrative,
logistical, and operational functions in low labor cost countries. The
American consumer goods company Procter and Gamble, for example,
was one of the first MNEs to set up global business services (such as call
centers) in countries such as the Philippines or Costa Rica to rationalize
its global services offering (UN, 2003, p. 97). Global tax optimization is
also an important reason for efficiency-seeking investments. According
to an investigation carried out by the Swiss magazine L’Hebdo (2009,
Internet source), every Swiss firm listed in the Swiss Market Index (SMI)
possessed subsidiaries in jurisdictions identified as “tax havens,” such
as the American State of Delaware or the British overseas territories of
Bermuda and Cayman Islands.
4. Strategic asset-seeking investments: This last type of investment reflects the
desire of firms to strengthen their long-term competitiveness and profit-
ability by accessing specific foreign capabilities and knowledge in order
to widen their global competencies portfolio (Birkinshaw, 1996, p. 476;
Deng, 2007, p. 72; Dunning and Lundan, 2008, p. 72; Michel, 2009,
p. 60). In today’s knowledge economy, strategic asset-seeking invest-
ments have become increasingly important for firms wishing to sustain
a competitive edge. Among many examples, the Swiss pharmaceutical
company Novartis acquired in 2011 the American medical company
Alcon to strengthen its healthcare portfolio and access the high-growth-
potential eye-care market (The Wall Street Journal, 2010, Internet source;
Novartis, 2011, Internet source). Eye-catching investments by MNEs from
emerging economies also recently hit the headlines. The acquisition in
2005 of IBM’s PC business by the Chinese information technology and
electronics company Lenovo is representative of the rise of emerging
MNEs on the international economic stage and their ambition to become
dominant global players by tapping into the knowledge of established
Western companies (Financial Times, 2010, Internet source).
The marked rise of FDI in the second half of the 20th century also led
scholars to progressively theorize MNE activity (Vernon, 1966; Hymer,
1972; Kojima, 1973; Buckley and Casson, 1976, 1985; Teece, 1981, 1985;
Hennart, 1982, 1986; Rugman, 1982, 1986; Casson, 1987; Buckley, 1990). As
noted by Dunning and Lundan (2008, p. 79), classical and neoclassical trade
theories did not capture all the subtleties of the complex nature of MNE
activity. Although they addressed the “where” of production, they did not

say anything about the ownership and the organization of foreign activi-
ties (Dunning, 1995; Krugman and Obstfeld, 2006, p. 168; Dunning and
Lundan, 2008, p. 79). As described by Hymer (1976, cited by Dunning and
Rugman, 1985, p. 229), MNEs are “creatures of market imperfections.” Unlike
traditional trade companies, which engage in cross-border activities through
exporting or licensing (market structure), MNEs internalize the specificities
of different business environments by directly owning and/or controlling
value-adding activities in foreign locations (hierarchical structure) (Dunning
and Narula, 1998; Rainelli, 2001, pp. 61ss.). In other words, MNEs super-
sedethe market by taking advantage of market imperfections and internal-
izing the benefits of cross-border activities (Hymer, 1976, p. 48; Dunning
and Lundan, 2008, p. 79).
As noted by Dunning and Lundan (2008, p. 79) “once one allows for imper-
fections in goods or factor markets, the possibility of alternative patterns of
ownership of firms and/or organizing transactions arises”. The emergence
of MNEs, as entities replacing the market, has therefore opened up new
perspectives in the organization of international business activity and set
new challenges in the understanding of foreign activity. As will be pointed
out in the next two sections, these evolutions have deeply affected the global
management of innovation processes.
The first attempts to theorize FDI and MNE activity were based on the
recognition of the imperfect nature of competition (Vernon, 1974, p. 278;
Rugman, 1980, p. 365; Helpman and Krugman, 1985, p. xi; Dunning, 1993b,
p. 196; Grossman, 1997, p. 1; Dunning and Lundan, 2008, p. 79; Michel,
2009, p. 9). Among these early contributions, the works of Hymer (1960),
who analyzed the bases of international production through monopolistic
competition, and Vernon (1966), who developed his well-known product
life cycle theory on the basis of international trade theories, were particu-
larly influential and provided key insights into the characteristics required
of firms engaging in foreign activities and the logic of international produc-
tion (Gray, 1996, p. 51; Dunning and Lundan, 2008, pp. 79–86; Michel,
2009, p. 10).
Based on these early developments and on former pivotal contributions
by economists such as Coase (1937, 1960), Penrose (1959), Arrow (1969),
and Williamson (1971), IB scholars started to focus on the analysis of the
determinants of internalization (Buckley and Casson, 1976, p. 45; Rugman,
1980, p. 368; Kogut and Zander, 1993, p. 628; Dunning and Lundan, 2008,
pp. 93–95; Michel, 2009, p. 10). They sought to explain the circumstances
under which MNEs’ hierarchical structures, which allow an internalization
of cross-border value-added activities through the common governance of
domestic and foreign activities, would be more beneficial than traditional
market structures represented by external trading relationships (Rugman,
1980, p. 368; Kogut and Zander, 1993, p. 628; Dunning, 2003; Dunnng

and Lundan, 2008, pp. 93–94). The works of Buckley and Casson (1976),
Swedendorg (1979), Hennart (1982), Buckley (1987, 1990), and Casson
(1987) are particularly representative of this strand of the literature and had
a substantial influence on the understanding of MNE activity. Other works
by Aliber (1970, 1971, 1983), who explained MNE activity through exchange
rate theories and the relative strength of currencies, and Kojima (1973, 1978,
1982), who elaborated a macroeconomic theory of FDI, also contributed to
the development of a comprehensive theory of MNE activity.
By drawing on the main outcomes of these contributions, Dunning
presented for the first time in 1976 what has since become the dominant
explanation of MNE activity in the field of international business: the eclectic
or OLI paradigm (Cantwell and Narula, 2003; Koh, 2005, p. 39; McCann and
Mudambi, 2005, p. 1859).5 This general framework describing the activities
of firms engaged in foreign value-added activities is articulated around three
variables: ownership-specific (O) advantages, location-specific (L) advan-
tages and internalization (I) advantages (Dunning, 1977, 1979, 1988, 1993a,
2001). According to Dunning’s eclectic paradigm, a firm’s decision to under-
take FDI is dependent on three conditions.
First, the firm in question has to possess some kind of O-advantages
over the host market’s firms (Gray, 1996, p. 53; Erdener and Shapiro, 2005,
p. 417; Dunning and Lundan, 2008, p. 99; Eden and Dai, 2010, p. 13).
These specific O-advantages can be either tangible assets (capital, natural
endowments, manpower, etc.) or intangible assets (superior technology,
managerial, marketing, or entrepreneurial skills, access to market, etc.)
and are necessary to compete against local firms and overcome the various
costs related to the implantation of business activities in foreign locations
such as adaptation costs, information costs, and set-up costs (Hymer, 1976,
p. 41; Dunning, 2001, p. 176; Dunning and Lundan, 2008, p. 96). As noted
by Dunning and Lundan (2008, p. 109), O-advantages can broadly be
compared to what Porter (1980, 1985, 1986) called the competitive advan-
tages of firms. Second, besides possessing some kind of O-advantages over
local firms, companies have to perceive that it is in their best interest
to exploit them themselves in a foreign location rather than licensing
their rights of use to foreign entities (Rugman, 1980, p. 368; Erdener and
Shapiro, 2005, p. 419; Dunning and Lundan, 2008, p. 99). These advan-
tages are referred to as I-advantages. Third, the foreign location has to
provide exclusive advantages to the company (Dunning, 1998; Eden et al.,
2003, p. 31; Dunning and Lundan, 2008, p. 100). These L-advantages
range from the possession of special natural resources or market character-
istics to the existence of specific location-bound capabilities or knowledge
(Erdener and Shapiro, 2005, p. 418; Galan et al., 2007, p. 979). As under-
lined by Dunning and Lundan (2008, p. 109), Porter’s diamond model
(presented in Section 5.1) is a particularly useful tool for analyzing the

L-advantages of regions. According to Dunning’s eclectic paradigm, the

configuration of a firm’s OLI-advantages position will therefore directly
determine whether or not it will engage in FDI activity (Dunning and
Lundan, 2008, p. 100). This simple systemic paradigm based on only three
variables became the most powerful explanation of foreign production
and MNE activity (Cantwell and Narula, 2003; Gray, 2003; Dunning and
Lundan, 2008, p. 100).
The rise of MNEs as entities that own and/or control value-adding activi-
ties in foreign locations considerably widened the spectrum of organiza-
tional relationships in the management of cross-border activities, and the
globalization of the economy deeply affected the configuration of the value
chain (i.a. Kogut, 1984; Bartlett and Ghoshal, 1986; Ghoshal and Nohria,
1989; Ghoshal and Bartlett, 1990; Kogut and Zander, 1993; Birkinshaw and
Morrison, 1995; Birkinshaw and Hood, 1998; Porter, 1998a, 2007; Hervas-
Oliver and Albors-Garrigos, 2008, 2009; Papanastassiou and Pearce, 2009;
Hervas-Oliver et al., 2011). By referring to Porter’s model as described
throughout this thesis (see Figure 5.4), the value chain has become increas-
ingly global and firms can now distribute and execute their various value-
adding activities across a broader range of locations by taking advantage
of the specific profiles of different types of business environment (Porter,
2000, p. 267).
According to Porter (1998a, p. 316), firms face two basic choices in the
setting-up of their value chain. First, they have to decide where to perform
each of their value-adding activities. While the location of assembly plants
or the manufacture of mature, labor-intensive products will tend to be driven
by cost or market considerations, more sensitive activities such as design
and R&D will tend to be performed in high-innovation-potential regions
such as specialized clusters (Porter, 2000, p. 267). As noted by Porter (2000,
p. 267) “firms must capture the cost advantages of spreading activities across
locations while also harnessing the advantages of clusters”. Second, firms
have to decide how to co-ordinate their geographically dispersed activities.
As shown in Table 6.3 below, firms now have many different options when
it comes to engaging in cross-border activities. They range from the whole
ownership of foreign subsidiaries to simple contractual alliances or cross-
border outsourcing. The efficiency with which they will be able to co-ordi-
nate their spatially dispersed activities is an important source of competitive
advantage (Kogut and Zander, 1993; Porter, 1998b, p. 318; Augier and Teece,
2006; Mudambi, 2008, p. 700). Although the web of relationships developed
by MNEs can be complex, it allows them to tap into the L-advantages of
different types of location. As will be argued in Section 6.2, the disaggrega-
tion of the value chain across multiple locations offers unique opportunities
for MNEs to enhance their innovation capacities and sustain a competitive
edge in a globalizing economy.

Table 6.3 A typology of cross-border co-operation modes
Form Equity Transfer of Mode

of or Geographical resources of
co-operation non-equity Duration scope and rights transfer
Wholly owned Equity Unlimited At discretion Whole range? Internal
foreign of MNE
affiliates
Joint ventures Equity Unlimited Agreed Whole range? Internal
Foreign Equity Unlimited Limited Whole range? Internal
minority
holdings
“Fade-out” Equity Limited Nature of Whole range? Internal/
agreements agreement Limited market
period
Licensing Non-equity Limited May include Limited range Market
limitations
Franchising Non-equity Limited Limited Limited + Market
support
Management Non-equity Limited May be Limited Market
contracts specified
Turnkey Non-equity Limited Not usually Limited in Market
ventures time
Contractual Non- Limited May be Specified by Mixed
alliances equity agreed contract
Cross-border Non-equity Limited May include Small Market
outsourcing limitations
Source: Dunning and Lundan (2008, p. 261), based on Buckley and Casson (1985).
6.2 The globalization of the innovation process
As noted by Dunning (1998) in his award-winning article, the role of loca-

tion in his OLI paradigm – and thus for MNEs – has profoundly evolved over
the last decades. From being seen as a complementary variable of the OLI
framework (Ethier, 1986), location has become a crucial factor of a firm’s
global competitiveness (Dunning, 1998, p. 60; Eden et al., 2003, p. 31).
Dunning (1998, pp. 47–48) identified three main factors that had contrib-
uted to this evolution. First, intellectual capital emerged as the main source
of value creation and competitive advantage. Second, despite improve-
ments in transportation and communication technologies and the reduc-
tion of many trade barriers, enhancing knowledge capital and innovation
performance extensively rely on access to tacit knowledge, and this kind
of knowledge tends to be location-bound and concentrated in only a small
number of specialized clusters. Third, today’s economy can be described as
an era of “alliance capitalism”. Collaboration, interaction, and openness are

the sine qua non of the success of both the innovation process and the firm
as a whole.
These changes, already well documented in Chapters 4 (nature of the
innovation process) and 5 (tendency of economic and innovative activity
to cluster spatially), have had deep impacts on MNEs’ strategies and global
value chain configuration. One of the most striking demonstrations of these
transformations has been the rapid growth of strategic asset-seeking FDI at
the expense of other types of investment such as natural resource-seeking or
market-seeking FDI (Dunning, 1998, p. 54; Mudambi, 2008, p. 699). MNEs
are increasingly targeting locations that provide access to new knowledge
and capabilities that will in turn help them to maintain or augment their
O-advantages (Kogut and Zander, 1993, p. 625; Birkinshaw et al., 1998,
p. 221; Dunning, 1998, pp. 50–51; Mudambi, 2002, p. 1; Hocking et al.,
2004, p. 565; Mudambi and Navarra, 2004, p. 385; McCann and Mudambi,
2005, p. 1866; Li and Scullion, 2006, p. 71; Yang et al., 2008, p. 882; Meyer
et al., 2011, p. 236). As noted by Ketels (2008, p. 124) “Multinational compa-
nies now connect business activities across different locations and orches-
trate value chains in order to leverage the complementarity strengths of
different locations in adding value to the final good or service.” As innova-
tion is crucial to the success and growth of firms, its management in a global
economy is of particular importance.
Although access to specific foreign knowledge and technological compe-
tencies has become an increasingly important determinant of a firm’s global
competitiveness, the study of the internationalization of R&D activity had
been partially overlooked until the 1980s (Cantwell et al., 2004, p. 58;
Criscuolo, 2004, p. 39). This relatively late interest in the question of the
location of R&D activity reflected the fact that, at the time, it was supposed
that MNEs were conducting their innovation activity in their home coun-
tries and that the global exploitation of technological assets was achieved
through an internalized transfer of knowledge from headquarters to owned
and controlled foreign production units (Vernon, 1966; Caves, 1971, 1982,
1996; Buckley and Casson, 1976; Hymer, 1976; Rugman, 1981). This wide-
spread belief was supported by empirical evidence (principally using data on
U.S. firms) demonstrating that MNEs were undertaking the large majority
of their innovation activities in their home countries (Criscuolo, 2004,
p. 39). Moreover, the sensitive nature of the R&D function made it likely
to be performed at home, where the risk of imitation and the leakage of
information were expected to be easier to control (Patel and Pavitt, 1999).
Nevertheless, it was soon realized that an ethnocentric strategy to keep R&D
in the home country might prevent MNEs from achieving an optimum
international knowledge position (Kotabe et al., 2007).
Early studies on the internationalization of R&D activity adopted
Vernon’s product cycle model (Vernon, 1966, 1977). According to Vernon’s
original model (1966), new products are developed to meet local needs

in the home country, close to its innovatory activities and markets. At a

later stage of the cycle, the products are exported to countries most similar
to the home country in their demand patterns and supply capabilities,
and then, gradually, as products mature and standardize, the probability of
producing them in a foreign location increases. Vernon perceived innova-
tion as a demand-led process triggered by market impetuses and proximity
to local customers (Criscuolo, 2004, p. 40). Using Vernon’s model to explain
international R&D activity, Ronstadt (1984) argued that U.S. corporations,
with few exceptions, set up foreign research facilities merely to adapt their
basic technology to overseas markets in the context of their FDI. Similarly,
in an analysis of the automobile industry, Maxcy (1982) emphasized that
out of 20 large multinational car assemblers, the overwhelming majority
of R&D expenditure was limited to adaptive tasks and only two companies
(GM and Ford) had foreign R&D large enough to conduct the entire design,
prototype development, and testing of vehicles abroad. A variety of other
studies confirmed that the great majority of foreign R&D was directed to
the adaptation of particular products or processes rather than to funda-
mental research (i.a. Pearce, 1990; Casson, 1991; Pearce and Singh, 1992;
Pavitt, 1992).
Although Vernon’s model limited the internationalization of production
to mature and standardized products and constrained foreign R&D activity to
minor adaptive effort, its demand-led interpretation contributed significantly
to the understanding of the internationalization of R&D activity (Criscuolo,
2004, p. 40). Indeed, the more a firm engages in foreign production and
penetrates new markets, the more it needs R&D facilities to adapt the tech-
nology developed in the home country to the specificity of the local demand
(Criscuolo, 2004, p. 40). This type of R&D operation has been identified in
the literature as “home-base exploiting” (HBE) (Kuemmerle, 1996) or “asset-
exploiting” (Dunning and Narula, 1995). In this case, foreign R&D facili-
ties are set up to adapt competencies and technologies created in the home
country to unfamiliar foreign environments. The home country is therefore
the most valuable contributor to the technological advancement of the firm
and knowledge tends to flow from the parent company (located in the home
country) to the R&D subsidiary (established in the foreign country), which
acts as the receiving unit of knowledge (Criscuolo, 2004, p. 40). To some
extent, this type of foreign R&D activity reflects the precepts of the traditional
theory of foreign production. Using Dunning’s terminology, the parent firm
perceives that it possesses some kind of O-advantages over its host competi-
tors, which would be best exploited internally (I-advantages) from a foreign
location (which presents L-advantages) (Dunning and Lundan, 2008). In
order to take advantage of this profit opportunity, the parent company
therefore decides to engage in market-seeking FDI and establishes a foreign
R&D branch to adapt its value-adding activity to local tastes and indigenous
resources and capabilities.

In the 1990s, the internationalization of R&D activity increased at a rapid

pace. According to UNCTAD (2005, p. xxvi), between 1993 and 2002, the
R&D expenditure of foreign affiliates worldwide more than doubled, from
US$30 billion to US$67 billion. This growth phenomenon triggered the
emergence of a new literature analyzing the nature and the role of foreign
R&D (i.a. Pierce and Singh, 1992; Cantwell, 1995; Dunning and Narula,
1995; Florida, 1997; Kuemmerle, 1997, 1999; Cantwell and Janne, 1999).
Although adaptive investment still mattered, new evidence revealed that
MNEs were also conducting more strategic investment in the frame of their
R&D internationalization strategy. As pointed out by Dunning and Boyd
(2003, p. 1), knowledge has progressively become one of the most exchanged
assets within the MNE internal network.
However, the most valuable knowledge is often tacit knowledge, that
is, knowledge embedded in working interactions, learning relationships,
and shared experiences, which people and organizations have in a specific
institutional environment (Cantwell, 1991). As tacit knowledge tends to be
location-specific, the challenge for MNEs is to absorb the locally generated
knowledge and to leverage it within their network (Dunning and Lundan,
2008, p. 371). Therefore, rather than simply applying and exploiting knowl-
edge developed in the home country, R&D subsidiaries have been increas-
ingly established to “tap into” the knowledge, capabilities, and technologies
of the host countries, thus generating new knowledge and competencies for
the MNE as a whole. In this case, knowledge tends to flow from the foreign
subsidiary to the parent company. This type of R&D operation has been
identified in the literature as “home-base augmenting” (HBA) (Kuemmerle,
1996) or “asset-augmenting” (Dunning and Naruala, 1995). In other words,
by locating R&D subsidiaries in technologically advanced knowledge hubs (or
specialized clusters), MNEs aim not only to improve their existing capabili-
ties but also to acquire, internalize, and create completely new technological
assets. Unlike foreign production, or the resulting adaptive R&D investment,
which requires some kind of O-advantages on the part of the investing firm,
foreign research is undertaken to create or acquire an advantage (Dunning
and Lundan, 2008, p. 369).
The emergence of these “competence-creating” R&D affiliates coincides
with the growing independence of MNEs’ subsidiaries within the MNE
network (Cantwell and Piscitello, 1999; Pearce, 1999; Zander, 1999). As
underlined by Cantwell and Mudambi (2005, p. 1109), the greater integration
of subsidiaries within an MNE’s international network allows R&D facilities
to gain a more creative role and to generate new technology directly related
to the idiosyncrasies of the foreign environment in which they are located.
Indeed, a greater degree of strategic independence allows R&D facilities to
better integrate into the host environment and to take greater advantage
of localized sources of knowledge. The recent literature on affiliates “center
of excellence” (i.e. foreign affiliates recognized by other units of the MNE

for their unique capabilities) witnesses the growing role of subsidiaries in

the competence-creating process of MNEs (Holm and Pedersen, 2000). The
increasing autonomy of MNEs’ subsidiaries and the emergence of foreign
centers of excellence make knowledge management a key issue for the MNE
(Doz, 1986; Hedlund, 1986; Porter, 1986; Bartlett and Ghoshal, 1989; Kogut
and Zander, 1993; Tracey and Clark, 2003). As mentioned by Nohria and
Ghoshal (1997) in their classic contribution, one of the most important chal-
lenges for MNEs is therefore to find a structure that allows them to co-or-
dinate their range of dispersed activities in such a way that they are able to
reach and to tap into various location-specific resources abroad.
To conclude this section, MNEs’ geographic dispersion has thus increas-
ingly become a basis of knowledge creation. By referring to Dunning’s OLI
paradigm, modern MNEs now aim to enhance their technological assets by
organizing and internalizing (I-advantages) the specific L-advantages offered
by the world’s most specialized knowledge hubs. In turn, this dynamic
mechanism constantly strengthens their O-advantages and their innovation
capacities. This process perfectly illustrates the dynamic nature of Dunning’s
eclectic paradigm.
6.3 The role of clusters in the global innovation strategy of

multinational enterprises
Despite the growing body of literature analyzing the role of clusters as drivers
of innovation, productivity, and growth and the fact that MNEs increasingly
need to seek complementary foreign assets and knowledge to add value to
their core O-advantages in order to maintain their competitive edge in a
global economy, clusters, innovation, and FDI have not been regarded in a
common perspective until recently (Birkinshaw and Sölvell, 2000; De Beule
et al., 2008; Mudambi and Swift, 2010, 2012). The increasing autonomy
of MNEs’ subsidiaries and the emergence of asset-augmenting R&D affili-
ates have nevertheless shed new light on the self-reinforcing relationship
between clusters and MNEs in the global innovation process (De Beule et al.,
2008).
As underlined by Dunning (2000) and Rugman and Verbeke (2001), leading
MNEs, driven by asset-seeking strategies and the need to constantly enhance
their O-advantages, have increasingly invested in leading clusters in order to
augment their knowledge base. From the perspective of the MNE, being part
of a cluster and taking advantage of its dynamic environment may lead to
several benefits (Porter, 1998b; Enright, 2000). As pointed out in Chapter 5,
clusters not only positively impact on firms’ productivity but also exten-
sively stimulate firms’ innovation capacities. The positive impacts of clusters
on the asset-creating and competitiveness of MNEs has progressively become
the focus of several studies (i.a. Birkinshaw and Hood, 2000; Birkinshaw and
Sölvell, 2000; Enright, 2000; Rugman and Verbeke, 2003; Mudambi and Swift,

2010, 2012). It is worth noting that although co-location may allow firms to
reap the benefits of agglomeration through different types of spillover, some
studies have shown that the potential loss of knowledge to nearby competi-
tors – defined in the literature as “knowledge outflow” (Furman et al., 2006) –
may incite firms (and especially leading firms or the most innovative ones)
to move away from clusters in order to protect their cutting-edge technolo-
gies (Shaver and Flyer, 2000). This option has nevertheless been identified
by Alcacer and Zhao (2009) as not really sustainable or desirable since firms
have little control over the subsequent location decisions of competitors and
may rely on crucial resources confined within clusters.
As firms established in leading clusters tend to benefit from knowledge
spillovers and access to specialized labor and intermediate inputs, R&D activ-
ities particularly benefit from a physical presence in clusters, which explain
their specifically high level of geographical concentration (Audretsch and
Feldman, 1996; Alcacer, 2006). Since tacit knowledge, which is often the
most valuable type of knowledge, is hardly transmitted other than through
face-to-face relationships, leading clusters play a crucial role in the global
technology-enhancing process of MNEs (Jaffe et al., 1993; Cantwell and
Santangelo, 2000). As underlined by Mudambi and Swift (2010, p. 462), the
most competitive firms seek to locate some of their R&D activities inside
leading clusters in order to gain access to locally embedded knowledge and
technological assets. For example, in 2003, the Swiss biopharmaceutical
company Novartis decided to locate its global headquarters for explora-
tory research and vaccine development in the world’s leading biopharma-
ceutical cluster of Cambridge (MA, U.S.A.) (Gugler and Michel, 2010, p. 7).
This choice had been explicitly motivated by the region’s specific techno-
logical infrastructure and its location in the midst of renowned academic
and research institutions as well as innovative biotech companies (Novartis,
2012, Internet source).
Since clusters – like any other region – vary dramatically in terms of their
relative strengths and technological profile, MNEs, known for their ability to
integrate knowledge on a global basis, can enhance their competitive advan-
tages and their knowledge portfolio by dispersing their R&D activities across
different types of cluster according to their idiosyncrasies and complemen-
tarities (Rugman and D’Cruz, 1993; Benner and Tushman, 2003; Lorenzen,
2004; Mudambi, 2008; Asmussen et al., 2009). Although the IB literature
clearly identifies that MNEs increasingly seek to multi-locate their R&D oper-
ations to take advantage of different regions’ specific technological profiles,
the importance of clusters – vis-à-vis other types of location – and the role
of cross-cluster relationships in the global knowledge-enhancing process of
MNEs are still relatively under-studied (Cantwell and Kosmopoulou, 2000;
Cantwell and Mudambi, 2005).
In order to contribute to a better understanding of the relationship that
MNEs maintain with clusters in the frame of their global innovation strategy,

a review of the main conclusions stemming from the previous two chapters
can be particularly useful. First, and as developed in Chapter 4, innovation is
a particularly complex process. While innovation was initially depicted as a
smooth and well-behaved process starting with investments in basic research
and ending up with innovations and direct financial returns, scholars quickly
realized that the reality was much more complicated. Innovation and R&D
activities are an inherently uncertain process relying on continuous interac-
tions, face-to-face relationships, and the combination of different types of
knowledge, capabilities, skills, and resources.
Based on these observations, and as put forward in Chapter 5, these intrinsic
characteristics give innovation a profound geographic nature and explain
the tendency of innovative activity to concentrate in specific locations and
create specialized innovation systems or clusters despite the new opportuni-
ties offered by globalization. As innovation is a sine qua non of success and the
maintenance of a competitive edge in today’s global economy, firms never-
theless had to adapt their innovation strategy to the new reality of the world
economy. While the removal of trade barriers and technological improve-
ments have made it easier to access and transfer tangible goods and codified
knowledge across borders, tacit knowledge, which is particularly important
to innovation, is still location bound and embedded in the particular web of
relationships developed in the specific innovation infrastructure of regions.
As illustrated in this chapter, MNEs have the capacity to tap into the
idiosyncratic capabilities and knowledge of different business environ-
ments by establishing subsidiaries in multiple locations and internalizing
the benefits of the geographic dispersion of their various value-adding
activities. To that extent, the dynamic environment of clusters, created
through constant interactions between a variety of geographically concen-
trated actors linked by commonalities and complementarities, represents a
unique source of innovation and an exclusive opportunity to capture tacit
knowledge to increase the probability of success of the innovation process.
As firms have to constantly improve their technological assets in order to
maintain a competitive edge in an economy defined by global competition,
conducting strategic asset-seeking investments in clusters is therefore a
unique way to enhance their innovation performance. Furthermore, as each
cluster presents distinctive characteristics, the multi-location of subsidiaries
in different clusters and the subsequent cross-cluster relationships between
subsidiaries allow MNEs to take advantage of the specific strengths of various
world-class knowledge hubs.
Figure 6.1 is an original illustration of the relationship that MNEs maintain
with clusters in the frame of their global innovation strategy based on the
theoretical argument developed throughout this thesis. The figure represents
the situation of a firm X (illustrated in the center of the figure by the white
circle circumscribing the OLI-advantages configuration) in time t0 located in
the region X of country X, defined as an innovation-driven economy.

Three remarks should be made at this point. First, firm X can initially
be either an MNE or a “mono-national” company. What matters here is
that the firm evolves in an economy in which it is conceivable to expand
its business activities beyond its national borders if it appears to be in its
interest to do so. Second, the firm’s home region can be identified as either
a “cluster-region” or a “non-cluster region”. Whatever the region’s type,
managing its business without monitoring non-local opportunities and
knowledge sources (especially in knowledge-intensive industries such as
the pharmaceutical industry or biotechnology) could result in disastrous
economic decisions (Asheim and Gertler, 2005, p. 310). Moreover, as noted
by Fagerberg (2005, p. 13), even the world’s leading cluster (or innovation
system) in terms of innovation performance can suffer from “lock-in” issues
if its members do not get abreast of the latest technologies emerging in
other locations and become complacent by relying exclusively on internally
produced knowledge. Third, the model focuses on firms from innovation-
driven economies because they are the most inclined to undertake strategic
asset-seeking investments in foreign locations and clusters, and therefore
the most suitable to explore the role of clusters in the global innovation
strategy of MNEs. As underlined by Sala-I-Martin et al. (2009, p. 7), unlike
firms from factor-driven economies or efficiency-driven economies, which
can still manage to increase their productivity by implementing existing
technologies or making incremental progress, firms from innovation-driven
economies have to constantly develop brand new products and/or processes
to remain competitive.6
With these initial comments in mind, Figure 6.1 depicts the situation of
firm X, which, on the basis of its OLI-advantages configuration in time t0,
finds that it would be in its interest and in line with its long-term goals to
enhance its O-advantages by establishing a subsidiary (SA) in the region A of
country A in order to take advantage of the specific business environment of
this region (L-advantages). As explained in Section 6.1, this FDI can be either
a market-seeking investment or a strategic asset-seeking investment. In the
case of the former type of investment, the firm would mainly aim to increase
its O-advantages by extending its knowledge of country A’s market in order to
better respond to the specific requests of its customers in terms of the devel-
opment of adapted products, processes, or services. We can cite here again
the example of Novartis, which decided to establish R&D activity in China in
order to better understand the special needs of Chinese patients.7 In the case
of the latter type of investment, the firm would explicitly target region A to
increase its knowledge assets, and consequently its O-advantages, by tapping
into the specific capabilities and knowledge of this region.8 Irrespective of
the investment’s type, the decision to engage in cross-border activities and
to establish a subsidiary (SA) in a foreign location (in this case in region A of
country A) will have a direct impact on the OLI-advantages configuration of
firm X. If the firm is able to properly internalize the strengths of the different

environments in which it operates and efficiently manages its geographi-

cally dispersed activities, it will not only enhance its O-advantages but also
completely modify the structure of its I- and L-positions (Tracey and Clark,
2003). This new and improved competitive position of firm X is represented
in Figure 6.1 by the first dotted ring (light grey). This representation aims
to demonstrate that investing in foreign locations and taking advantage of
the knowledge profiles of different locations have the capacity to extend the
firms’ natural boundaries.
Following this investment in region A and according to its new
OLI-advantages configuration in time t1, firm X realizes that undertaking
a strategic asset-seeking investment and establishing a subsidiary (SB) in
cluster B of country B would be crucial to increase its knowledge base and
improve its innovation performance (O-advantages). Supposing that cluster
B presents a business environment particularly conducive to innovation
and that its members generate high-quality knowledge complementary to
firm X’s main activity (L-advantages), having a physical presence in cluster
B would allow firm X, once embedded in cluster’s B regional network, to tap
into the exclusive knowledge produced within cluster B. Furthermore, the
establishment of a subsidiary (SB) in cluster B enlarges firm X’s global innova-
tion network and reveals new collaboration opportunities between subsid-
iary A (SA) located in country A and subsidiary B (SB) located in country
B (represented in Figure 6.1 by the thin dotted arrow linking SA and SB).
The internalization of the L-advantages of cluster B and the benefits derived
from the common governance of geographically dispersed entities gener-
ating complementary knowledge strengthen firm X’s O-advantages. The
new OLI-advantages configuration and the improved competitive position
of firm X following its strategic FDI in cluster B and the extension of its
global innovation network are represented in Figure 6.1 by the passage to
the second dotted ring.
The pressure to constantly innovate, intensified by global competition,
makes firm X increasingly keen to penetrate the world’s leading clusters
in order to access the necessary new sources of knowledge to increase its
technological assets and maintain its competitive edge. Based on its new
OLI-advantages configuration in time t2, firm X decides to undertake a new
strategic asset-seeking investment in cluster C of country C. The logic of
this investment is similar to the previous one and the resulting improved
competitive position and new OLI-advantages configuration of firm X are
represented in Figure 6.1 by the third dotted ring.
By continuously extending its global innovation network, fostering cross-
subsidiary relationships, and tapping into the most innovative clusters, firm
X seeks to constantly enhance its competitive position. This quest toward
the improvement of its competitive position and enhancement of its tech-
nological assets is represented in Figure 6.1 by the constant growth of the
dotted rings (case “n”). The bigger the dotted ring, the more firm X has

FirmX CountryC
t0 t1 t2 t3 tn
RegionC
CountryA
CountryX
SA SC
Region/Cluster
e X
ClusterC
2014-05-25
Countr
o yB O Countryn
L I
Region
o B
Regionn
Clustern
Cluster
t B
Sn
SB
Figure 6.1 Clusters and the global innovation strategy of multinational enterprises from innovation-driven economies

to rely on the world’s most complex knowledge and the more it has the
tendency to penetrate clusters in its global knowledge-enhancing process.9
As we have argued in this chapter, the evolution of the world economy
and the emergence of MNEs have deeply altered the geography of innova-
tion. While the majority of R&D activity used to be performed in the firms’
home countries only three decades ago, the changing nature of competition
and the increasing importance of intellectual capital as the main source of
competitive advantages have forced firms to reevaluate their innovation
strategy by increasingly locating their R&D activities in foreign territories.
Despite the tendency of innovative activity to concentrate in certain loca-
tions, MNEs have the special ability to tap into the specific knowledge
profile of different types of environment and to internalize the benefits of
the management of geographically dispersed activities. This unique charac-
teristic of MNEs has opened up new perspectives in the management of the
innovation process.
In this new economic reality, clusters offer firms exclusive opportunities to
access tacit knowledge and enhance their innovation performance in order
to maintain a competitive edge. As the literature analyzing the relationship
that MNEs maintain with clusters in the frame of their global innovation
strategy is still in its infancy, this chapter offered an original analysis of the
importance of clusters in the global knowledge-enhancing process of MNEs.
As emphasized, the more a firm reaches the knowledge frontier, the more it
needs to access the world’s most complex knowledge to improve its competi-
tive position. To that extent, clusters represent a unique source of innova-
tion, and a physical presence in clusters allows MNEs to tap into knowledge
and ideas where they are first generated.
An extension of Figure 5.5 (presented in the conclusion to Chapter 5),
Figure 6.2 summarizes the main contributions of this chapter by illustrating
the hypothetical example of the global network of subsidiaries implemented
by a random firm X initially located in the cluster X of a country X. As
emphasized, this particular firm has progressively deployed a worldwide
network of subsidiaries located either in cluster regions (subsidiaries XA, XB,
XD and XH) or in non-cluster regions (subsidiaries XC, XE, XF and XG) in
order to take advantage of the specific profile of different types of environ-
ment. While the literature on clusters has thoroughly described the positive
endogenous externalities resulting from the geographical agglomeration of
economic activities linked by commonalities and similarities on economic
performance (i.e. resulting from the constant interactions between clusters’
members), few studies have defined the role of clusters in an international
perspective. As emphasized in Figure 6.2, a cluster is not an isolated island

Subsidiary XA
Cluster A Firm X Home cluster X
Subsidiary XE and F
in regions E and F Cluster H
Subsidiary XH
Subsidiary XB
Cluster B
Subsidiary XG
Subsidiary XC in region G
in region C
Cluster D Subsidiary XD
Figure 6.2 Representation of the global network of subsidiaries implemented by firm

X initially located in cluster X
Note: Inter-subsidiary relationships are not represented to keep the figure readable.
on the world map and this chapter offered an in-depth theoretical analysis
of the role of clusters as a unique source of knowledge in the global innova-
tion strategy of firms.

Conclusion to Part II
Having examined in detail the main features of the economics of innova-
tion in the first part of this dissertation, we focused in this second part on
an analysis of the nature of the innovation process and on the impact of the
recent evolution of the world economy on that process.
Understanding the mechanisms of the innovation process is crucial to
explaining how innovation occurs and how innovation can be managed
and organized. To that extent, Chapter 4 stressed the cognitive nature of
the innovation process. As we have argued, innovation is a particularly
complex process relying on the combination of different types of knowl-
edge, capabilities, skills, and resources, making its outcome highly uncer-
tain. Based on these observations, this chapter demonstrated that scholars
progressively departed from a linear vision of the innovation process to
adopt more realistic models underlying the collective and fuzzy nature of
innovation.
Following these developments, Chapter 5 focused on the tendency of inno-
vative activities to cluster spatially. As illustrated in that chapter, despite the
greater integration of the world economy, location still matters. The impor-
tance of location as a legitimate source of competitiveness has been reflected
by the growing popularity of the concept of cluster and the numerous studies
pointing out the positive impact of spatial agglomeration of economic activi-
ties on productivity, innovation, and entrepreneurship. Based on this revival
of interest in the study of spatial phenomena in economics and the progres-
sive development of a formal cluster theory, innovation scholars reassessed
the geographical features of innovation by adopting a systemic vision of
the innovation process emphasizing the importance of external sources of
knowledge and interactions in the stimulation of innovation.
Finally, Chapter 6 examined the new geography of innovation in a
globalized economy. As argued in this chapter, the improvement of tech-
nologies and the removal of trade barriers set a new deal in the manage-
ment of the innovation process. Firms, and especially MNEs, now have
131

the possibility to take advantage of the specific characteristics of different

types of environment and to internalize the benefits of the management of
spatially dispersed activities. To that extent, the pressure to constantly inno-
vate, intensified by global competition, has prompted MNEs to increasingly
undertake strategic asset-seeking investments in leading clusters in order to
improve their technological assets and maintain a competitive edge in an
increasingly knowledge-oriented economy.
Although this second part offers a unique theoretical assessment of the
role of clusters in the stimulation of innovation in today’s economy, more
empirical research is still needed to understand the relationship between
firms, clusters, and innovation. Part III will provide new insights into the
spatial patterns of innovative activities and the innovative process in a
globalized economy.

Part III
The Distribution of Inventive
Activity – Evidence from Patent
Data in Switzerland and Focus on
the Basel Pharmaceutical Cluster
Introduction to Part III
The evolution of the world economy has set new challenges in the organ-
ization of the innovation process. On the one hand, the globalization of
competition has strengthened the prominence of innovation. Companies,
and especially those from innovation-driven economies, have to constantly
innovate and introduce new products or processes to maintain a competi-
tive edge. On the other hand, the rise of knowledge as the main source of
competitive advantage has had a deep influence on the geography of inno-
vation. As we saw in Part II, despite the greater integration of the world
economy, economic and innovative activities still tend to be particularly
unevenly distributed across locations. This growing importance of location
in competitiveness has been reflected by the evolution of clusters, which
offer unique advantages in terms of growth, innovation, and entrepreneur-
ship. The reduction of trade barriers and the improvement of technologies
have nevertheless unveiled many new opportunities for firms to exploit the
specific profile of many different types of environments. To that extent,
conducting strategic asset-seeking investments in the world’s leading clus-
ters seems to be a natural way for MNEs to improve their technological assets
and remain competitive in today’s global economy.
As more research is still needed to better understand both the character-
istics of the new geography of innovation and the importance of clusters
in the global innovation strategy of MNEs, the aim of this third part is to
make a contribution to filling this research gap by empirically assessing the
theoretical developments presented above. Switzerland – and, more specifi-
cally, applicants for pharmaceutical patents lodged established in the Basel
133

pharmaceutical cluster – have been chosen to provide a new perspective

on the evolution of the innovation process in a globalized economy. This
choice has been made for two main reasons. First, Switzerland is one of the
world’s most competitive and innovative countries (WEF, 2012). As high-
lighted in the Global Competitiveness Report 2012–2013, out of 144 coun-
tries Switzerland ranked first both in the Global Competitiveness Index and
in innovation and sophistication (WEF, 2012, p. 336). Moreover, the fact that
Switzerland is an innovation-driven economy implies that innovation is a
key condition for the success and growth of Swiss firms in the global economy
(OECD, 2006). Second, the selection of pharmaceutical applicants located in
the Basel pharmaceutical cluster is based on two criteria: on the one hand,
the pharmaceutical sector has increasingly become regarded as an essential
source of innovation and growth (Audretsch, 2001; Cooke, 2006; Waxell and
Malmberg, 2007). According to the OECD (2012b, Internet source), the phar-
maceutical industry accounted for almost 39 percent of the total business
enterprise R&D expenditure in Switzerland in 2008. On the other hand, the
Basel region is widely recognized as the heart of one of the world’s leading
pharmaceutical clusters: the BioValley (Zeller, 2004; Chiesa and Chiaroni,
2005; Cooke, 2006; European Cluster Observatory, 2013). Furthermore, and
as will be explained in Chapter 8, the Basel pharmaceutical cluster has been
statistically identified as one of Switzerland’s main inventive clusters.
As the analyses performed throughout this third part will be based on
patent applications lodged at the European Patent Office (EPO), the term
“invention” will be preferred to “innovation.” Although patents are an indi-
rect indicator of innovation and many studies use the term “innovation” to
describe patent-based results (i.a. Coronado Guerrero and Acosta Sero, 1997;
Breschi, 1999; Paci and Usai, 2000; Acs et al., 2002; Porter, 2003a; Porter
et al., 2004; Ratanawaraha and Polenske, 2007; Ejermo, 2009), they are a
better indicator of invention than innovation (see Chapter 3). As noted in
Chapter 3, invention and innovation are nevertheless two closely related
notions as an initial invention is a necessary step towards an innovation.1
Through this approach, this third part aims to answer three main pairs of
questions:
● What is the spatial distribution of inventive activities in Switzerland and

what is the inventive performance of Swiss regions?
● What are the specialization patterns of inventive activities in Switzerland
and what are the country’s most inventive clusters?
● How international is the inventive process of pharmaceutical applicants
located in the Basel area and what is the role of clusters and cross-cluster
relationships in their global innovation process?
In order to respond to these questions, this part has been structured around
three chapters. Chapter 7 provides a detailed analysis of the geographical

Geographical Distribution of Inventive Activities 135
distribution of inventive activities in Switzerland. Through original carto-

graphic profiles at different geographical levels, this chapter emphasizes the
inventive performance of the Swiss regions. Based on these results, Chapter 8
extends the analysis one step further by evaluating the specialization patters
of inventive activities in Switzerland and by identifying the country’s most
inventive clusters. This in-depth study of inventive activities in Switzerland
reveals unique insights of the inventive features of the Swiss regions and,
together with Chapter 7, provides policy makers with an exclusive tool for
implementing policies best suited to sustaining or improving innovation in
their region. Finally, Chapter 9 investigates in more detail the new nature
of the inventive process in a globalized economy. By analyzing the loca-
tion of residence of the inventors of pharmaceutical patents demanded by
applicants established in the Basel area, this chapter provides not only a new
perspective on the internationalization of the inventive process but also an
original insight into the role of clusters in the global innovation process
of pharmaceutical firms located in the Basel pharmaceutical cluster. As the
importance of clusters in the global innovation strategies of MNEs is still
relatively under-studied, this chapter contributes to a better understanding
of this issue.

7
Geographical Distribution of
Inventive Activities and Inventive
Performance in Switzerland
The theoretical developments presented in parts I and II established that

innovation is crucial to the enhancement of economic growth and stand-
ards of living in the long run (i.a. Schumpeter, 1937/1989; Romer, 1990;
Grossman and Helpman, 1991a, b; Aghion and Howitt, 1992; Sala-I-Martin
et al., 2009). However, the intrinsic characteristics of the innovation process
tend to make innovative activities concentrate in certain locations (i.a.
Freeman, 1991; Jaffe et al., 1993; Feldman, 1994; Audretsch and Feldman,
1996; Malmberg et al., 1996; Asheim and Gertler, 2005; Fagerberg, 2005).
Despite the globalization of the economy, the benefits of economies of
agglomeration, knowledge spillovers, access to tacit knowledge, and constant
interactions between the different actors involved in a region’s innovation
infrastructure strengthen the role of location in the innovation process.
This observation has generated a large number of studies analyzing from
many different angles the spatially bounded nature of economic and inno-
vative activities (i.a. Marshall, 1890/1916; Weber, 1909/1929; Myrdal, 1957;
Perroux, 1950; Nelson and Winter, 1982; Pyke et al., 1990; Krugman, 1991a,
b; Storper, 1992; Nelson, 1993; Cooke and Morgan, 1994; Paci and Usai,
2000; Porter, 2000).
The goal of this chapter is to provide a new perspective on the geograph-
ical distribution of inventive activities in Switzerland. As suggested by Porter
(2008, p. 48), the innovative performance of a region – and by extension its
level of productivity and economic performance – is directly related to the
innovativeness of its economic actors (universities, research institutions, and
especially firms). As a consequence, measuring the inventive performance of
regions is particularly important for policy makers who wish to implement
the most suitable policies to support innovation and set up the necessary
framework conditions to sustain economic growth in the long term.
This chapter has been broken down in two main sections. Section 7.1
presents the database that will be used throughout this third part and
137

points out the advantages of patent data in relation to the objective of

this chapter. Section 7.2 focuses on the geographical patterns of inventive
activities in Switzerland. By providing a rich cartographic analysis of the
inventive performance of the Swiss regions, this section offers a thorough
picture of the distribution of inventive activities across the Swiss territory.
Because of the large amount of data and the different perspectives adopted,
selectivity has nevertheless been necessary in the presentation of results.
Detailed regional inventive profiles can be generated on request.
7.1 Presentation of the database
This third part will perform a thorough descriptive analysis of patent data
from several unique databases of patent applications at the European Patent
Office (EPO).1 These databases have been constructed on the basis of the
OECD REGPAT database (June 2012), on which registers patent applications
at the EPO since 1977, and by which they are links them to the regions using
the applicants’/inventors’ addresses.
It is worth noting that patent data can be extracted either at the applicant
level (the entities that own the patents, which are mainly firms but can
also be universities, research institutions, or individuals) or at the inventor
level (the people/researchers who have concretely developed the invention
for which a patent is sought). In June 2012, the OECD REGPAT database
recoded more than 2.5 million entries at the applicant level and more than
5.9 million entries at the inventor level. These databases provide various
types of information about the patent application process such as the appli-
cation number, the applicants’ ID, the publication number, the person ID,
the applicant’s/inventor’s name, address, region and country, the priority
date, the application date, and the technological class (IPC) of the invention.
Further details about some of these categories will be given in the following
pages. For more information about the OECD REGPAT database, please refer
to Maraut et al. (2008).
The implementation of such databases is particularly time consuming and
involves a substantial data cleaning process. Although the OECD contrib-
uted to provide a computerized database of patent applications at the EPO,
many allocation mistakes had to be corrected. Table 7.1 presents six recur-
rent allocation mistakes observed in the inventor database.
As indicated, some inventors allocated to an existing Swiss address were
either not allocated to the corresponding Swiss region (row 1) or allocated to
a wrong Swiss region (row 6) and some inventors located in foreign countries
were allocated to Swiss regions (rows 2–5). Similar mistakes were noticed in
the applicant database.2 In order to give the reader a sense of the relative
“rawness” of the database, and to emphasize the progress that is still to be
made by the OECD in providing a high-quality database, the address column

Table 7.1 Example of allocation mistakes observed in the OECD REGPAT database
(June 2012)
Row_ Pub_ Inv_ Reg_ Reg_

nbr nbr name Address code name
1 EP40943 Studer, Rolf 124 Grenzascherstrasse, CHZZZ Not classified
Otto Basel
2 EP301038 Jordan, Paul Alpsteinweg 7, 7750 CH056 Graubünden
Konstanz
3 EP623426 Hou, Chih- 4F., No. 4, Lane 46 CH056 Graubünden
Hsiang Chang-an St., Lu-Chou,
Hsiang, Taipei Hsien,
Taiwan
4 EP1678975 LI, Hui Chateau R├®gency E802 CH056 Graubünden
Jiangtai Lu 2 Chaoyang
Dist., Beijing 100102
5 EP2327315 Burke, Apartment 377, 299 CH021 Bern
Louise Mary Spring Street, ,Melbourne,
Victoria 3000,
6 EP2334700 Lanzavecchia, Institute For Research in CH033 Aargau
Antonio Biomedicine Via Vela 6,
CH-5400 Bellinzona
Notes: Italic = wrong allocation; Row_nbr = Row number; Pub_nbr = Publication number; Inv_
name = inventor name; Reg_code = Region code; Reg_name = Region name
Source: Personal elaboration based on OECD REGPAT database June 2012.
has not been modified. As shown, addresses contain many typing errors and
the information provided is not uniform.3
Because of these misallocations, each inventor and applicant has been
manually reallocated to their actual region of residence.4 Although particu-
larly time consuming, this process has nevertheless allowed us to assign each
inventor and applicant to a narrower geographical area. While the OECD
REGPAT database referred to the NUTS 3 level of the Eurostat classification
of regions (which corresponds to cantons in Switzerland), we reallocated
each inventor and applicant at the municipality level.5 As will be shown
in the next section, this more precise geographical breakdown is particu-
larly useful in the evaluation of the inventive and specialization profile of
different types of region.
Regarding the choice of patent data, Chapter 3 has already cautiously
evaluated the strengths and weaknesses of patents in the analysis of innova-
tive activities. As emphasized, although not a perfect (or direct) indicator
of innovation, patents are a fairly reliable measure of inventiveness and
present exclusive advantages in the study of the geography of invention
and the inventive performance of regions (OECD, 2009b, p. 93). Concretely,
patent data extracted from the OECD REGPAT database have three main

advantages with regard to the objectives of this study. First, patent docu-
ments provide detailed information about the name and the residence of
inventors and applicants.6 As a consequence, patent data can be allocated to
regions, thereby allowing a detailed analysis of the spatial origin of inven-
tions. Second, patent documents record the technological content of an
invention and can be linked to technological fields or industrial sectors.
This characteristic is particularly useful in an examination of the specializa-
tion pattern of inventive activities. Third, patent applications at the EPO
are relatively costly compared with applications at national patent offices
and tend therefore to reflect invention of high innovative value (Paci and
Usai, 2000, p. 99; Gambardella et al., 2008). As noted by the OECD (2009b,
p. 45–46): “A company from a European country (EPO member state) will pay
on average EUR 24,100 to have a Euro-direct patent granted and validated;
a US company will pay EUR 10,250 to receive a USPTO grant; a Japanese
company will pay EUR 5,460 to acquire a JPO grant.”7 The cost of obtaining
a standard euro-direct patent has even been estimated by Roland Berger
Market Research (2005) at EUR 30,530. Moreover, the greater integration of
the European market and the larger protection offered by European patents
have prompted companies to increasingly apply for European patents rather
than national patents (Paci and Usai, 2000, p. 99).
Because of these advantages, patent data have been widely used in the
study of the innovative performance of regions and the geography of inno-
vation. Among cornerstone contributions, the works of Jaffe et al. (1993),
Archibugi and Michie (1995), Audretsch and Feldman (1996), Coronado
Guerrero and Acosta Sero (1997), Griliches (1998), Breschi (1999), Cantwell
(1999), Cantwell and Janne (2000), Paci and Usai (2000), Ernst (2001), Acs
et al. (2002), Le Bas and Sierra (2002), Co (2003), Porter (2003a), OECD
(2004), Porter et al. (2004), Ejermo (2009), and Picci (2010) should be cited.
It is worth noting that the OECD REGPAT database records patent applica-
tions and not patents granted by the EPO. Although not every application
is granted, patent applications reflect inventive activity and several studies
have based their analyzes on the OECD database (i.a. Paci and Usai, 2000;
Michel, 2009; Hendy and Sissons, 2011; Miguelez and Gomez-Miguelez,
2011; Tanner, 2011; Aldieri, 2012; D’Agostino et al., 2012). According to the
EPO (European Patent Office, 2013a, Internet source), on average around
50 percent of patent applications are eventually granted.
7.2 The geographical patterns of inventive activities

in Switzerland
Before investigating in more detail the distribution of inventive activities

across the Swiss territory, two methodological remarks have to be made. First,
as distinct from most economic analyses, the unit of analysis of geographical
studies is not predetermined (Feldman, 2000, p. 377). While analyses at the

level of political jurisdictions (such as municipalities, counties, states, and

countries) are often relevant because they reflect the situation of a homo-
geneous institutional setting (similar laws, tax system, political system, etc.)
and their outcomes tend to be easier to implement because they normally
depend on the disposition of a single government, they may not always
reveal the complexity of reality.8
Innovation perfectly illustrates the limitations of analyses based only on
political jurisdictions. As we argued in the second part of this thesis, innova-
tion is a complex process involving different types of actor, which may not
be located in the same political jurisdiction but which may contribute to a
common innovative effort. No consensus regarding the correct unit of anal-
ysis has emerged from the literature yet (Feldman, 2000, p. 377). While some
studies rely on political jurisdictions (i.a. Coronado Guerrero and Acosta Sero,
1997; Feldman and Lichtenberg, 1998; Porter and Stern, 1999; Hinloopen,
2003; Criscuolo, 2005), others use geographical units going beyond legal
administrative divisions such as Metropolitan Statistical Areas (MSA) in the
U.S. or Labor Market Areas (i.a. Thompson, 1962; Malecki, 1985; Jaffe et al.,
1993; Audretsch and Feldman, 1996; Maggioni, 2002; Alecke et al., 2003) or
other measures of distance (Adams, 2002).
In order to take into account this issue, this study will rely on different
types of geographical unit. As results at the level of official political juris-
dictions are particularly important for policy makers in giving them a clear
picture of the inventive profile of their region and subsequently allowing
them to take the right decisions to support innovation, the following anal-
yses will be performed at the level of both districts and cantons.9 However, as
the innovation process ignores legal administrative divisions, further results
will be presented at the level of main regions and employment basins.10
Although this breakdown is only partially consistent with the reality of the
innovation process,11 this multi-level analysis should nevertheless provide a
fairly good representation of the geographical dispersion of inventive activi-
ties in Switzerland.
The second remark concerns methodological choices in the elaboration of
patent indicators. As emphasized by the OECD (2009b, p. 60): “Patent statis-
tics can only be meaningfully interpreted if there is adequate knowledge of
the criteria and methodologies used to compile them.” The first methodo-
logical choice concerns the selection of the database. As explained in the
previous section, patent data can be sorted either at the inventor or at the
applicant level. While patent counts by inventors’ region of residence tend
to be recommended to compile statistics on the inventive performance of
regions, indicators based on applicants’ region of residence provide unique
insights into the ownership of inventions (Paci and Usai, 2000, p. 99; OECD,
2009b, p. 63). Although measures of the inventive performance of regions
compiled on the basis of applicants’ region of residence can be biased because
firms (and especially MNEs) may apply for patents from their headquarter

rather than from the subsidiary in which the invention has actually been
developed, it would nevertheless be rash to assume that the entity owning
the patent and its region of residence do not benefit at all from the knowl-
edge associated with the invention. As a consequence, the inventive perform-
ance of Swiss regions will be analyzed in this study by looking at indicators
constructed on the basis of both inventors’ and applicants’ regions of resi-
dence. This methodological choice makes even more sense in the context of
a geographically small country such as Switzerland. Indeed, evaluating the
inventive performance of Swiss regions by relying exclusively on inventors’
region of residence would be questionable too. To give readers an idea of
distance in Switzerland, the federal capital Bern is located only some 100
kilometers (or 60 miles) west of Zurich and 130 kilometers (or 80 miles) east
of Geneva. It is therefore quite common for people in Switzerland to live in
a certain region and work in another. Consequently, indicators of the inven-
tive performance of regions based exclusively on the location of residence of
inventors would result in serious allocation mistakes. For example, a patent
developed by an inventor working for a firm located in Zurich but living in
Bern would be attributed to Bern even though Bern is not participating in
the inventive effort.12 Furthermore, an analysis at the applicant level will be
particularly useful to an examination of the new geography of invention (see
Chapter 9).
The second methodological choice resides in the selection of a reference
date (Hinze and Schmoch, 2004). Each patent document contains different
dates describing the various stages of the inventive process (OECD, 2009b,
p. 61). As noted by the OECD (2009b, p. 61), patent documents generally
include four different dates: the priority date (which corresponds to the “first
date of filing of a patent application anywhere in the world”), the application
date (which refers to “the date on which a patent is filed at a specific patent
office” such as the EPO), the publication date (which corresponds to the
date on which “information about the invention is disclosed to the general
public and made available to statisticians,” generally “18 months from the
priority date”), and the grant date (which refers to “the date on which patent
rights are conferred to the applicant by the authorized body. It takes [ ... ] on
average [ ... ] five years at the EPO for a patent to be granted, but it can take
up to ten years in some cases”).13 As the OECD REGPAT database records
patent applications (and not granted patents) and as the granting process
can be particularly long, this study will use the priority date as the reference
date. Although applying for a patent does not imply that the patent will
be granted, the application process is already a sign of an inventive effort.
Furthermore, this choice is in line with the recommendations of the OECD,
which encourages researchers to use the priority date in the examination of
inventive performance because it is the closest date to the date of invention
(OECD, 2009b, p. 62).

Based on the aforementioned methodological choices, the remainder of

this section will now present the outcome of a thorough descriptive analysis
of the geographical dispersion of inventive activities across the Swiss terri-
tory. As stated, all results have been derived from original databases of patent
applications at the EPO and will be given at both the applicants’ and the
inventors’ levels.
Two additional comments must be made. First, although databases have
been constructed on the basis of the last update of the OECD REGPAT data-
base at the time of writing (June 2012), analyses will be restricted to the
period 1977–2008. This decision results from the fact that data for recent
years are still incomplete. Although the OECD REGPAT database contains
patent applications until 2011, the average number of patent applications
per year by applicants and inventors located in Switzerland dropped from
respectively 4,992 and 3,078 over the period 2006–2008 to only 1,238 and
857 over the period 2009–2011. As pointed out previously, while a time lag
of 18 months prevails between the priority date and the publication date,
it takes additional time for the OECD to treat patent applications and enter
them in its databases. Second, in order to avoid double counting, each
patent application has been allocated to a region using fractional counts.
For example, if a patent application has been made by two applicants or two
inventors located in two different regions, a half patent has been attributed
to each region. For readability purposes, the following tables will, however,
only present round numbers of patent applications.
7.2.1 Analysis of the evolution of the number of patent applications

at the EPO by applicants and inventors located in Switzerland
Following these comments, Table 7.2 below presents the evolution of the
total number of patent applications at the EPO by applicants established in
Switzerland.
As shown here, almost 84,000 patents were requested at the EPO by appli-
cants established in Switzerland over the period 1977–2008. Switzerland is
one of the most active countries in terms of patent applications (i.a. AGEFI,
2011, p. 9; Haour, 2012, p. 16; FSO, 2012a, Internet source). Among OECD
countries, only Luxembourg exhibited a higher rate of patent applications at
the EPO by applicant per 10,000 inhabitants in 2008 (Figure 7.1). Although
Luxembourg and Switzerland are widely known as the home of many MNEs –
and patent indicators at the applicant level may therefore overestimate the
inventive performance of these two countries because certain MNEs may
apply for patents from their Luxembourgian or Swiss subsidiaries even if
the inventive process has not been performed in these countries – unlike
Luxembourg, Switzerland records even higher figures at the inventor level, which
testifies to the solid inventive performance of the country (see Figure 7.4 below).
These positive results in terms of inventive activity are in line with the

Table 7.2 Evolution of the total number of patent applications at the EPO by appli-
cants located in Switzerland, 1977–2008
Cumulative
number
Number of patent Percentage of of patent Cumulative
Year applications total applications percentage
1977 249 0.30 249 0.30

1978 733 0.87 983 1.17
1979 1,063 1.27 2,046 2.44
1980 1,247 1.49 3,294 3.92
1981 1,394 1.66 4,688 5.58
1982 1,514 1.80 6,202 7.39
1983 1,640 1.95 7,842 9.34
1984 1,729 2.06 9,572 11.40
1985 1,721 2.05 11,293 13.45
1986 1,745 2.08 13,038 15.53
1987 1,975 2.35 15,014 17.88
1988 2,097 2.50 17,111 20.38
1989 2,094 2.49 19,206 22.88
1990 2,080 2.48 21,287 25.36
1991 1,938 2.31 23,225 27.66
1992 2,068 2.46 25,294 30.13
1993 2,000 2.38 27,294 32.51
1994 2,125 2.53 29,420 35.04
1995 2,140 2.55 31,561 37.59
1996 2,419 2.88 33,980 40.48
1997 2,824 3.36 36,805 43.84
1998 3,150 3.75 39,956 47.59
1999 3,391 4.04 43,347 51.63
2000 3,816 4.55 47,164 56.18
2001 4,052 4.83 51,217 61.01
2002 3,961 4.72 55,178 65.72
2003 4,248 5.06 59,427 70.79
2004 4,595 5.47 64,022 76.26
2005 4,954 5.90 68,977 82.16
2006 5,279 6.29 74,257 88.45
2007 4,931 5.87 79,188 94.32
2008 4,765 5.68 83,954 100.00
Total 83,954 100.00
Source: Personal elaboration based on OECD REGPAT database (June 2012).
excellent innovative performance of the country, as pointed out in the intro-

duction to this third part (Swiss-American Chamber of Commerce and The
Boston Consulting Group, 2008; WEF, 2012, p. 336).
Figure 7.2 illustrates the steady increase in the number of patent applica-
tions at the EPO by applicants based in Switzerland. While only 249 patents
were requested in 1977, applications reached a peak in 2006 at 5,279 before

4
0
Luxembourg
Switzerland
Sweden
Finland
Germany
Netherlands
Denmark
Austria
Japan
France
Iceland
Israel
Belgium
Ireland
United States
OECD
Norway
Korea
Slovenia
United Kingdom
Italy
Canada
Australia
New Zealand
Spain
Estonia
Czech Republic
Hungary
Portugal
Greece
Poland
Slovak Republic
Turkey
Chile
Mexico
Figure 7.1 Number of patent applications per 10,000 inhabitants at the EPO by appli-
cants located in OECD countries in 2008*
Note: *2008 = last year available. Switzerland is regularly among the top countries in terms of
patents per capita.
Source: Personal elaboration based on OECD. StatExtract (2012, Internet source).
160000 6000
Total applications – Switzerland

140000
5000
Total applications – World
120000
4000
100000
80000 3000
60000
2000
40000
1000
20000
0 0
1985
1983
1977
1999
1981
1987
1995
1979
1991
1993
2003
2005
2007
1989
1997
2001
World Switzerland
Figure 7.2 Evolution of the total number of patent applications at the EPO by appli-
cants located in Switzerland (1977–2008) and total applicants (1978–2008)*
Note: *OECD.StatExtracts does not provide information for the year 1977.
Source: Personal elaboration based on OECD REGPAT database (June 2012) and OECD.StatExtract
(2012, Internet source).

slightly decreasing in 2007 and 2008. It is, however, still unclear whether this
slight drop in patent applications reflects a reduction of inventive activity
or simply the fact that the OECD REGPAT database is still incomplete (FSO,
2012a, Internet source). Similarly, the impressive growth of patent applica-
tions over the period cannot be interpreted simply as an explosion of inven-
tive activity but rather as the result of an increasing propensity to patent at
the EPO (Paci and Usai, 2000, p. 99). As noted by Paci and Usai (2000, p. 99)
and Paci et al. (1997), the greater integration of the European market and the
possibility offered by the EPO to protect an invention over several countries
have triggered a steady growth in patent applications at the EPO over the
years. Moreover, the number of patterns of patent applications at the EPO
by applicants located in Switzerland and by applicants from elsewhere in the
world show a similar pattern (see Figure 7.2).
Table 7.3 presents the evolution of patent applications at the EPO by
inventors located in Switzerland between 1977 and 2008. Like applications
at the applicant level, patent applications by inventors located in Switzerland
recorded a steady increase over the period. From fewer than 200 in 1977 the
annual number of applications grew to more than 3,000 between 2004 and
2008. As illustrated in Figure 7.3, this evolution reflects the global trend and
reflects a corresponding decrease in patent applications in 2007 and 2008
as noticed at the applicant level. It is, however, worth noting that the total
number of patent applications at the inventor level is lower than the total
number of patent applications at the applicant level. While almost 84,000
160000 3500
Total applications – Switzerland
140000 3000
Total applications – World
120000
2500
100000
2000
80000
1500
60000
1000
40000
20000 500
0 0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
World Switzerland
Figure 7.3 Evolution of the total number of patent applications at the EPO by inven-
tors located in Switzerland (1977–2008) and total applicants (1978–2008)*
Note: *OECD.StatExtracts does not provide information for the year 1977.
Source: Personal elaboration based on OECD REGPAT database (June 2012) and OECD.StatExtract
(2012, Internet source).

Table 7.3 Total number of patent applications at the EPO by inventors located in
Switzerland, 1977–2008
Cumulative
Number of patent Percentage of number of patent Cumulative
Year applications total applications percentage
1977 180 0.29 180 0.29
1978 572 0.93 753 1.23
1979 870 1.42 1,623 2.65
1980 1,016 1.66 2,640 4.30
1981 1,138 1.86 3,778 6.16
1982 1,202 1.96 4,980 8.12
1983 1,365 2.23 6,346 10.35
1984 1,492 2.43 7,838 12.78
1985 1,483 2.42 9,321 15.20
1986 1,445 2.36 10,767 17.55
1987 1,687 2.75 12,454 20.30
1988 1,733 2.83 14,188 23.13
1989 1,771 2.89 15,960 26.02
1990 1,685 2.75 17,645 28.77
1991 1,585 2.58 19,230 31.35
1992 1,737 2.83 20,968 34.18
1993 1,671 2.72 22,639 36.91
1994 1,725 2.81 24,365 39.72
1995 1,680 2.74 26,046 42.46
1996 1,887 3.08 27,933 45.54
1997 2,158 3.52 30,092 49.06
1998 2,400 3.91 32,492 52.97
1999 2,504 4.08 34,996 57.05
2000 2,728 4.45 37,724 61.50
2001 2,789 4.55 40,513 66.05
2002 2,650 4.32 43,164 70.37
2003 2,758 4.50 45,923 74.87
2004 3,025 4.93 48,948 79.80
2005 3,156 5.15 52,104 84.94
2006 3,132 5.11 55,237 90.05
2007 3,100 5.05 58,337 95.11
2008 3,001 4.89 61,339 100.00
Total 61,339 100.00
patents were requested by applicants located in Switzerland between 1977

and 2008, there were only 61,400 at the inventor level (see Table 7.3). As
noted by the OECD (2009b, pp. 63–64), a higher number of patent applica-
tions at the applicant level reflects the greater internationalization of research
activities; countries such as Finland, the Netherlands, and Switzerland are
well known for the internationalization of their inventive activities and for

owning inventions developed abroad. Although the number of patent appli-

cations at the inventor level is lower than at the applicant level, Switzerland
recorded the highest number of patent applications at the EPO by inventors
per 10,000 inhabitants among OECD countries in 2008 (Figure 7.4). Along
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Switzerland
Sweden
Germany
Finland
Denmark
Netherlands
Austria
Luxembourg
Israel
Japan
France
Belgium
OECD
United States
Norway
United Kingdom
Korea
Italy
Ireland
Iceland
Slovenia
Canada
Australia
New Zealand
Spain
Estonia
Czech Republic
Hungary
Portugal
Greece
Slovak Republic
Poland
Turkey
Chile
Figure 7.4 Number of patent applications per 10,000 inhabitants at the EPO by inven-
tors located in OECD countries in 2008*
Note: *2008 = last year available. Switzerland is regularly among the top countries in terms of
patents per capita.
Source: Personal elaboration based on OECD.StatExtract (2012, Internet source).
80000
70000 Luxemburg
60000
y = 5E+07x+24074
GDP per capita
Norway
50000 R2 = 0.5223
United States P-value < 0.0001
40000
30000 Switzerland
20000
10000
0
0 0.0001 0.0002 0.0003 0.0004 0.0005 0.0006 0.0007 0.0008
Patent applications per capita – Applicant level
Figure 7.5 GDP per capita vs. patent applications per capita at the EPO by applicants
located in OECD countries in 2008
Source: Personal elaboration based on OECD.StatExtract (2012, Internet source).

80000
Luxemburg
70000
y = 6E+07x+24169
60000 R2 = 0.2832
GDP per capita
Norway P-value = 0.0012

50000
United States
40000
30000 Switzerland
20000
10000
0
0 0.00005 0.0001 0.00015 0.0002 0.00025 0.0003 0.00035 0.0004 0.00045
Patent applications per capita – Inventor level
Figure 7.6 GDP per capita vs. patent applications per capita at the EPO by inventors
established in OECD countries in 2008
Source: Personal elaboration based on OECD. StatExtract (2012, Internet source).
with results at the applicant level, these results confirm the inventive dyna-
mism of Switzerland.
An analysis of the economic significance of patent applications is
presented in Figures 7.5 and 7.6 below. As emphasized, these two figures
reveal a positive and significant relationship between the number of patent
applications per capita (both at the applicant level and at the inventor level)
and GDP per capita among OECD countries in 2008. This relationship tends
to be even stronger at the applicant level as around 52 percent of the varia-
tion of GDP per capita across countries is explained by patent applications.
Although these results should be interpreted with great caution because
patent applications are obviously not the only explanation for differences
in GDP per capita between countries, they nevertheless reveal a positive
relationship between patent applications per capita and GDP per capita,
which stresses the economic significance of inventive activities, as pointed
out in parts I and II.
7.2.2 Evaluation of the spatial distribution of patent applications

at the EPO by applicants and inventors located in Switzerland
Based on these results at the country level, the remainder of this section will
analyze in more detail the spatial distribution of inventive activities across
the Swiss territory. Paci and Usai (2000) performed an analogous investi-
gation across regions of the European Union. As before, this analysis will
be undertaken both at the applicant and at the inventor level. In order to
provide a detailed picture of the inventive performance of the Swiss regions,
results will be presented at four different geographical levels: cantons,

districts, main regions, and employment basins. For readers unfamiliar with
Swiss geography, Appendix 3 provides a map of the regional breakdown that
will be used throughout this study. It is worth noting that the spatial distri-
bution of the two patent sets (applicants and inventors) is similar. Based on
an analysis of the correlation, it appeared that the coefficients of correla-
tion between the two series over the period 1977–2008 are (r =) 0.71 at the
districts level, 0.76 at the cantons level, 0.88 at the main regions level, and
0.95 at the employment basins level.
Figures 7.7 to 7.14 below present the spatial distribution of the total
number of patent applications at the EPO by applicants (Figures 7.7–7.10)
and inventors (Figures 7.11–7.14) located in Switzerland across cantons,
districts, main regions, and employment basins over the period 1977–2008.
Each figure contains two additional columns: one showing the number of
patent applications over the period 2000–2008 and the other an indicator
of “dynamism,” capturing on the basis of the patenting propensity in the
period 1977–2008 compared with the period 2000–2008. For example, if a
region has a dynamism indicator of 55 percent, it means that 55 percent of
its patent applications were requested over the recent period (2000–2008).
This indicator can be interpreted as a forward-looking measure of the inven-
tiveness of regions. Detailed regional inventive profiles can be generated
on request. It is worth noting that this analysis in absolute terms will be
completed by further investigations in relative terms (patents per inhabitant
and patents per employee) (see the last paragraph before Figure 7.7).
At the applicant level, the cantons of Zurich and Basel-City accounted for
more than 37 percent of the total number of patent applications at the EPO
over the period 1977–2008 (Figure 7.7). However, both cantons recorded
dynamism indicators below the Swiss average (48.37 percent) at respectively
46.08 percent and 41.96 percent, suggesting a slight decrease in their inven-
tive activity over the recent period.14 Figures 7.8–7.10 illustrate the spatial
distribution of patent applications at the district, main region, and employ-
ment basins levels. Regarding the dispersion of patent applications as meas-
ured through gini coefficients,15 the smaller the geographical unit of analysis
the greater the inequalities. While inventive activities appear relatively evenly
distributed across the Swiss territory at the level of main regions (gini1977–2008
= 0.21, gini2000–2008 = 0.20), the picture is reversed when the focus shifts to
the district level (gini1977–2008 = 0.72, gini2000–2008 = 0.75) and shows marked
inequalities in the regional propensity to patent. These differences are high-
lighted by the gap between the district that requested the most patents over
the period 1977–2008 (more than 15,000 in the district “canton Basel-City”)
and the one that demanded the least (0 in Distretto di Vallemaggia in the
canton of Ticino).
Figures 7.11–7.14 present the situation at the inventor level. While
the canton of Zurich recorded the highest number of patent applications
(23.19 percent of total), the canton of Basel-City ranked only seventh with

Total patent applications, applicant level, 1977–2008
Legend:  <1,000 1,000–4,000  4,000–10,000  >10,000
1977– 2000– Dynamism
Rank Canton % %
2008 2008 (in %)
1 Zurich ZH 15,766 18.78 7,265 17.89 46.08
2 Basel-City BS 15,367 18.31 6,447 15.88 41.96
3 Vaud VD 7,606 9.06 4,147 10.21 54.53
4 Zug ZG 5,703 6.79 3,391 8.35 59.46
5 Aargau AG 5,640 6.72 2,373 5.84 42.07
6 St. Gallen SG 4,344 5.18 1,995 4.91 45.93
7 Bern BE 4,206 5.01 1,886 4.65 44.84
8 Geneva GE 3,147 3.75 1,552 3.82 49.32
9 Neuchâtel NE 3,029 3.61 1,810 4.46 59.75
10 Schaffhausen SH 2,902 3.46 1,684 4.15 58.02
11 Basel-Country BL 2,603 3.10 1,741 4.29 66.90
12 Fribourg / Freiburg FR 2,233 2.66 1,150 2.83 51.51
… … … … … … … …
26 Appenzell AI 80 0.10 48 0.12 60.00
Innerrhoden
Switzerland 83,954 100.00 40,606 100.00 48.37
Mean 3,229 1,561
Median 1,774 887
Gini 0.55 0.55
Figure 7.7 Spatial distribution of patent applications at the EPO by applican ts located
in Switzerland – Cantons

Legend: <100  100–500  500–2,000  2,000–10,000  >10,000
Rank District % %
2008 2008 (in %)
1 Canton Basel-City BS 15,367 18.31 6,447 15.88 41.96
2 Bezirk Zurich ZH 6,189 7.37 3,464 8.53 55.97
3 Kanton Zug ZG 5,703 6.79 3,391 8.35 59.46
4 Bezirk Baden AG 3,701 4.41 1,485 3.66 40.15
5 Canton Geneva GE 3,147 3.75 1,552 3.82 49.32
6 Bezirk Schaffhausen SH 2,815 3.35 1,631 4.02 57.95
7 Bezirk Winterthur ZH 2,806 3.34 805 1.98 28.70
8 District de la Riviera- VD 2,696 3.21 1,416 3.49 52.55
Pays-d'Enhaut
9 Canton Nidwalden NW 1,905 2.27 1,022 2.52 53.68
10 District de Neuchâtel NE 1,893 2.26 1,112 2.74 58.74
11 District de la Sarine FR 1,756 2.09 961 2.37 54.74
12 Verwaltungskreis Bern- BE 1,719 2.05 760 1.87 44.24
Mittelland
… … … … … … … …
150 Distretto di Vallemaggia TI 0 0.00 0 0.00 0.00
Switzerland 83,954 100.00 40,606 100.00 48.37
Mean 559 270
Median 140 58
Gini 0.72 0.75
Figure 7.8 Spatial distribution of patent applications at the EPO by applicants located
in Switzerland – Districts

Legend:
<10,000
10,000–11,000
11,000–12,000 >12,000
Rank Main Region % %
2008 2008 (in %)
Northwestern
1 Switzerland 23,611 28.12 10,562 26.01 44.73
2 Zurich 15,766 18.78 7,265 17.89 46.08
3 Lake Geneva region 11,303 13.46 5,923 14.59 52.41
4 Espace Mittelland 11,262 13.42 5,556 13.68 49.33
5 Eastern Switzerland 10,369 12.35 5,040 12.41 48.61
6 Central Switzerland 10,024 11.94 5,504 13.56 54.91
7 Ticino 1,614 1.92 752 1.85 46.61
100.0 100.0
Switzerland 83,954 0 40,606 0 48.37
Mean 11,993 5,800
Median 11,262 5,556
Gini 0.21 0.20
K
in Switzerland – Main regions

Legend: <2,000 2,000–5,000 5,000–10,000 >10,000
Rank Employment Basin % %
2008 2008 (in %)
1 Zurich 24,307 28.95 12,245 30.16 50.38
2 Basel 18,184 21.66 8,272 20.37 45.49
3 Lausanne 7,255 8.64 3,873 9.54 53.39
4 Winterthur – 6,730 8.02 2,944 7.25 43.74
Schaffhausen
5 St. Gallen 4,542 5.41 2,130 5.25 46.90
6 Luzern 3,916 4.66 1,892 4.66 48.33
7 Geneva 3,699 4.41 1,948 4.80 52.65
8 Neuchâtel 3,091 3.68 1,828 4.50 59.13
9 Bern 2,732 3.26 1,234 3.04 45.18
10 Biel/Bienne 2,465 2.94 1,038 2.56 42.12
11 Fribourg 2,210 2.63 1,135 2.80 51.38
12 Aarau – Olten 1,719 2.05 752 1.85 43.77
… … … … … … …
16 Sion 378 0.45 117 0.29 31.10
Switzerland 83,954 100.00 40,606 100.00 48.37
Mean 5,247 2,537
Median 2,912 1,531
Gini 0.49 0.49
in Switzerland – Employment basins

Total patent applications, inventor level, 1977–2008
Legend:  <1,000  1,000–3,000  3,000–10,000  >10,000
Rank Canton % %
2008 2008 (in %)
1 Zurich ZH 14,824 23.19 5,801 22.02 39.14
2 Aargau AG 7,502 11.74 2,970 11.28 39.59
3 Vaud VD 5,583 8.74 2,739 10.40 49.06
4 Bern BE 5,089 7.96 2,202 8.36 43.28
5 Basel-Country BL 3,995 6.25 1,317 5.00 32.97
6 St. Gallen SG 3,824 5.98 1,652 6.27 43.20
7 Basel-City BS 2,623 4.10 1,088 4.13 41.50
8 Geneva GE 2,557 4.00 885 3.36 34.62
9 Neuchâtel NE 2,049 3.21 981 3.73 47.91
10 Luzern LU 2,022 3.17 941 3.57 46.52
11 Fribourg / Freiburg FR 1,875 2.94 679 2.58 36.21
12 Zug ZG 1,870 2.93 798 3.03 42.71
13 Solothurn SO 1,641 2.57 666 2.53 40.58
… … … … … … … …
26 Appenzell Innerrhoden AI 70 0.11 40 0.15 57.14
Switzerland 63,913 100.00 26,343 100.00 41.22
Mean 2,458 1,013
Median 1,627 665
Gini 0.50 0.50
Figure 7.11 Spatial distribution of patent applications at the EPO by inventors located
in Switzerland – Cantons

Legend:  <100  100–500  500–1,000  1,000–2,000  >2,000
1977- 2000- Dynamism
Rank District Canton % %
2008 2008 (in %)
1 Bezirk Zurich ZH 4,765 7.46 2,122 8.06 44.54
2 Bezirk Arlesheim BL 2,825 4.42 941 3.57 33.31
3 Bezirk Baden AG 2,814 4.40 1,148 4.36 40.83
4 Canton Basel-City BS 2,623 4.10 1,088 4.13 41.50
5 Canton Geneva GE 2,557 4.00 885 3.36 34.62
6 Verwaltungskreis BE 2,241 3.51 982 3.73 43.82
Bern-Mittelland
7 Bezirk Winterthur ZH 2,127 3.33 689 2.62 32.40
8 Canton Zug ZG 1,870 2.93 798 3.03 42.71
9 Amt Luzern LU 1,411 2.21 658 2.50 46.63
10 Bezirk Horgen ZH 1,250 1.96 454 1.73 36.37
11 Bezirk Meilen ZH 1,202 1.88 498 1.89 41.46
12 District de Lausanne VD 1,197 1.87 602 2.29 50.33
… … … … … … … …
150 Distretto di Bernina GR 1 0.00 0 0.00 0.00
Switzerland 63,913 100.00 26,343 100.00 41.22
Mean 426 175
Median 194 83
Gini 0.61 0.60
in Switzerland – Districts

Legend:
<2,000 2,000–10,000
10,000–12,000
>12,000

Rank Main Region % %
2008 2008 (in %)
1 Zurich 14,824 23.19 5,801 22.02 39.14
2 Northwestern Switzerland 14,121 22.09 5,376 20.41 38.07
3 Espace Mittelland 10,989 17.19 4,669 17.73 42.49
4 Lake Geneva region 9,122 14.27 4,056 15.40 44.47
5 Eastern Switzerland 8,017 12.54 3,379 12.83 42.15
6 Central Switzerland 5,231 8.18 2,395 9.09 45.79
7 Ticino 1,606 2.51 664 2.52 41.33
Switzerland 63,913 100.00 26,343 100.00 41.22
Mean 9,130 3,763
Median 9,122 4,056
Gini 0.27 0.25
in Switzerland – Main regions

Legend:  <1,000  1,000-4,000  4,000-10,000  >10,000
Rank Employment Basin % %
2008 2008 (in %)
1 Zurich 19,852 31.06 8,129 30.86 40.95
2 Basel 8,057 12.61 2,938 11.15 36.47
3 Lausanne 5,283 8.27 2,622 9.96 49.64
4 Winterthur – 4,767 7.46 1,724 6.55 36.17
Schaffhausen
5 St. Gallen 3,979 6.23 1,750 6.64 43.99
6 Bern 3,448 5.40 1,495 5.68 43.37
7 Geneva 3,115 4.87 1,170 4.44 37.56
8 Luzern 2,789 4.37 1,303 4.95 46.73
9 Aarau – Olten 2,692 4.21 1,096 4.16 40.74
10 Biel/Bienne 2,340 3.66 976 3.71 41.73
11 Neuchâtel 2,154 3.37 1,025 3.89 47.59
12 Fribourg 1,850 2.90 666 2.53 36.04
13 Lugano 1,138 1.78 505 1.92 44.41
… … … … … … …
16 Bellinzona 517 0.81 192 0.73 37.24
Switzerland 63,913 100.00 26,343 100.00 41.22
Mean 3,994 1,646
Median 2,741 1,133
Gini 0.35 0.35
in Switzerland – Employment basins

4.1 percent of total patent applications (Figure 7.11). This result perfectly
reflects the size issue in a country such as Switzerland when evaluating the
inventive performance of regions at the inventor level. As the canton of
Basel-City is geographically small, it is more likely that an inventor working
for a firm located in the canton of Basel-City lives in a neighboring region
than is the case in the canton of Zurich. This issue tends therefore to under-
estimate the inventive performance of geographically small regions. The
problem nevertheless dwindles when looking at more aggregated regions.
As illustrated for instance in Figure 7.13, the main regions of Zurich and
Northwestern Switzerland (where the canton of Basel-City is situated)
accounted for the largest number of patent applications over the period
1977–2008. Regarding the dispersion of patent applications measured
through gini coefficients, regional inequalities tend to be less marked than
at the applicant level. For example, while the gini coefficient of the distribu-
tion of patent applications at the district level over the period 1977–2008
was 0.72 at the applicant level and it was only 0.61 at the inventor level. This
result can be relatively easily interpreted as employment tends to be more
concentrated than population.
While the evaluation of the spatial distribution of total numbers of patent
applications is important from an informative standpoint, it does not say
much about the inventive performance of regions as effective numbers are
affected by size. A larger or more populous region is likely to record higher
numbers of patent applications than a proportionally smaller or less populous
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 7.15 Evolution of the number of patent applications per 10,000 inhabitants at
the EPO by applicants located in Switzerland, 1981–2008
Source: Personal elaboration based on OECD REGPAT database (June 2012) and FSO (2012b).

region. As a consequence, weighted numbers of patent applications are a

better indicator of the inventive performance of regions and provide better
insights into the inventive profile of Swiss regions.
Figure 7.15 shows the evolution of the number of patent applications per
10,000 inhabitants at the EPO by applicants established in Switzerland over
the period 1981–2008.16 As illustrated, this number grew from a little bit
more than 2 patent applications per 10,000 inhabitants in 1981 to more
than 6 in 2008. This evolution reflects the growth of the total number of
patent applications in Switzerland as presented above (Figure 7.2).
More interestingly, Figures 7.16–7.19 evaluate the inventive performance
of Swiss regions by analyzing the spatial distribution of patent applications
per 10,000 inhabitants by applicants across the Swiss territory. The figures
present the data for the years 1985, 1995, 2001, 2005, and 2008, with a focus
on 2005 as it is still uncertain whether the 2008 patent data are complete.
This breakdown has been chosen first to provide an overview of the evolu-
tion of the situation in the 1980s, 1990s, and 2000s and second because
the years 2001, 2005, and 2008 match employment data collected by the
Federal Statistics Office, which will be referred to later. Although the number
of patent applications per region may fluctuate from year to year because
the economic profile of regions evolves (new entities enter the markets and
others exit) and the inventive process is a continuous process that does not
obey the calendar, a certain consistency among the most inventive regions
throughout the years seems nevertheless to be discernable.
What is particularly interesting regarding the purpose of this study is the
tendency of inventive activity to cluster in the western and north-eastern parts
of Switzerland. This concentration is particularly obvious from Figures 7.16
and 7.19, which illustrate the spatial distribution of patent applications per
10,000 inhabitants at the applicant level across cantons and employment
basins. This relatively uneven distribution of inventive activity across the
Swiss territory is reflected by gini coefficients. For example, these oscillate
between 0.59 and 0.66 at the district level over the years under review. It
is also worth noting that the picture provided by the analysis of the inven-
tive performance of regions in terms of patent applications per inhabitant is
different from what has been revealed in terms of the number of patent appli-
cations. For example, while the canton of Zurich was the canton in which
the most patent applications were recorded at the EPO in 2005, it ranked
only seventh in terms of patent applications per inhabitant. Furthermore,
the multi-geographical level analysis performed is particularly revealing as to
which sub-regions boost, or stall, the inventive performance of regions. For
instance, while the employment basins of Geneva and Lausanne show high
inventive performance, when the focus shifts to the main regions level, the
lake Geneva region reveals under-average inventive performance because the
canton of Valais pulls down the inventive performance of the main region.
Similarly, if we look at the inventive performance of the canton of Fribourg,

Patent applications per 10,000 inhabitants, applicant level, 2005
Legend:  <3 3–7  7–20  >20
Rank
Canton 1985 1995 2001 2005 2008
2005
1 Basel-City BS 17.97 16.94 31.12 46.17 37.33
2 Zug ZG 10.13 13.12 31.72 42.25 37.13
3 Schaffhausen SH 4.31 10.76 24.28 34.36 13.62
4 Nidwalden NW 6.63 17.09 33.06 25.95 25.53
5 Neuchâtel NE 2.18 4.93 12.57 12.51 12.34
6 Basel-Country BL 1.31 2.52 6.41 7.80 8.44
7 Zurich ZH 3.42 3.55 5.80 7.09 6.75
8 Vaud VD 1.98 3.70 6.72 7.01 8.18
9 St. Gallen SG 2.02 2.94 4.32 5.57 5.24
10 Geneva GE 2.19 1.54 3.42 5.33 4.86
11 Fribourg / Freiburg FR 2.13 1.80 5.74 5.04 5.51
12 Aargau AG 2.89 3.35 4.95 4.25 5.69
13 Appenzell Innerrhoden AI 0.00 0.68 2.00 3.99 7.11
… … … … … … … …
26 Valais / Wallis VS 0.97 0.28 0.97 0.71 0.65
Switzerland CH 2.67 3.05 5.63 6.68 6.28
Mean 2.87 3.84 7.65 9.16 8.21
Median 1.99 1.69 2.86 3.70 5.37
Gini 0.42 0.52 0.56 0.56 0.50
M
Figure 7.16 Spatial distribution of patent applications per 10,000 inhabitants at the
EPO by applicants located in Switzerland – Cantons

Legend: 0–1 1–3 3–7 7–20 >20
Rank
District Canton 1985 1995 2001 2005 2008
2005
1 Bezirk Schaffhausen SH 5.44 15.76 35.16 50.27 19.52
2 Kanton Basel-City BS 17.97 16.94 31.12 46.17 37.33
3 Kanton Zug ZG 10.13 13.12 31.72 42.25 37.13
4 Bezirk Waldenburg BL 0.00 3.50 16.17 36.81 39.49
5 Kanton Nidwalden NW 6.63 17.09 33.06 25.95 25.53
6 District de Neuchâtel NE 3.47 12.05 28.48 23.62 26.74
7 District du Locle NE 2.03 4.97 4.16 15.99 19.24
8 District de la Riviera-Pays-d'Enhaut VD 7.47 13.74 22.76 15.28 33.70
9 Wahlkreis Rheintal SG 3.08 6.74 12.19 13.28 10.32
10 District de la Sarine FR 4.37 3.67 13.55 12.79 14.73
11 District de la Chaux-de-Fonds NE 3.04 2.48 12.29 12.08 8.95
12 Bezirk Zurich ZH 3.44 4.27 10.59 11.35 12.86
… … … … … … … …
150 Bezirk Raron VS 0.00 0.00 0.93 0.00 0.00
Schweiz / Suisse 2.67 3.05 5.63 6.68 6.28
Mean 1.67 2.03 3.80 4.41 4.20
Median 1.09 1.14 1.96 2.15 1.99
Gini 0.59 0.62 0.63 0.65 0.66
EPO by applicants located in Switzerland – Districts

Legend: <4 4–7 7–10 >10
Rank
Main Region 1985 1995 2001 2005 2008
2005
1 Northwestern Switzerland 5.79 6.78 10.28 12.87 12.06
2 Central Switzerland 2.92 2.80 7.78 9.64 8.58
3 Zurich 3.42 3.65 5.80 7.09 6.75
4 Eastern Switzerland 2.03 2.47 4.93 6.17 5.06
5 Lake Geneva region 1.85 1.90 4.47 5.15 5.55
6 Espace Mittelland 1.42 1.71 3.77 3.81 3.42
7 Ticino 1.32 1.31 2.60 2.27 3.08
Switzerland 2.67 2.96 5.63 6.68 6.28
Mean 2.68 2.95 5.66 6.71 6.36
Median 2.03 2.47 4.93 6.17 5.55
Gini 0.20 0.19 0.18 0.23 0.20
EPO by applicants located in Switzerland – Main regions

Legend: <2 2–5 5–10 >10
Rank
Employment Basin 1985 1995 2001 2005 2008
2005
1 Basel 7.71 7.52 13.96 19.53 16.66

2 Neuchâtel 2.17 4.59 11.70 11.75 11.39
3 Winterthur – Schaffhausen 5.13 4.45 7.68 11.10 5.93
4 Zurich 3.24 4.24 7.71 8.66 9.05
5 Lausanne 1.91 3.70 6.48 6.41 7.88
6 Geneva 2.15 1.50 3.76 5.79 4.81
7 St. Gallen 1.96 2.68 3.90 5.14 5.12
8 Fribourg 2.08 1.75 5.60 4.97 5.54
9 Biel/Bienne 2.10 1.93 3.43 4.42 2.88
10 Luzern 1.90 2.42 4.09 4.07 3.52
11 Lugano 1.44 2.17 3.99 3.27 4.07
12 Aarau – Olten 0.87 1.26 1.88 2.59 2.91
13 Bern 0.90 1.04 1.85 1.84 1.29
… … … … … … …
16 Sion 0.96 0.19 0.57 0.39 0.61
Switzerland 2.67 3.05 5.63 6.68 6.28
Mean 2.37 2.61 5.00 5.79 5.38
Median 2.08 2.17 3.99 4.97 4.81
Gini 0.25 0.33 0.36 0.38 0.34
EPO by applicants located in Switzerland – Employment basins
Source: Personal elaboration based on OECD REGPAT database (June 2012).w

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 7.20 Evolution of the number of patent applications per 10,000 inhabitants at
the EPO by inventors located in Switzerland, 1981–2008
Source: Personal elaboration based on OECD REGPAT database (June 2012) and FSO (2012b).
we can see that it is almost entirely driven by the inventive performance of

the district de la Sarine.
Analogously, Figure 7.20 illustrates the evolution of the number of patent
applications per 10,000 inhabitants at the inventor level over the period
1981–2008. As emphasized, the growth of patent applications per 10,000
inhabitants shows a similar trend to the evolution of the total number of
patent applications and increases from less than 2 patent applications per
10,000 inhabitants in 1981 to more than 4 between 2004 and 2007.
Figures 7.21–7.24 present the spatial distribution of patent applications
per 10,000 inhabitants at the inventor level across cantons, districts, main
regions, and employment basins. Although the geographical distribution of
inventive activity as measured by gini coefficients is more evenly dispersed
across the Swiss territory than at the applicant level, a similar concentration
of inventive activity can be observed in the western and north-eastern parts
of Switzerland. The more homogeneous dispersion of inventive activity at
the inventor level is not particularly surprising as economic activity (repre-
sented by firms, research centers, academic institutions, etc.) tends to be
more concentrated in a smaller number of locations (such as urban areas)
than population that is more widespread across the territory (people living
in rural municipalities and working in urban centers).
As at the applicant level, weighted numbers of patent applications provide
a more accurate picture of the inventive performance of regions and lessen
issues related to the mobility of inventors. For instance, while the canton
of Zurich recorded the largest number of total patent applications at the
inventor level and the canton of Basel-City ranked seventh, in terms of patent

Patent applications per 10,000 inhabitants, inventor level, 2005
Legend: <3 3–5 5–10 >10
Rank
Canton 1985 1995 2001 2005 2008
2005
1 Schaffhausen SH 2.84 3.57 6.41 12.50 4.77
2 Zug ZG 6.77 6.09 8.31 7.91 9.66
3 Basel-City BS 3.37 3.14 6.49 7.35 6.18
4 Neuchâtel NE 1.99 2.67 7.47 6.85 6.22
5 Basel-Country BL 5.23 3.57 4.79 6.65 4.95
6 Zurich ZH 3.45 3.33 4.83 5.89 4.96
7 Aargau AG 3.31 4.57 6.69 5.38 5.93
8 Vaud VD 1.89 2.45 4.32 4.63 5.31
9 St. Gallen SG 1.80 2.40 3.76 4.51 3.47
10 Schwyz SZ 0.75 1.62 2.89 3.92 4.66
11 Thurgau TG 1.23 1.86 3.61 3.37 3.26
12 Appenzell Innerrhoden AI 0.00 0.14 2.33 3.33 6.79
13 Fribourg/Freiburg FR 1.70 2.57 3.42 3.07 2.72
… … … … … … … …
26 Uri UR 0.10 1.11 1.52 0.14 0.38
Switzerland 2.30 2.39 3.87 4.26 3.95
Mean 2.06 2.11 3.65 3.99 3.93
Median 1.64 1.56 2.94 3.05 3.32
Gini 0.40 0.33 0.28 0.30 0.27
F
EPO by inventors located in Switzerland – Cantons

Legend: <1 1–3 3–6 6–10 >10
Rank
District 1985 1995 2001 2005 2008
2005
1 Bezirk Reiat SH 5.06 1.89 20.96 18.21 4.06
2 Bezirk Schaffhausen SH 2.50 4.37 5.17 14.04 5.63
3 District de Neuchâtel NE 2.73 4.39 15.08 12.74 7.96
4 Bezirk Oberklettgau SH 1.59 0.00 4.21 12.45 4.96
5 District de Lavaux-Oron VD 2.95 2.92 7.35 10.71 10.93
6 Bezirk Rheinfelden AG 6.45 4.13 6.27 9.24 9.65
7 Bezirk Arlesheim BL 5.98 4.35 5.89 8.92 6.26
8 Bezirk Baden AG 5.12 7.23 13.04 8.91 11.35
9 Bezirk Zurich ZH 3.58 3.11 6.46 8.01 5.99
10 Kanton Zug ZG 6.77 6.09 8.31 7.91 9.66
11 Wahlkreis Rheintal SG 2.38 4.05 8.70 7.81 6.09
12 Bezirk Meilen ZH 4.63 4.07 6.02 7.79 5.00
13 Bezirk Imboden GR 1.27 7.18 5.88 7.48 7.38
… … … … … … … …
150 District de Saint-Maurice VS 0.00 1.09 1.66 0.00 1.88
Switzerland 2.30 2.39 3.87 4.26 3.95
Mean 1.79 2.02 3.28 3.44 3.51
Median 1.41 1.48 2.64 2.84 3.00
Gini 0.48 0.49 0.41 0.43 0.41
EPO by inventors located in Switzerland – Districts

Legend: <3 3-4 4-6 >6
Rank
Main Region 1985 1995 2001 2005 2008
2005
1 Northwestern Switzerland 3.83 4.02 6.16 6.08 5.72
2 Zurich 3.45 3.33 4.83 5.89 4.96
3 Eastern Switzerland 1.60 2.03 3.46 4.17 3.52
4 Central Switzerland 1.91 2.10 3.68 3.67 4.21
5 Lake Geneva region 1.92 1.74 3.17 3.44 3.60
6 Espace Mittelland 1.52 1.80 3.04 3.26 2.84
7 Ticino 1.58 1.34 2.10 2.35 2.57
Switzerland 2.30 2.39 3.87 4.26 3.95
Mean 2.26 2.34 3.78 4.12 3.92
Median 1.91 2.03 3.46 3.67 3.60
Gini 0.15 0.15 0.13 0.15 0.12
EPO by inventors located in Switzerland – Main regions

Legend: <2 2–4 4–6 >6
Rank
Employment Basin 1985 1995 2001 2005 2008
2005
1 Basel 4.34 3.58 5.51 6.88 5.61
2 Neuchâtel 1.97 2.83 7.16 6.67 5.92
3 Winterthur – Schaffhausen 3.19 3.16 4.70 6.53 4.21
4 Zurich 3.35 3.75 5.43 5.76 5.71
5 Lausanne 1.79 2.35 4.11 4.47 5.71
6 St. Gallen 1.70 2.00 3.79 4.07 3.12
7 Biel/Bienne 2.23 2.02 3.11 3.61 2.78
8 Lugano 1.86 1.55 2.82 3.27 3.03
9 Geneva 2.53 1.44 2.86 3.23 2.15
10 Aarau – Olten 1.49 2.12 3.19 3.18 3.47
11 Fribourg 1.66 2.49 3.31 3.01 2.72
12 Luzern 1.19 1.42 2.86 2.72 2.89
13 Bern 1.17 1.20 2.18 2.58 2.00
… … … … … … …
16 Sion 1.01 0.83 1.39 1.13 0.91
Switzerland 2.30 2.39 3.87 4.26 3.95
Mean 1.99 2.08 3.49 3.77 3.49
Median 1.75 2.01 3.15 3.25 3.08
Gini 0.21 0.23 0.24 0.26 0.23
EPO by inventors located in Switzerland – Employment basins

applications per inhabitant the canton of Basel-City ranked third and the
canton of Zurich sixth. It is worth noting that a certain consistency between
the top inventive regions in terms of patent applications per inhabitant at
the applicant and inventor level can be emphasized. At the cantonal level
for instance, eight cantons appear in the top ten of both series. Moreover,
this dual analysis at the level of both applicants and inventors is particularly
useful to offset the inherent weaknesses of each series. As it has already been
pointed out, while the inventive performance of a region measured at the
applicant level may reflect the activity of a single (or a small number of)
firm(s) (i.e. MNEs) specialized in patent applications, it is unlikely that the
inventive performance of the region in question has been overestimated if it
also records top-notch results at the inventor level. If we look, for instance,
at the District de la Sarine in the canton of Fribourg, as well as driving the
inventive performance of the canton at the applicant level, it also leads
patenting activity at the inventor level.
While patent applications per inhabitant are already a good indicator of
the inventive performance of regions, a weighting by employee gives an
even better representation as it divides the number of patent applications by
the number of people participating in the economic and innovative effort.
Figures 7.25–7.32 illustrate the spatial distribution of patent applications per
10,000 employees at the applicant and inventor level for the years 2001,
2005, and 2008 with a similar focus on year 2005.17
As emphasized at the applicant level (Figures 7.25–7.28), and in line with
what has been noticed so far, the spatial distribution of inventive activities
measured through patent applications per employee tends to be concen-
trated in the western and north-eastern part of Switzerland and gini coef-
ficients increase in inverse proportion to the size of the geographical unit
of analysis. Regarding the inventive performance of regions, the perspective
is also relatively analogous to what has been put forward in terms of patent
applications per inhabitant. For example, among the top ten most inventive
cantons in terms of patent applications per employee, nine are similar to
the top ten per inhabitant. Similar observations can be made at the inventor
level.
What is, however, more interesting to assess is the differences between
the two patent series (applicants and inventors). As already underlined,
results at the applicant level may be biased by a few firms (i.e. subsidiaries
of MNEs) specialized in patent filing. As the implantation of such firms may
be motivated by fiscal considerations and some Swiss cantons such as Zug
or Nidwalden – ranked respectively second and fourth in terms of patent
applications per 10,000 employees at the applicant level – are widely known
for their attractive tax systems and the presence of many affiliates of MNEs
employing sometimes no or very few employees (firms known as “mailbox
companies”), inventive performance measured at the applicant level must
be interpreted with caution (OECD, 2009b, p. 63; LesEchos.fr, 2010, Internet

Patent applications per 10,000 employees, applicant level, 2005
Legend: <5 5–10 10–50 >50
Rank
Canton 2001 2005 2008
2005
1 Schaffhausen SH 56.06 81.03 30.30
2 Zug ZG 54.05 73.09 57.62
3 Basel-City BS 44.23 66.81 51.45
4 Nidwalden NW 78.83 66.59 64.27
5 Neuchâtel NE 28.53 29.55 27.05
6 Basel-Country BL 16.29 20.58 21.05
7 Vaud VD 15.91 17.24 19.16
8 Zurich ZH 10.83 14.35 13.00
9 Fribourg / Freiburg FR 15.13 13.78 14.96
10 St. Gallen SG 9.66 12.75 11.45
11 Aargau AG 12.15 11.00 13.87
12 Appenzell Innerrhoden AI 5.36 10.73 18.49
13 Geneva GE 6.62 10.47 8.80
… … … … … …
26 Valais / Wallis VS 2.45 1.86 1.67
Switzerland 12.29 15.18 13.56
Mean 16.08 19.48 16.78
Median 7.27 10.23 12.71
Gini 0.54 0.51 0.49
Figure 7.25 Spatial distribution of patent applications per 10,000 employees at the
EPO by applicants located in Switzerland – Cantons

Legend: <1 1–10 10–20 20–50 >50
Rank
District Canton 2001 2005 2008
2005
1 Bezirk Waldenburg BL 54.42 131.13 136.87
2 Bezirk Schaffhausen SH 73.22 106.37 38.52
3 Kanton Zug ZG 54.05 73.09 57.62
4 Kanton Basel-City BS 44.23 66.81 51.45
5 Kanton Nidwalden NW 78.83 66.59 64.27
6 District de la Riviera-Pays-d'Enhaut VD 65.34 44.37 96.50
7 District de Neuchâtel NE 49.41 42.92 47.83
8 District de Lavaux-Oron VD 49.45 36.25 36.35
9 Bezirk Imboden GR 30.64 35.54 35.34
10 District du Locle NE 8.22 31.52 30.85
11 Wahlkreis Rheintal SG 26.80 30.08 22.15
12 District de Nyon VD 17.39 29.20 19.23
13 Bezirk Lebern SO 20.70 28.12 14.81
… … … … … …
150 Bezirk Raron VS 2.56 0.00 0.00
Switzerland 12.29 15.18 13.56
Mean 9.05 10.84 9.92
Median 4.53 5.53 5.08
Gini 0.61 0.62 0.62
EPO by applicants located in Switzerland – Districts

Legend: <5 5–10 10–15 >15
Rank 2005 Main Region 2001 2005 2008

1 Nordwestern Switzerland 22.37 29.22 25.99
2 Central Switzerland 17.71 22.43 18.87
3 Eastern Switzerland 11.45 14.75 11.53
4 Zurich 10.83 14.35 13.00
5 Lake Geneva region 10.02 11.89 12.11
6 Espace Mittelland 8.71 9.09 7.84
7 Ticino 5.52 4.92 6.36
Switzerland 12.29 15.18 13.56
Mean 12.37 15.24 13.67
Median 10.83 14.35 12.11
Gini 0.18 0.23 0.19
EPO by applicants located in Switzerland – Main regions

Legend: <5 5–10 10–20 >20
Rank
Employment basin 2001 2005 2008
2005
1 Basel 28.33 41.17 33.62
2 Winterthur – Schaffhausen 19.18 29.13 14.74
3 Neuchâtel 26.83 27.93 25.15
4 Zurich 15.01 18.04 17.77
5 Lausanne 15.14 15.59 18.44
6 Fribourg 14.70 13.55 14.96
7 St. Gallen 9.02 12.19 11.54
8 Geneva 7.70 12.04 9.20
9 Biel/Bienne 8.16 11.10 6.84
10 Luzern 9.68 9.90 8.22
11 Lugano 7.60 6.29 7.37
12 Aarau – Olten 4.40 6.23 6.63
13 Bern 3.92 3.98 2.70
… … … … …
16 Sion 1.43 1.00 1.54
Switzerland 12.29 15.18 13.56
Mean 11.19 13.43 11.83
Median 8.59 11.57 8.71
Gini 0.36 0.38 0.34
EPO by applicants located in Switzerland – Employment basins

Patent applications per 10,000 employees, inventor level, 2005
Legend: <5 5–10 10–15 >15
Rank
Canton 2001 2005 2008
2005
1 Schaffhausen SH 14.79 29.48 10.62
2 Basel-Country BL 12.19 17.57 12.34
3 Neuchâtel NE 16.96 16.19 13.64
4 Aargau AG 16.43 13.93 14.46
5 Zug ZG 14.16 13.68 14.99
6 Zurich ZH 9.01 11.93 9.56
7 Vaud VD 10.22 11.38 12.44
8 Schwyz SZ 7.76 10.85 12.29
9 Basel-City BS 9.23 10.64 8.52
10 St. Gallen SG 8.42 10.32 7.58
11 Appenzell Innerrhoden AI 6.25 8.94 17.65
12 Thurgau TG 9.24 8.86 8.05
13 Fribourg / Freiburg FR 9.01 8.39 7.40
… … … … … …
26 Uri UR 4.06 0.39 0.98
Switzerland 8.46 9.67 8.54
Mean 8.21 9.25 8.75
Median 7.40 7.82 8.19
Gini 0.25 0.27 0.25
EPO by inventors located in Switzerland – Cantons

Legend: <1 1–10 10–20 20–40 >40
Rank
District 2001 2005 2008
2005
1 Bezirk Oberklettgau SH 17.90 54.09 20.26
2 Bezirk Reiat SH 56.27 51.40 11.38
3 District de Lavaux-Oron VD 29.03 42.84 42.86
4 Bezirk Schaffhausen SH 10.77 29.71 11.11
5 Bezirk Meilen ZH 19.40 26.93 17.09
6 Bezirk Rheinfelden AG 15.27 24.43 25.43
7 Bezirk Imboden GR 17.96 23.90 22.96
8 District de Neuchâtel NE 26.16 23.15 14.23
9 Bezirk Arlesheim BL 14.68 23.13 15.40
10 Bezirk Pfäffikon ZH 10.02 22.87 18.03
11 District du Val-de-Ruz NE 10.85 21.63 17.60
12 Bezirk Hinwil ZH 17.48 21.47 17.98
13 Bezirk Baden AG 29.90 21.39 25.01
… … … … … …
150 District de Saint-Maurice VS 5.95 0.00 7.12
Mean 8.57 9.36 9.31
Median 7.22 7.15 7.45
Gini 0.43 0.44 0.44
EPO by inventors located in Switzerland – Districts

Legend: <6 6–10 >10
Rank
Main Region 2001 2005 2008
2005
1 Northwestern 13.40 13.80 12.32
Switzerland
2 Zurich 9.01 11.93 9.56
3 Eastern 8.03 9.96 8.01
Switzerland
4 Central 8.37 8.54 9.25
Switzerland
5 Lake Geneva 7.12 7.93 7.85
region
6 Espace Mittelland 7.04 7.78 6.51
7 Ticino 4.45 5.11 5.30
Mean 8.20 9.29 8.40
Median 8.03 8.54 8.01
Gini 0.10 0.13 0.11
EPO by inventors located in Switzerland – Main regions

Legend: <5 5–8 8–12 >12
Rank
Employment bassin 2001 2005 2008
2005
1 Winterthur – Schaffhausen 11.75 17.15 10.48
2 Neuchâtel 16.42 15.84 13.08
3 Basel 11.17 14.51 11.31
4 Zurich 10.56 12.00 11.22
5 Lausanne 9.60 10.86 13.36
6 St. Gallen 8.78 9.67 7.04
7 Biel/Bienne 7.40 9.06 6.62
8 Fribourg 8.70 8.20 7.35
9 Aarau – Olten 7.48 7.66 7.90
10 Geneva 5.86 6.71 4.11
11 Luzern 6.76 6.62 6.76
12 Lugano 5.37 6.28 5.49
13 Bern 4.63 5.59 4.17
… … … … …
16 Sion 3.49 2.90 2.29
Mean 7.87 8.80 7.78
Median 7.44 7.93 7.19
Gini 0.24 0.25 0.23
EPO by inventors located in Switzerland – Employment basins

source; Swissinfo.ch, 2011, Internet source; The Wall Street Journal, 2011,
Internet source; Credit Suisse, 2012). A good way to compensate for poten-
tial biases at the applicant level is to analyze the situation at the inventor
level. If a region presents high patenting activity both at the applicant and
at the inventor level, it is likely that this region is particularly inventive. By
comparing for instance the top ten cantons in terms of patent applications
per 10,000 employees (Figures 7.25 and 7.29) at the applicant and inventor
levels, eight appear in both series,18 suggesting a certain consistency in
results. Regarding the cantons of Zug and Nidwalden, while the former still
shows above-average inventive performance at the inventor level (ranking
fourth), the latter stands well below the Swiss average (16th with 6.97 patents
per 10,000 employees). Although further investigations should be made, this
observation nevertheless calls into question the good inventive performance
of the canton of Nidwalden as measured at the applicant level.
As emphasized in this chapter, information contained in patent application

documents makes patent data particularly suitable to an investigation of
the geographical features of inventive activity. Based on databases of patent
applications at the EPO, this chapter focused on the analysis of the Swiss
geography of invention.
As pointed out, Switzerland is a particularly inventive country in terms of
patent applications at the EPO. These results confirm other studies that have
underlined the country’s high innovative performance. However, inven-
tive activities are relatively unevenly distributed across the Swiss territory.
Although Switzerland could be seen from an international perspective as
a single urbanization from Lake Geneva to Lake Constance, the inventive
performance of the Swiss regions significantly varies from one to another.
For example, while the canton of Schaffhausen recorded almost 30 patent
applications per 10,000 employees at the inventor level in 2005, the canton
of Uri reported only 0.39 patent applications per 10,000 employees. Similar
discrepancies can be seen between more comparable cantons in terms of total
number of employees. For example, the canton of Basel-Country recorded
more than 17 patent applications per 10,000 employees at the inventor level
in 2005, the canton of Solothurn only 7 and the canton of Valais just over
3.19 These observations confirm the theoretical developments presented in
the second part of this dissertation stressing the tendency of innovative
activities to concentrate in certain regions.
Although complementary analyses of the economic impact of patent
applications on economic variables such as GDP per capita or average wages
at the regional level would have been particularly interesting, the lack of

quality regionalized data in Switzerland unfortunately prevents such inves-

tigations.20 Analyses across OECD countries have nevertheless pointed out
a positive relationship between patent applications per inhabitant and GDP
per capita, thus confirming to some extent the crucial role of invention and
innovation on economic competitiveness.

8
Sectoral Distribution of Inventive
Activity and Specialization Patterns –
Towards an Identification of
Switzerland’s Main Inventive
Clusters
As pointed out in the previous chapter, inventive activity is unevenly distrib-

uted across the Swiss territory and this unevenness is even more obvious
at the level of small geographical units of analysis. Despite the unequal
levels of inventive performance between regions, a certain concentration
of inventive activity has been observed in the western and north-eastern
parts of Switzerland. The goal of this section is to go one step further and to
investigate in more detail the specialization patterns of inventive activity in
Switzerland by conducting sectoral-level analyzes and identifying the coun-
try’s main inventive clusters.1 As argued in the second part of this disser-
tation, economic and innovative activities linked by commonalities and
complementarities tend to concentrate in certain geographical areas and to
form what has been called in the literature clusters or regional innovation
systems (i.a. Marshall, 1890/1916; Porter, 1990, 1998a; Krugman, 1991a, b;
Nelson, 1993; Freeman, 1995; Cooke, 1998). Despite the widening of the
world economy, these “evolutionary phenomena of economic geography”
are still a crucial source of innovation, productivity growth, and competi-
tiveness as they give access to precious location-bound assets (such as tacit
knowledge) that cannot be easily transferred across locations or accessed
from a foreign location.
In order to provide a better understanding of the spatial concentration of
inventive activity in Switzerland, this chapter has been broken down in two
sections. Section 8.1 examines the sectoral distribution of inventive activity
across the Swiss territory. Through various tables, this section emphasizes
the sectors in which the most patents have been requested by applicants
and inventors located in Switzerland as well as their regional features. Based
on these results, Section 8.2 explores the specialization pattern of inventive
181

activity across the Swiss regions. By relying on statistical indicators of disper-

sion and specialization, this section points out the main inventive clusters
in Switzerland.
Along with Chapter 7, this chapter provides an in-depth descriptive
analysis of the distribution and concentration of inventive activity across
the Swiss territory. This original inventive profile of Switzerland reveals the
country’s invention hubs and provides unique insights into the country’s
main sources of invention and competitiveness.
8.1 The sectoral distribution of inventive activity

in Switzerland
As patents are classified by technological fields (IPC)2 and not by indus-

trial sectors, each patent application has been linked to an industrial sector
(NACE Rev. 1.1)3 according to a concordance table developed by Schmoch
et al. (2003). As their concordance table does not cover the whole spectrum
of technological categories, some patent applications had to be removed
from the original sample, which explains why the total number of patent
applications highlighted below differs from that in the previous chapter.4 It
is also worth noting that although the propensity to patent tends to differ
from sector to sector, the goal of this section is not to evaluate the inventive
performance of the regions but to assess the spatial distribution of inventive
activity at the sectoral level.
Based on this methodology, Tables 8.1 and 8.2 illustrate the sectoral distri-
bution of patent applications at both the applicant and inventor levels for
the periods 1977–2008 and 2000–2008.
As shown by Table 8.1, the pharmaceutical sector recorded the largest
number of patent applications (10,751 out of 83,034) at the EPO by appli-
cants located in Switzerland over the period 1977–2008. While 13 percent of
total patent applications were in the pharmaceutical sector, the ten leading
sectors in terms of number of patent applications (pharmaceuticals, special-
purpose machinery, basic chemical, medical equipment, rubber and plas-
tics products, measuring instruments, general-purpose machinery, office
machinery and computers, fabricated metal products, and machine tools)
accounted for around 64 percent of the total. As revealed by gini coefficients,
each sector presents distinctive geographical features. Over the period 1977–
2008, Pesticides, agro-chemical products (gini = 0.92), Soap, detergents, toilet
products (gini = 0.90), Food, beverages (gini = 0.87), Tobacco products (gini =
0.87), and Pharmaceuticals (gini = 0.84) are the sectors that show the highest
concentration, while Non-metallic mineral products (gini = 0.45), Furniture,
consumer goods (gini = 0.49), Lighting equipment (gini = 0.49), Fabricated
metal products (gini = 0.52), Basic metals (gini = 0. 53), and Wood products
(gini = 0.53) are the most uniformly distributed. Moreover, the results from
the two time series (1977–2008 and 2000–2008) present a certain symmetry.

Table 8.1 Sectoral distribution of patent applications at the EPO by applicants established in Switzerland 1977–2008 and
2000–2008
Total Rank Total

Rank patent Cantonal Rank variation patent Cantonal
1977– NACE applications gini 2000– 1977–2008 – applications gini Dynamism
2008 code NACE name 1977–2008 % 1977–2008 2008 2000–2008 2000–2008 % 2000–2008 (in %)
1 24.4 Pharmaceuticals 10,751 12.95 0.84 1 0 6,308 15.76 0.84 58.68

2 29.5 Special-purpose 7,523 9.06 0.58 3 −1 2,815 7.04 0.61 37.42
machinery
3 24.1 Basic chemicals 7,192 8.66 0.79 4 −1 2,606 6.51 0.71 36.24
4 33.1 Medical equipment 6,869 8.27 0.60 2 +2 4,435 11.08 0.66 64.56
5 25 Rubber and plastics 4,463 5.38 0.56 6 −1 2,140 5.35 0.58 47.94
products
6 33.2 Measuring instruments 4,330 5.21 0.63 5 +1 2,412 6.03 0.68 55.71
7 29.2 General-purpose 4,121 4.96 0.61 7 0 1,831 4.58 0.68 44.45
2014-05-25
machinery
8 30 Office machinery, 2,724 3.28 0.60 8 0 1,671 4.18 0.62 61.37
computers
9 28 Fabricated metal 2,707 3.26 0.52 10 −1 1,125 2.81 0.57 41.56
products
10 29.4 Machine tools 2,446 2.95 0.55 14 −4 883 2.21 0.55 36.09
11 32.2 Signal transmission, 2,319 2.79 0.61 9 +2 1,301 3.25 0.62 56.11
telecommunications
12 29.1 Energy machinery 2,268 2.73 0.66 11 +1 993 2.48 0.70 43.78
13 15 Food, beverages 2,097 2.53 0.87 12 +1 947 2.37 0.87 45.19
14 26 Non-metallic mineral 1,930 2.33 0.45 16 −2 782 1.96 0.56 40.52
products
15 36 Furniture, consumer 1,840 2.22 0.49 17 −2 736 1.84 0.53 40.01
goods
16 29.7 Domestic appliances 1,695 2.04 0.55 15 +1 849 2.12 0.64 50.08
Continued

Table 8.1 Continued
Total Rank Total

2008 code NACE name 1977–2008 % 1977–2008 2008 2000–2008 2000–2008 % 2000–2008 (in %)
17 34 Motor vehicles 1,661 2.00 0.55 19 −2 697 1.74 0.56 41.98

18 33.5 Watches, clocks 1,582 1.91 0.79 13 +5 916 2.29 0.81 57.94
19 27 Basic metals 1,411 1.70 0.53 22 −3 502 1.26 0.56 35.60
20 31.2, Electric distribution, 1,392 1.68 0.65 21 −1 556 1.39 0.61 39.98
31.3 control, wire, cable
21 32.1 Electronic components 1,271 1.53 0.68 18 +3 703 1.76 0.63 55.33
22 33.4 Optical instruments 1,249 1.50 0.60 24 −2 483 1.21 0.64 38.72
2014-05-25
23 31.6 Other electrical 998 1.20 0.62 23 0 489 1.22 0.60 49.08
equipment
24 35 Other transport 916 1.10 0.63 26 −2 349 0.87 0.72 38.11
equipment
25 32.3 Television and radio 850 1.02 0.71 20 +5 628 1.57 0.77 73.90
receivers, audiovisual
electronics
26 24.2 Pesticides, agro- 848 1.02 0.92 29 −3 306 0.77 0.91 36.12
chemical products
27 33.3 Industrial process 700 0.84 0.57 25 +2 415 1.04 0.67 59.35
control equipment
28 31.1 Electric motors, 698 0.84 0.77 28 0 308 0.77 0.80 44.06
generators,
transformers
29 24.6 Other chemicals 681 0.82 0.71 31 −2 253 0.63 0.72 37.20

30 29.3 Agricultural and forestry 567 0.68 0.70 27 +3 321 0.80 0.80 56.67
machinery
31 21 Paper 546 0.66 0.67 30 +1 269 0.67 0.71 49.28
32 17 Textiles 536 0.65 0.81 34 −2 111 0.28 0.74 20.69
33 29.6 Weapons and 294 0.36 0.73 36 −3 104 0.26 0.82 35.27
ammunition
34 19 Leather articles 274 0.33 0.78 37 −3 80 0.20 0.83 29.47
35 24.5 Soap, detergents, toilet 231 0.28 0.90 35 0 105 0.26 0.88 45.53
preparations
2014-05-25
36 31.4 Accumulators, battery 227 0.27 0.64 32 +4 146 0.37 0.68 64.55
37 16 Tobacco products 202 0.24 0.87 33 +4 145 0.36 0.93 71.78
38 20 Wood products 179 0.22 0.53 38 0 73 0.18 0.63 40.67
39 31.5 Lightening equipment 137 0.16 0.49 41 −2 52 0.13 0.62 38.32
40 23 Petroleum products, 110 0.13 0.64 40 0 53 0.13 0.68 48.30
nuclear fuel
41 18 Wearing apparel 98 0.12 0.70 39 +2 59 0.15 0.82 59.70
42 24.7 Man-made fibers 67 0.08 0.83 42 0 37 0.09 0.88 55.22
43 24.3 Paints, varnishes 16 0.02 0.83 43 0 7 0.02 0.83 42.42
Total 83,034 100.00 0.55 40,018 100.00 0.55 48.19
Source: Personal elaboration based on OECD REGPAT Database (June 2012).

Table 8.2 Sectoral distribution of patent applications at the EPO by inventors established in Switzerland 1977–2008 and 2000–2008
Total Rank Total

2008 code NACE name 1977–2008 % 1977–2008 2008 2000–2008 2000–2008 % 2000–2008 (in %)
1 29.5 Special-purpose machinery 5,993 9.87 0.57 3 −2 1,979 7.62 0.59 33.02
2 24.4 Pharmaceuticals 5,724 9.43 0.71 1 +1 2,852 10.99 0.71 49.84
3 24.1 Basic chemical 4,790 7.89 0.63 4 −1 1,635 6.30 0.54 34.14
4 33.1 Medical equipment 4,391 7.23 0.52 2 +2 2,498 9.62 0.55 56.90
5 33.2 Measuring instruments 3,167 5.22 0.57 5 0 1,515 5.84 0.60 47.84
6 29.2 General-purpose machinery 3,059 5.04 0.59 6 0 1,279 4.93 0.63 41.83
7 25 Rubber and plastics products 2,754 4.54 0.47 8 −1 1,154 4.45 0.49 41.93
8 28 Fabricated metal products 2,416 3.98 0.56 10 −2 938 3.61 0.58 38.83
9 30 Office machinery, computers 2,246 3.70 0.61 7 +2 1,248 4.81 0.60 55.55
10 29.4 Machine tools 2,176 3.58 0.57 12 −2 768 2.96 0.58 35.32
2014-05-25
11 32.2 Signal transmission, 2,109 3.47 0.63 9 +2 1,046 4.03 0.63 49.61
telecommunications
12 29.1 Energy machinery 1,816 2.99 0.65 14 −2 737 2.84 0.67 40.59
13 26 Non-metallic mineral 1,587 2.61 0.47 15 −2 585 2.25 0.46 36.86
products
14 29.7 Domestic appliances 1,522 2.51 0.54 13 +1 740 2.85 0.56 48.66
15 36 Furniture, consumer goods 1,496 2.47 0.50 16 −1 578 2.23 0.56 38.64
16 33.5 Watches, clocks 1,475 2.43 0.80 11 +5 808 3.11 0.82 54.82
17 34 Motor vehicles 1,415 2.33 0.52 18 −1 533 2.06 0.54 37.73
18 27 Basic metals 1,190 1.96 0.57 22 −4 389 1.50 0.54 32.69
19 32.1 Electronic components 1,125 1.85 0.69 17 +2 555 2.14 0.66 49.35
20 15 Food, beverages 1,038 1.71 0.76 20 0 467 1.80 0.76 44.96
21 33.4 Optical instruments 1,019 1.68 0.56 21 0 394 1.52 0.59 38.69
22 31.2, Electric distribution, control, 893 1.47 0.64 24 −2 350 1.35 0.67 39.26
31.3 wire, cable
23 31.6 Other electrical equipment 833 1.37 0.69 23 0 385 1.49 0.67 46.29

24 32.3 Television and radio 822 1.35 0.72 19 +5 524 2.02 0.74 63.71
receivers, audiovisual
electronics
25 35 Other transport equipment 818 1.35 0.62 25 0 287 1.11 0.66 35.09
26 24.2 Pesticides, agro-chemical 617 1.02 0.83 29 −3 196 0.76 0.87 31.80
products
27 29.3 Agricultural and forestry 560 0.92 0.76 32 −5 96 0.37 0.52 17.17
machinery
28 33.3 Industrial process control 513 0.85 0.57 26 +2 253 0.98 0.64 49.41
equipment
29 31.1 Electric motors, generators, 500 0.83 0.74 28 +1 206 0.80 0.75 41.23
transformers
30 24.6 Other chemicals 488 0.80 0.58 30 0 184 0.71 0.52 37.69
31 21 Paper 441 0.73 0.64 27 +4 207 0.80 0.69 47.02
32 17 Textiles 412 0.68 0.70 33 −1 80 0.31 0.64 19.53
2014-05-25
33 29.6 Weapons, ammunition 245 0.40 0.62 34 −1 68 0.26 0.68 27.77
34 31.4 Accumulators, batteries 191 0.32 0.69 31 +3 105 0.41 0.70 55.21
35 20 Wood products 165 0.27 0.63 35 0 55 0.21 0.68 33.59
36 24.5 Soap, detergents, toilet 139 0.23 0.78 39 −3 37 0.15 0.79 27.17
products
37 19 Leather articles 126 0.21 0.69 41 −4 35 0.14 0.69 28.12
38 31.5 Lighting equipment 118 0.20 0.53 36 +2 47 0.18 0.67 39.85
39 16 Tobacco products 95 0.16 0.75 37 +2 42 0.16 0.82 44.54
40 23 Petroleum products, nuclear 85 0.14 0.64 40 0 37 0.14 0.74 43.25
fuel
41 18 Apparel 79 0.13 0.70 38 +3 41 0.16 0.80 52.27
42 24.7 Man-made fibers 36 0.06 0.85 42 0 10 0.04 0.83 28.72
43 24.3 Paints, varnishes 10 0.02 0.81 43 0 6 0.02 0.84 62.91
Total 60,716 100.00 0.50 25,970 100.00 0.50 42.77

The largest rank variation corresponds to a five-place improvement in (32.3)

Television and radio receivers, audiovisual electronics and (33.5) Watches,
clocks. Among the sectors that have shown the highest dynamism in terms
of patent applications over the recent period, (24.4) Pharmaceuticals, (33.1)
Medical equipment, (33.2) Measuring instruments, (30) Office machinery,
computers, (32.2) Signal transmission, telecommunications, (29.7) Domestic
appliances, (33.5) Watches, clocks, (32.1) Electronic components, (32.3)
Television and radio receivers, audiovisual electronics, (33.3) Industrial
process control equipment, (29.3) Agricultural and forestry machinery,
(31.4) Accumulators, battery, (16) Tobacco products, (18) Apparel, and (24.7)
Man-made fibers recorded more than 50 percent of their patent applications
after 2000.
Table 8.2 below illustrates the situation at the inventor level.
With 9.87 percent of total patent applications, (29.5) Special-purpose
machinery was the sector in which the most patent applications were lodged
at the inventor level over the period 1977–2008. (24.4) Pharmaceuticals
ranked a close second with 9.43 percent of the total and was first over the
period 2000–2008 thanks to a dynamism (49.84 percent) above the Swiss
average (42.77 percent). It is worth noting that the sectoral distribution of
patent applications is similar between the two series (applicant and inventor).
Although not in the same order, the top ten sectors in terms of patent appli-
cations identified at the applicant level appear in the top ten at the inventor
level. Regarding the dispersion of inventive activity, in line with what was
noticed in the previous chapter, patenting activity is more evenly distributed
across the Swiss territory. While the distribution of total patent applications
over the period 1977–2008 recorded a gini coefficient of 0.55 at the appli-
cant level, it stood at 0.50 at the inventor level. A certain consistency can
also be noticed between the two time series (1977–2008 and 2000–2008). As
at the applicant level, the largest rank variation was a five-place improve-
ment in (32.3) Television and radio receivers, audiovisual electronics and a
five-place decline in (29.3) Agricultural and forestry machinery. Among the
ten sectors in which the most patent applications were demanded over the
period 1977–2008, nine were similar over the period 2000–2008. Machine
tools (29.4) is the only sector which slid out of the top ten (ranked 12th) in
the recent period.
In order to extend the analysis one step further and to evaluate in more
detail the specialization patterns of inventive activity across the Swiss terri-
tory, the remainder of this section will focus on patent applications lodged
in 2005.5 This emphasis on the year 2005 will allow a comparison of the
distribution of inventive activity (latest complete data available) with the
distribution of productive activity measured through employment data.
Tables 8.3 and 8.4 below illustrate the sectoral distribution of patent applica-
tions at the applicant and inventor level in 2005.

Sectoral Distribution of Inventive Activities 189
Table 8.3 Sectoral distribution of patent applications at the EPO by applicants estab-
lished in Switzerland in 2005
Total
NACE patent Cumulative
Rank code NACE name applications % %
1 24.4 Pharmaceuticals 834 17.07 17.07
2 33.1 Medical equipment 569 11.65 28.72
3 33.2 Measuring instruments 347 7.10 35.83
4 24.1 Basic chemical 316 6.48 42.31
5 29.5 Special-purpose machinery 314 6.44 48.74
6 25 Rubber and plastics products 258 5.29 54.03
7 30 Office machinery, computers 199 4.08 58.11
8 29.2 Non-specific purpose machinery 178 3.64 61.75
9 32.2 Signal transmission, 151 3.09 64.84
telecommunications
10 28 Fabricated metal products 137 2.81 67.65
11 33.5 Watches, clocks 137 2.80 70.46
12 29.1 Energy machinery 116 2.39 72.85
13 26 Non-metallic mineral products 105 2.16 75.00
14 29.4 Machine tools 100 2.05 77.05
15 36 Furniture, consumer goods 97 1.98 79.03
16 29.7 Domestic appliances 91 1.86 80.89
17 32.3 Television and radio receivers, 85 1.74 82.63
audiovisual electronics
18 15 Food, beverages 84 1.72 84.35
19 34 Motor vehicles 81 1.66 86.01
20 32.1 Electronic components 74 1.53 87.54
21 31.2, Electric distribution, control, wire, 71 1.46 89.00
31.3 cable
22 31.6 Other electrical equipment 66 1.36 90.36
23 33.3 Industrial process control 50 1.02 91.38
equipment
24 27 Basic metals 49 1.01 92.40
25 24.2 Pesticides, agro-chemical products 41 0.84 93.23
26 35 Other transport equipment 41 0.84 94.07
27 33.4 Optical instruments 40 0.82 94.90
28 29.3 Agricultural and forestry 33 0.67 95.57
machinery
29 24.6 Other chemicals 31 0.63 96.21
30 21 Paper 27 0.56 96.77
31 16 Tobacco products 24 0.49 97.26
32 31.1 Electric motors, generators, 24 0.49 97.75
transformers
33 31.4 Accumulators, battery 23 0.47 98.22
... ... ... ... ... ...
43 23 Petroleum products, nuclear fuel 3 0.07 100.00
Total 4,889 100.00

Table 8.4 Sectoral distribution of patent applications at the EPO by inventors estab-
lished in Switzerland in 2005
Total
NACE NACE patent Cumulative
Rank code name applications % %
1 24.4 Pharmaceuticals 365 11.75 11.75
2 33.1 Medical equipment 328 10.56 22.31
3 29.5 Special-purpose machinery 236 7.59 29.91
4 33.2 Measuring instruments 215 6.93 36.84
5 24.1 Basic chemicals 194 6.26 43.10
6 30 Office machinery, computers 148 4.77 47.87
7 25 Rubber and plastics products 132 4.27 52.14
8 29.2 General-purpose machinery 122 3.93 56.07
9 33.5 Watches, clocks 114 3.68 59.75
10 28 Fabricated metal products 108 3.47 63.22
11 32.2 Signal transmission, 101 3.26 66.48
telecommunications
12 29.4 Machine tools 87 2.81 69.29
13 26 Non-metallic mineral 87 2.80 72.09
products
14 29.1 Energy machinery 78 2.52 74.62
15 29.7 Domestic appliances 76 2.46 77.07
16 32.3 Television and radio receivers, 71 2.30 79.37
audiovisual electronics
17 36 Furniture, consumer goods 64 2.07 81.44
18 34 Motor vehicles 61 1.97 83.41
19 32.1 Electronic components 60 1.95 85.36
20 31.6 Other electrical equipment 56 1.82 87.18
21 15 Food, beverages 46 1.49 88.66
22 31.2, Electric distribution, control, 43 1.39 90.06
31.3 wire, cable
23 33.4 Optical instruments 39 1.26 91.32
24 35 Other transport equipment 37 1.20 92.52
25 27 Basic metals 34 1.11 93.63
26 33.3 Industrial process control 30 0.99 94.62
equipment
27 24.2 Pesticides, agro-chemical 29 0.93 95.55
products
28 31.4 Accumulators, batteries 20 0.66 96.21
29 21 Paper 19 0.64 96.85
30 24.6 Other chemicals 18 0.59 97.44
31 29.3 Agricultural and forestry 15 0.51 97.95
machinery
32 31.1 Electric motors, generators, 12 0.40 98.35
transformers
33 17 Textiles 8 0.28 98.63
... ... ... ... ... ...
43 24.7 Man-made fibers 1 0.04 100.00
Total 3,112 100.00

As shown in Tables 8.3 and 8.4, respectively 4,889 and 3,112 patent
applications were lodged at the EPO by applicants and inventors located in
Switzerland in 2005. As their sectoral distribution is similar to what has been
shown over the periods 1977–2008 and 2000–2008, the analysis will focus
on the specialization pattern of inventive activity at the level of employment
basins.6 As already underlined, the Swiss territory has been broken down by
the FSO into 16 employment basins by grouping together spatial mobility
regions (FSO, 2012e). The creation of these regions responds to the necessity
to better analyze certain social and spatial phenomena that go beyond official
political jurisdictions. As the innovation process cannot be restricted to legal
administrative divisions, employment basins are particularly appropriate to
Table 8.5 Regional distribution of patent applications at the applicant level for the
ten most inventive sectors in the top three employment basins, 2005
Total Share of
number sector
NACE Employment of patent patents
code NACE name basin applications (in %)
24.4 Pharmaceuticals Basel 505 60.61

(n* = 834) Zurich 155 18.68
Geneva 61 7.41
33.1 Medical equipment Zurich 151 26.59
(n* = 569) Basel 120 21.21
Winterthur-Schaffhausen 106 18.60
33.2 Measuring instruments Basel 115 33.35
(n = 347) Zurich 104 30.04
St. Gallen 44 12.81
24.1 Basic chemicals Basel 137 43.52
(n = 316) Zurich 74 23.36
Lugano 20 6.31
29.5 Special-purpose machinery Zurich 106 33.90
(n = 314) Winterthur-Schaffhausen 48 15.25
Lausanne 43 13.82
25 Rubber and plastics products Zurich 54 20.87
(n = 258) Fribourg 44 17.07
30 Office machinery, computers Zurich 65 33.00
(n = 199) Lausanne 24 12.03
Neuchâtel 21 10.78
29.2 General-purpose machinery Zurich 57 32.30
(n = 178) Lucerne 47 26.40
St. Gallen 14 8.15
32.2 Signal transmission, Zurich 61 40.73
telecommunications
Geneva 16 10.93
28 Fabricated metal products Zurich 51 37.09
(n = 137) St. Gallen 25 18.18
Lucerne 16 11.64
Note: * n = total number of patent applications in sector.


an evaluation of the specialization pattern of inventive activity across the

Swiss territory. Furthermore, the fact that the distribution of the two patent
categories (applicants and inventors) shows the highest level of correlation
at the employment basin level (r = 0.95) confirms to some extent the rele-
vance of this unit of analysis to an understanding of the spatial features of
inventive activity in Switzerland.
Tables 8.5 and 8.6 below show the three employment basins in which the
most patent applications at the applicant and inventor level were lodged
Table 8.6 Regional distribution of patent applications at the inventor level for the ten
most inventive sectors in the top three employment basins, 2005
Total Share of
number sector
NACE NACE Employment of patent patents
code name basin applications (in %)
24.4 Pharmaceuticals Basel 177 48.68

(n* = 365) Zurich 63 17.43
Lausanne 27 7.60
33.1 Medical equipment Zurich 66 20.27
(n = 328) Bern 44 13.49
29.5 Special-purpose machinery Zurich 81 34.59
Bern 19 8.32
33.2 Measuring instruments Zurich 76 35.61
(n = 215) St. Gallen 38 18.01
Basel 23 10.73
24.1 Basic chemicals Zurich 54 27.97
(n = 194) Basel 53 27.32
Lugano 14 7.57
30 Office machinery, computers Zurich 48 32.87
(n = 148) Lausanne 21 14.75
Neuchâtel 17 11.66
25 Rubber and plastics products Zurich 39 29.89
St. Gallen 15 11.54
29.2 General-purpose machinery Zurich 53 44.08
(n = 122) Lucerne 22 18.73
33.5 Watches, clocks Neuchâtel 39 34.56
(n = 114) Biel/Bienne 28 24.99
Lausanne 24 21.04
28 Fabricated metal products Zurich 37 34.62
(n = 108) St. Gallen 15 14.64
Aarau-Olten 9 8.86
Note: * n = total number of patent applications in sector.


in 2005 in the ten most inventive sectors identified in Tables 8.3 and 8.4.7
As emphasized, employment basins recording the largest number of patent
applications (see Figures 7.10 and 7.14) tend to regularly appear in these
top three. For instance, the employment basin of Zurich is ranked in the
top three of each category at the applicant level and in nine of the top ten
categories at the inventor level. As these rankings suffered from size distor-
tion, an analysis in relative terms is necessary to evaluate the inventive posi-
tion of these regions. These two tables nevertheless provide a sketchy picture
of the sectoral distribution of inventive activity across the Swiss territory. As
pointed out, for example, a large majority of patent applications in (24.4)
Pharmaceuticals and (33.5) Watches, clocks come from respectively the
employment basin of Basel and the employment basins of Neuchâtel, Biel/
Bienne, Lausanne, and Geneva.8 While the former is the heart of the Swiss
pharmaceutical industry and home of many pharmaceutical-related firms
such as Novartis, Roche, Actelion, Clariant, Lonza, Syngenta, Auris Medical,
and Basilea pharmaceutica, the latter employment basin is home to many
firms in the watch and clock industry such as the Swatch Group, TAG Heuer,
Rolex, Patek Philippe, Audemars Piguet, and Breitling.
8.2 Specialization patterns and identification of

Switzerland’s main inventive clusters
In order to investigate more thoroughly the specialization patterns of inven-

tive activity in Switzerland, each employment basin’s sectoral speciali-
zation has been measured through a patent indicator of specialization.9
Several authors, including Soete and Wyatt (1983), Soete (1987), Patel and
Pavit (1991), Cantwell (1993), Patel and Vega (1999), Usai and Paci (2000),
Cantwell and Iammarino (2001), Liu and White (2001), and Brusoni and
Geuna (2003), have used similar types of indicator in their research. This
study relies on the index of Revealed Technological Advantage (RTA), which
is, according to the OECD (2009, p. 89), the most frequently used indicator
of specialization. The RTA index is defined as:
∑
m
Yij j =1
Yij
RTAij = :
∑ ∑ ∑
n n m
i =1
Yij i =1 j =1
Yij
in which Yij corresponds to the total number of patent applications lodged

by applicants/inventors located in region (i) in sector (j), ∑ i =1 Yij refers to the
n
total number of patent applications lodged by applicants/inventors in all

regions in sector (j), and ∑ j =1 Yij relates to the total number of patent applica-
m
tions lodged by applicants/inventors located in region (i) in all sectors and

∑ i =1 ∑ j =1 Yij corresponds to the total number of patent applications lodged by
n m
applicants/inventors in all regions and in all sectors.

This index is particularly useful because it provides a measure of the

specialization of a region in relative terms in comparison with other regions
(Paci and Usai, 2000, p. 103). Moreover, and as noted by Paci and Usai (2000,
p. 103), it “has the advantage of being double weighted so that the resulting
description of technological specialization is not influenced by sectoral or
national [in this case regional] differences in the propensity to patent”. In
other words, if a region’s RTA in sector X is greater than 1, it means that the
region is specialized (or has a comparative advantage) in the sector in ques-
tion compared to the other regions, and conversely if the index is below 1.
Tables 8.7 and 8.8 illustrate the specialization patterns of the most inven-
tive sectors across the 16 employment basins at the applicant and inventor
levels in 2005. As patenting activity may vary from one year to another, RTA
indexes for the whole period (1977–2008) give a more accurate picture of
regional specialization and have therefore been indicated in brackets under
each 2005 RTA index.10 The last row of both tables reveals the correlation
between RTA indexes for 2005 and those for the whole period (1977–2008).
As can be seen, they range from 0.99 to 0.22 at the applicant level and from
0.91 to 0.05 at the inventor level. These differences in correlation between
employment basins can be explained either by an evolution of the inven-
tive structure of the region (e.g. implantation of new firms applying for
different types of patents) or simply by the fact that the inventive pattern
of the employment basin was different in 2005 than over the whole period.
It nevertheless seems that the most inventive employment basins in terms
of total number of patent applications tend to show a higher level of corre-
lation than less inventive ones. This observation makes sense as the rate
of patent applications per year is steadier in more inventive employment
basins than in less inventive ones. It is worth noting that Paci and Usai
(2000, p. 106) observed similar correlations in their analysis of European
regions and judged the specialization pattern between their two periods of
analysis as relatively stable.
In Tables 8.7 and 8.8, RTA indexes greater than 1 have been highlighted in
light grey and show employment basins that have a comparative advantage
in the sector in question compared to other regions in 2005. RTA indexes
greater than 2 have been highlighted in dark grey and report employment
basins particularly specialized in the sector in question in 2005. As we have
seen, inventive activity analyzed at the sectoral level underlines a clear
tendency to cluster in certain regions of the Swiss territory.
First, as shown by gini coefficients (see Figures 8.1–8.5), some sectors are
more concentrated in certain regions and others are more homogeneously
distributed across the Swiss territory. Second, each sector’s inventive activity
shows unique geographical concentration patterns. Figure 8.1 emphasizes
the employment basins that are particularly specialized (RTA > 2 both at
the applicant and inventor level) in the most inventive sectors presented in
Tables 8.7 and 8.8. This dual approach based on an analysis at the applicant

Table 8.7 Regional specialization of the top inventive sectors at the applicant level measured through the RTA index, employment basins, 2005
Biel/ Aarau – Winterthur-
NACE name* Geneva Lausanne Sion Fribourg Neuchâtel Bienne Bern Basel Olten Zurich Schaffhausen St. Gallen Chur Lucerne Bellinzona Lugano
Pharmaceuticals 1.30 0.87 0.00 0.12 0.25 0.00 0.23 2.78 0.11 0.65 0.05 0.26 0.00 0.20 0.00 0.98
(1.51) (0.8) (0.5) (0.18) (0.2) (0.01) (0.38) (3.07) (0.32) (0.4) (0.11) (0.14) (0.17) (0.32) (0.29) (1.26)
Medical equipment 1.61 0.82 0.90 0.21 1.17 1.17 1.42 0.97 0.34 0.93 2.11 0.25 0.23 0.42 0.57 0.43
(1.28) (0.7) (0.77) (0.3) (1.09) (1.56) (1.61) (0.82) (0.49) (0.99) (1.88) (0.54) (2.55) (0.76) (0.2) (0.85)
Measuring 0.61 0.90 0.00 0.42 0.66 0.59 0.44 1.53 0.28 1.05 0.49 2.32 0.37 0.21 0.00 0.00
instruments (0.83) (0.68) (0.69) (0.63) (1.42) (0.87) (0.38) (1.19) (0.45) (1.25) (0.57) (1.58) (1.08) (0.32) (0.44) (0.37)
Basic chemical 0.75 0.34 0.81 1.10 0.07 0.00 0.24 1.99 2.34 0.82 0.36 0.23 5.48 0.38 2.06 5.19
(1.19) (0.28) (0.24) (1.28) (0.15) (0.13) (0.21) (2.72) (0.72) (0.51) (0.39) (0.42) (1.18) (0.33) (0.41) (2.47)
2014-05-25
Special-purpose 0.28 1.66 1.64 0.43 0.44 0.44 1.96 0.09 0.76 1.18 1.73 1.78 0.00 2.74 1.04 0.52
machinery (0.31) (1.54) (0.7) (0.51) (0.56) (0.44) (1.2) (0.18) (1) (1.04) (2.58) (1.76) (0.55) (1.8) (0.63) (0.59)
Rubber and plastics 0.68 1.56 3.98 6.66 0.71 0.13 0.90 0.38 1.91 0.73 1.71 0.70 3.23 0.83 2.52 0.64
products (0.44) (2.05) (0.96) (4.92) (0.66) (0.49) (0.78) (0.4) (1.28) (0.93) (1.28) (1.1) (1.37) (0.72) (0.47) (0.62)
Office machinery, 1.50 1.45 0.00 0.39 2.47 1.20 2.35 0.34 0.48 1.15 0.97 0.54 0.00 0.72 0.00 1.65
computers (1.36) (1.17) (0.73) (0.74) (3.2) (0.83) (2.53) (0.28) (0.61) (1.28) (0.89) (0.52) (1.08) (0.49) (0.44) (0.67)
General-purpose 0.30 0.68 0.00 0.22 0.39 0.77 1.30 0.28 1.88 1.13 0.51 1.47 0.72 6.33 0.00 2.31
machinery (0.29) (0.48) (1.79) (0.56) (0.36) (0.54) (0.88) (0.29) (1.14) (1.17) (0.98) (1.67) (1.12) (4.89) (2.2) (1.19)
Signal 1.92 0.72 0.00 0.39 0.91 1.82 3.32 0.06 0.79 1.42 1.73 0.48 0.00 0.32 0.00 1.09
transmission, (1.55) (0.42) (0.28) (0.44) (1.94) (2.18) (3.84) (0.14) (0.38) (1.58) (0.72) (0.75) (0.32) (0.37) (0.56) (0.34)
telecommunications
Fabricated metal 0.26 0.48 3.74 0.00 0.33 1.25 1.12 0.17 2.78 1.29 0.66 3.29 2.81 2.79 0.00 1.20
products (0.46) (0.46) (2.3) (0.4) (0.48) (1.15) (1.76) (0.2) (2.85) (1.33) (0.91) (2.33) (1.92) (1.36) (1.48) (1.68)
Continued

Table 8.7 Continued
Biel/ Aarau – Winterthur-

NACE name* Geneva Lausanne Sion Fribourg Neuchâtel Bienne Bern Basel Olten Zurich Schaffhausen St. Gallen Chur Lucerne Bellinzona Lugano
Watches, clocks 3.85 1.67 3.76 3.42 6.37 8.77 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.17 2.38 0.00
(3.37) (0.92) (1.25) (1.58) (8.04) (12.2) (0.08) (0.04) (0.12) (0.1) (0.18) (0.02) (0.1) (0.13) (0.13) (0.15)
Energy machinery 0.15 0.57 4.41 1.50 0.59 1.47 0.00 0.22 2.04 1.85 1.41 1.08 0.00 0.62 0.00 0.00
(0.68) (0.54) (0.58) (0.92) (0.69) (1.22) (0.47) (0.14) (1.82) (1.88) (1.3) (0.89) (0.24) (0.72) (0.75) (0.89)
Non-metallic mineral 0.50 0.34 0.00 0.55 0.54 0.16 2.56 0.04 0.91 1.31 3.11 1.71 0.00 1.14 0.00 1.17
2014-05-25
products (0.68) (0.77) (2.38) (1.35) (0.47) (0.74) (1.52) (0.27) (1.56) (1.23) (1.46) (1.42) (1.36) (1.82) (1.24) (1.43)
Machine tools 0.53 0.36 0.00 0.00 2.53 5.15 0.97 0.18 3.82 0.73 1.36 1.63 1.29 1.08 16.30 0.82
(1.19) (0.68) (0.54) (0.41) (1.32) (2.96) (1.58) (0.18) (2.97) (0.99) (0.86) (1.78) (1.17) (1.36) (7.61) (1.23)
Furniture, consumer 0.73 0.37 0.00 0.40 1.42 2.48 3.18 0.38 0.49 1.19 0.99 1.68 1.33 1.85 0.00 0.00
goods (1.6) (0.53) (1.87) (0.86) (1.22) (2.21) (1.68) (0.38) (1.17) (1.1) (0.66) (1.3) (1.28) (2.11) (1.28) (1.15)
Domestic appliances 0.00 3.44 0.00 1.29 0.25 3.39 0.85 0.15 5.25 0.69 0.50 2.78 0.00 0.00 0.00 0.90
(0.56) (2.3) (2.01) (0.98) (0.29) (0.83) (1.43) (0.19) (2.93) (1.06) (0.64) (1.72) (1.64) (1.34) (0.74) (1.37)
Television and radio 1.45 1.42 0.00 0.46 4.05 0.40 1.82 0.00 0.00 1.68 0.40 0.21 0.00 0.56 0.00 0.00
receivers, audiovisual (0.85) (1.74) (0) (0.76) (3.35) (0.4) (1.9) (0.06) (0.43) (1.66) (0.54) (0.32) (0) (0.35) (0.47) (0.83)
electronics
Food, beverages 2.10 6.88 0.00 0.00 0.00 0.00 0.46 0.49 1.14 0.08 0.34 1.94 0.00 0.14 0.00 0.00
(1.69) (7.77) (0.89) (0.13) (0.02) (0.02) (0.41) (0.27) (0.3) (0.26) (0.16) (1.07) (0.39) (0.16) (0.19) (0.58)
Motor vehicles 0.43 0.74 0.00 3.13 0.28 0.00 0.00 0.17 1.77 1.01 3.64 1.12 3.18 0.59 0.00 2.03
(0.76) (0.61) (2.36) (2.44) (0.67) (1.28) (0.78) (0.15) (0.86) (1.22) (2.88) (0.99) (0.86) (0.58) (1.22) (1.42)

Electronic 0.71 1.13 0.00 0.00 2.45 0.46 0.52 0.37 0.00 1.44 0.45 1.93 3.44 1.28 4.36 0.00
components (0.94) (0.76) (0.69) (0.53) (2.89) (0.61) (0.5) (0.18) (0.65) (1.95) (0.55) (0.88) (0.25) (0.3) (0.63) (0.21)
Electric distribution, 0.74 0.34 0.00 0.55 0.00 0.48 0.54 0.00 2.67 2.37 0.32 0.00 1.80 2.68 0.00 0.00
control, wire, cable (0.36) (0.14) (0.16) (0.34) (0.89) (0.69) (0.33) (0.17) (4.15) (1.7) (0.38) (2.52) (1.07) (1.95) (1.64) (0.22)
Other electrical 0.26 0.00 0.00 0.29 0.35 0.52 2.32 0.07 0.00 2.05 0.94 0.27 1.93 3.42 0.00 2.47
equipment (0.53) (0.31) (0.22) (0.55) (0.71) (0.58) (1.17) (0.07) (0.46) (2.41) (0.75) (0.47) (0.39) (0.57) (0.9) (0.51)
... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Correlation RTA 0.85 0.93 0.34 0.94 0.99 0.83 0.33 0.89 0.55 0.64 0.70 0.57 0.22 0.61 0.35 0.40
2005 and 1977–2005
2014-05-25
* Notes: Full table can be requested.NACE codes are not displayed for layout reasons.Numbers in brackets correspond to RTA indexes for the period 1977–2008.Numbers
highlighted in light grey are >1 and those highlighted in dark grey are >2.

Table 8.8 Regional specialization of the top inventive sectors at the inventor level measured through the RTA index, employment basins, 2005
Biel/ Aarau- Winterthur- St.
NACE name* Geneva Lausanne Sion Fribourg Neuchâtel Bienne Bern Basel Olten Zurich Schaffhausen Gallen Chur Lucerne Bellinzona Lugano
Pharmaceuticals 1.37 0.84 1.18 1.64 0.21 0.02 0.39 4.07 0.59 0.58 0.50 0.32 0.12 0.11 0.44 1.05
(1.62) (1.09) (2.72) (1.26) (0.16) (0.15) (0.57) (3.87) (0.42) (0.42) (0.34) (0.17) (0.27) (0.21) (0.62) (1.1)
Medical equipment 1.63 1.13 1.03 0.20 0.83 1.63 2.32 0.58 0.97 0.68 1.44 0.57 0.84 1.54 1.45 0.80
(1.38) (1.14) (0.68) (0.48) (0.76) (1.87) (2.04) (0.61) (0.83) (0.85) (1.24) (0.8) (1.48) (1.03) (0.44) (1.08)
Special-purpose 0.88 0.54 0.50 0.62 0.35 0.34 1.43 0.41 1.90 1.16 1.90 0.94 0.68 1.34 0.00 0.83
machinery
(0.48) (0.86) (0.39) (0.4) (0.43) (0.41) (1.05) (0.35) (1.57) (1.06) (2.4) (1.6) (1.21) (1.07) (0.59) (0.66)
Measuring 0.64 1.18 1.27 0.79 0.20 0.40 0.59 0.90 0.93 1.19 0.48 2.61 1.04 0.68 0.00 0.55
instruments
(1.07) (1.14) (0.58) (0.62) (1.14) (0.74) (0.71) (0.78) (0.83) (1.25) (0.53) (1.57) (1.05) (0.75) (0.34) (0.65)
Basic chemicals 1.10 0.50 1.91 1.24 0.04 0.20 0.71 2.28 0.62 0.94 0.56 0.37 3.77 0.53 0.47 3.97
(1.24) (0.51) (2.45) (3.19) (0.25) (0.25) (0.36) (2.86) (0.68) (0.62) (0.45) (0.45) (1.67) (0.39) (0.55) (2.1)
Office machinery, 1.56 1.63 0.88 1.81 2.99 1.07 1.14 0.34 0.49 1.10 0.34 0.31 0.00 0.85 0.62 1.29
computers
2014-05-25
(1.4) (1.39) (0.37) (1.37) (2.77) (0.99) (1.73) (0.35) (0.56) (1.24) (0.44) (0.39) (0.54) (0.43) (0.6) (0.69)
Rubber and plastics 0.85 1.12 1.06 2.59 0.19 0.20 1.12 0.08 1.36 1.00 1.52 1.67 1.56 1.44 2.08 0.39
products
(0.7) (1.4) (0.51) (1.02) (0.43) (0.82) (1.03) (0.44) (1.14) (1.03) (1.26) (1.36) (1.74) (1.33) (1.13) (0.89)
General-purpose 0.27 0.26 0.62 0.38 0.48 0.33 0.66 0.30 1.06 1.48 0.96 0.77 0.00 4.23 2.01 1.50
machinery
(0.38) (0.44) (0.52) (0.39) (0.35) (0.6) (0.73) (0.33) (1.19) (1.23) (1.13) (1.28) (1.11) (3.61) (2.51) (1.14)
Watches, clocks 2.73 2.33 1.02 0.00 8.86 6.69 0.07 0.00 0.00 0.04 0.28 0.00 0.00 0.20 0.00 0.00
(2.09) (1.89) (1) (0.46) (10.14) (7.58) (0.39) (0.09) (0.09) (0.09) (0.24) (0.02) (0.08) (0.29) (0.11) (0.11)
Fabricated metal 0.64 0.31 2.17 0.14 0.16 0.97 1.04 0.38 2.23 1.16 0.96 2.12 1.91 1.40 1.70 0.48
products
(0.52) (0.55) (0.67) (0.3) (0.45) (1.22) (1.39) (0.29) (1.56) (1.12) (0.94) (2.27) (1.49) (1.21) (1.02) (1.58)
Signal 1.25 1.16 0.23 2.29 1.10 1.28 1.56 0.18 1.60 1.33 0.39 0.37 0.45 0.41 1.82 1.29
transmission,
tele-
communications
(1.02) (0.96) (0.33) (1.07) (1.85) (1.36) (1.93) (0.23) (0.71) (1.46) (0.42) (0.57) (0.32) (0.43) (0.97) (0.57)
Machine tools 0.51 0.76 1.01 0.00 3.81 4.06 1.42 0.30 1.18 0.44 0.93 1.23 0.00 1.29 5.54 2.64
(1.08) (0.82) (0.3) (0.22) (1.43) (2.89) (1.3) (0.29) (1.63) (0.73) (1.02) (1.67) (0.91) (1.23) (5.03) (1.35)
Non-metallic 0.11 0.32 1.01 2.13 0.81 0.23 1.12 0.14 0.87 0.99 2.65 1.85 1.21 1.36 0.00 1.50
mineral products
(0.82) (0.57) (1.17) (1.1) (0.51) (0.65) (1.37) (0.35) (1.3) (1.01) (1.37) (1.36) (1.75) (1.98) (1.1) (1.63)

Energy 0.13 0.38 1.49 2.46 0.22 1.99 1.13 0.32 0.61 1.48 1.46 1.14 0.88 0.57 0.00 0.00
machinery
(0.59) (0.5) (0.2) (0.61) (0.45) (1.07) (0.52) (0.32) (1.64) (1.59) (1.49) (0.91) (0.43) (0.75) (0.39) (0.69)
Domestic 1.43 2.36 1.53 0.12 0.00 0.70 0.53 0.09 1.76 0.98 0.89 1.51 0.45 1.57 0.00 0.69
appliances
(0.72) (1.72) (1.66) (0.57) (0.36) (0.71) (1.41) (0.24) (1.13) (0.96) (0.97) (1.81) (0.76) (1.62) (0.5) (1.52)
Television and 1.49 2.32 0.55 1.40 1.43 0.37 1.12 0.06 0.23 1.47 0.73 0.32 0.00 0.16 0.00 0.00
radio receivers,
audiovisual
electronics
(1.22) (1.95) (0.05) (1.25) (1.61) (0.4) (1.26) (0.05) (0.26) (1.7) (0.43) (0.15) (0.24) (0.13) (0.34) (0.62)
Furniture, 0.62 0.54 0.00 0.36 1.53 1.80 1.78 0.09 0.91 1.26 1.04 0.81 0.00 2.41 0.00 0.41
consumer goods
(1.5) (0.67) (1.25) (0.51) (1.73) (1.66) (1.58) (0.35) (1.14) (0.82) (0.66) (1.4) (1.21) (2.35) (1.21) (1.14)
Motor vehicles 0.47 0.22 0.00 2.64 0.31 0.27 0.35 0.25 0.92 1.40 2.11 2.02 2.12 0.18 0.00 0.85
(0.66) (0.74) (0.57) (1.78) (0.72) (1.04) (0.56) (0.25) (0.94) (1.21) (2.18) (0.99) (0.95) (0.92) (0.64) (1.24)
Electronic 0.72 1.55 0.00 0.00 2.01 1.11 0.40 0.28 1.53 1.21 0.64 1.75 2.51 0.34 0.00 0.00
components
2014-05-25
(0.72) (1.18) (0.15) (0.78) (2.55) (0.57) (0.53) (0.25) (1.38) (1.59) (0.49) (0.71) (1.05) (0.49) (0.63) (0.2)
Other electrical 0.21 0.37 2.07 0.41 0.23 0.00 1.06 0.22 0.09 2.37 0.51 0.26 1.22 0.40 0.00 1.39
equipment
(0.44) (0.43) (0.22) (0.64) (0.55) (0.42) (1.01) (0.14) (0.7) (2.17) (0.69) (0.46) (0.45) (0.21) (0.92) (0.5)
Food, beverages 0.87 4.75 1.27 0.67 0.00 0.00 1.66 0.75 0.36 0.35 1.16 1.36 0.00 0.16 0.00 0.00
(1.25) (5.44) (0.51) (0.96) (0.31) (0.15) (1.42) (0.53) (0.25) (0.47) (0.84) (0.85) (0.46) (0.2) (0.12) (0.62)
Electric 0.80 0.25 0.00 0.00 0.00 1.05 0.00 0.10 1.40 1.82 0.68 1.06 0.00 2.99 4.24 0.00
distribution,
control, wire,
cable
(0.39) (0.3) (0.25) (0.39) (0.62) (1.21) (0.3) (0.33) (3.23) (1.34) (1.09) (0.69) (0.73) (2.71) (1.02) (0.27)
Optical 0.17 1.33 0.00 0.00 1.15 0.00 0.28 0.54 0.64 0.92 0.97 3.11 3.53 0.34 3.14 3.46
instruments
(0.56) (0.89) (0.2) (1.3) (1.66) (0.55) (0.64) (0.54) (1.13) (1.06) (0.5) (2.53) (1.61) (0.46) (5.21) (1.02)
... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Correlation 0.53 0.75 0.05 0.35 0.91 0.89 0.15 0.81 0.24 0.70 0.55 0.54 0.90 0.35 0.50 0.51
RTA 2005 and
1977–2005
* Notes: Full table can be requested.NACE codes are not displayed for layout reasons.Numbers in brackets correspond to RTA indexes for the period 1977–2008.Numbers highlighted in light grey
are >1 and those highlighted in dark grey are >2.

and inventor level has the advantage of reducing the possibility of unreliable
results, which could emerge from a single perspective, and provides a fairly
reliable picture of the inventive profile of the Swiss regions. As noted above,
an analysis at the applicant level only might for instance reveal specializa-
tion patterns influenced by the patenting activity of subsidiaries specialized
in patent filing rather than reflecting the true inventive profile of a region.
This issue can be illustrated through two examples extracted from Tables 8.7
and 8.8. While the RTA indexes of the employment basins of Fribourg in
the sector Watches, clocks and of Bellinzona in the sector Electronic compo-
nents were respectively 3.42 and 4.36 in 2005 at the applicant level, they
were both 0 at the inventor level. Although further investigations should be
undertaken to better understand these differences, these examples underline
the limitations of an analysis based on a single perspective.
The light grey square in Figure 8.1 includes sectors that have RTA indexes
greater than 2 in a certain employment basin at both applicant and inventor
level in 2005. It comprises (classified in terms of total number of patent
applications lodged at the applicant level (see Table 8.3)):
● Measuring instruments in the employment basin of St. Gallen (RTA(applicant;

2005) = 2.32; RTA(inventor; 2005) = 2.61)
● Basic chemical in the employment basin of Chur (RTA(applicant; 2005) = 5.48;
RTA(inventor; 2005) = 3.77)
● Rubber and plastics products in the employment basins of Fribourg
(RTA(applicant; 2005) = 6.66; RTA(inventor; 2005) = 2.59) and Bellinzona (RTA(applicant;
2005) = 2.52; RTA(inventor; 2005) = 2.08)
● Fabricated metal products in the employment basins of Sion (RTA(applicant;
2005) = 3.74; RTA(inventor; 2005) = 2.17) and Aarau-Olten (RTA(applicant; 2005) = 2.78;
RTA(inventor; 2005) = 2.23)
● Non-metallic mineral products in the employment basin of Winterthur-
Schaffhausen (RTA(applicant; 2005) = 3.11; RTA(inventor; 2005) = 2.65)
● Machine tools in the employment basin of Neuchâtel (RTA(applicant; 2005) =
2.53; RTA(inventor; 2005) = 3.81)
● Domestic appliances in the employment basin of Lausanne (RTA(applicant;
2005) = 3.44; RTA(inventor; 2005) = 2.36)
● Motor vehicles in the employment basins of Fribourg (RTA(applicant; 2005) =
3.13; RTA(inventor; 2005) = 2.64) and Chur (RTA(applicant; 2005) = 3.18; RTA(inventor;
2005) = 2.12)
● Electronic components in the employment basin of Chur (RTA(applicant; 2005)
= 3.44; RTA(inventor; 2005) = 2.51)
● Electric distribution, control, wire, cable in the employment basin of
Lucerne (RTA(applicant; 2005) = 2.68; RTA(inventor; 2005) = 2.99).
The dark grey square contains sectors that have RTA indexes greater than 2
in a certain employment basin at both applicant and inventor level in 2005

Measuring instruments RTA > 2 in 2005 at
St. Gallen the applicant and
Machine-tools
inventor level
Neuchâtel Electric distribution, control, wire, cable
Basic chemical Luzern
Electronic components Chur
Chur
Non-specific purpose machinery
Luzern
Non-metallic mineral products
Winterthur-Schaffhausen Office machinery and computers
Other electrical equipment Neuchâtel
Rubber and plastic products Zurich
Bellinzona Watches, clocks Pharmaceutical
Rubber and plastic products Biel/Bienne Basel
Fribourg Motor vehicles
Basic chemical
Chur Watches, clocks Food, beverages Lugano
Geneva
2014-05-25
Lausanne Electronic components
Motor vehicles
Neuchâtel
Fribourg
Machine-tools
Fabricated metal products Watches, clocks
Motor vehicles Biel/Bienne
Aarau-Olten Neuchâtel
Winterthur-Schaffhausen
Fabricated metal products
Sion
St. Gallen RTA > 2 over the
Domestic appliances whole period (1977–
Lausanne 2008) at the applicant
and inventor level)
Figure 8.1 Sectors showing strong specializations in certain employment basins, 2005 and 1977–2008

and over the whole period (1977–2008). These employment basins have
therefore shown a strong and steady specialization in the sectors in ques-
tion. It includes (classified in terms of total number of patent applications
demanded at the applicant level (see Table 8.3)):
● Pharmaceuticals in the employment basin of Basel (RTA(applicant; 2005, 1977–2008)
= 2.78, 3.07; RTA(inventor; 2005, 1977–2008) = 4.07, 3.87)
● Basic chemicals in the employment basin of Lugano (RTA(applicant; 2005, 1977–
2008) = 5.19, 2.47; RTA(inventor; 2005, 1977–2008) = 3.97, 2.10)
● Office machinery, computers in the employment basin of Neuchâtel
(RTA(applicant; 2005, 1977–2008) = 2.47, 3.20; RTA(inventor; 2005, 1977–2008) = 2.99, 2.77)
● General-purpose machinery in the employment basin of Lucerne
● Fabricated metal products in the employment basin of St. Gallen
● Watches, clocks in the employment basins of Geneva (RTA(applicant; 2005,
1977–2008) = 3.85, 3.37; RTA(inventor; 2005, 1977–2008) = 2.73, 2.09), Neuchâtel
(RTA(applicant; 2005, 1977–2008) = 6.37, 8.04; RTA(inventor; 2005, 1977–2008) = 8.86, 10.14),
and Biel/Bienne (RTA(applicant; 2005, 1977–2008) = 8.77, 12.20; RTA(inventor; 2005, 1977–
2008) = 6.69, 7.58)
● Machine tools in the employment basin of Biel/Bienne (RTA(applicant; 2005,
1977–2008) = 16.30, 2.96; RTA(inventor; 2005, 1977–2008) = 5.54, 2.89)
● Food, beverages in the employment basin of Lausanne (RTA(applicant; 2005,
1977–2008) = 6.88, 7.77; RTA(inventor; 2005, 1977–2008) = 4.75, 5.44)
● Motor vehicles in the employment basin of Winterthur-Schaffhausen
● Electronic components in the employment basin of Neuchâtel (RTA(applicant;
2005, 1977–2008) = 2.45, 2.89; RTA(inventor; 2005, 1977–2008) = 2.01, 2.55)
● Other electrical equipment in the employment basin of Zurich (RTA(applicant;
2005, 1977–2008) = 2.05, 2.41; RTA(inventor; 2005, 1977–2008) = 2.37, 2.17).
In order to obtain a comprehensive view of the main Swiss inventive clus-

ters, it is important to add to the previous list the sectors that have shown
a strong specialization (RTA indexes > 2) in certain employment basins
over the whole period (1977–2008) at both applicant and inventor level.
The addition of these pairs of sectors and employment basins lessens the
probability of occurrence of results reflecting an analysis based on a single
year only (in this case 2005). The sectors that are particularly specialized in
certain employment basins over the whole period are (classified in terms of
total number of patent applications demanded at the applicant level (see
Table 8.3)):
● Basic chemicals in the employment basin of Basel (RTA(applicant; 1977–2008) =

2.72; RTA(inventor; 1977–2008) = 2.86)

● Special-purpose machinery in the employment basin of Winterthur-

Schaffhausen (RTA(applicant; 1977–2008) = 2.58; RTA(inventor; 1977–2008) = 2.40)
● General-purpose machinery in the employment basin of Bellinzona
(RTA(applicant; 1977–2008) = 2.20; RTA(inventor; 1977–2008) = 2.51)
● Machine tools in the employment basin of Bellinzona (RTA(applicant; 1977–2008)
= 7.61; RTA(inventor; 1977–2008) = 5.03)
● Furniture, consumer goods in the employment basin of Lucerne
(RTA(applicant; 1977–2008) = 2.11; RTA(inventor; 1977–2008) = 2.35)
● Electric distribution, control, wire, cable in the employment basin of
Aarau-Olten (RTA(applicant; 1977–2008) = 4.15; RTA(inventor; 1977–2008) = 3.23).
This analysis of specialization clearly shows that inventive activity evaluated

at the sectoral level tend to cluster in particular Swiss regions. Figure 8.2
illustrates the spatial distribution of the country’s main inventive clusters
as identified in the two previous lists. These inventive clusters confirm
some specificities of the Swiss economic landscape. As previously pointed
out, inventive activity in pharmaceuticals (and basic chemical) are strongly
concentrated in the employment basin of Basel (which is commonly known as
the heart of the Swiss pharmaceutical industry), inventive activity in watches
and clocks are clustered in the employment basins of Geneva, Neuchâtel,
and Biel/Bienne (known for the strength of their watch industry), food and
Zurich
• Other electrical equipment
Aarau-Olten
Biel/Bienne Basel • Electric distribution Winterthur-Schaffhausen
• Watches, clocks • Pharmaceutical • Motor vehicles
• Machine-tools • Basic chemical • Special-purpose machinery
Neuchâtel
• Office machinery and
computers
• Watches, clocks St. Gallen
• Electronic components • Fabricated metal products
Luzern
Geneva • General purpose machinery
• Watches, clocks • Furniture, consumer goods
Lausanne
Bellinzona Lugano
• Food, beverages
• General purpose machinery • Basic chemical
• Machine-tools
Figure 8.2 Spatial representation of the main inventive clusters at the employment
basin level in Switzerland

0.95
Tobacco products
0.9
Accumulators, battery
0.85 Petroleum products, nuclear fuel
Pesticides, agro-chemical products
0.8
Electric distribution, control, wire, cable
0.75
Basic chemical
Pharmaceuticals
0.7
Electric motors, generators, transformers
0.65
Gini LQ
Paints, varnishes
0.6
Soap, detergents, toilet prep. Watches, clocks and measuring instruments
0.55 Textiles
Electronic components
Rubber and plastics products
0.5
Machine-tools
0.45
Special purpose machinery
0.4 s
e
t ur
0.35 a Non-specific purpose machinery
fe
ke
Energy machinary
i
0.3 er-l Wood products
u st
Cl
Food, beverages
0.25
Medical equipment
0.2
0 10000 20000 30000 40000 50000 60000 70000 80000 90000
Employment (FTE)
Figure 8.3 Industrial sectors and cluster-like features, employment data, 2005
Notes: (1) As employment data are classified in Switzerland according to the NOGA General
Classification of Economic Activities, they had to be harmonized with NACE categories. This
explains why categories’ names are not always identical.
(2) In order to make the figure more readable, labels have not been attributed to every dot.
Source: Personal elaboration based on FSO (2013b).
beverages in the employment basin of Lausanne (presence of Nestlé), and

some engineering-related sectors in north-eastern Switzerland.
In order to enrich this analysis, Figures 8.3, 8.4, and 8.5 compare the
specialization patterns of the spatial distribution of inventive activity meas-
ured through patent application data at applicant and inventor level with the
spatial distribution of productive activity measured in terms of employment
data. According to Porter (2003a, p. 559), each sector (or industry) presents
“different patterns of spatial competition and different drivers of local
behavior”. Based on his in-depth analysis of the economic performance of
regions, Porter (2003a, p. 559) noted that what he named “traded industries”
(defined as “industries that are not resource dependent” in opposition to

Tobacco products
0.95
Pesticides, agro-chemical products
0.9
Other electrical equipment
0.85 Electric distribution, control, wire, cable
Food, beverages
0.8
Watches, clocks
0.75 Non-specific purpose machinery

Gini RTA
Basic chemical
Pharmaceuticals
0.7
Signal transmission, telecommunications
0.65 Rubber and plastics products
Measuring instruments
0.6 Medical equipment
Office machinery and computers

0.55 es
ur Special purpose machinery
e at
f
0.5 Fabricated
ke metal products
-li
t er
s
0.45 C lu
0.4
0 100 200 300 400 500 600 700 800 900
Total patent applications
Figure 8.4 Industrial sectors and cluster-like features, patent applications data, appli-
cant level, 2005
Note: In order to make the figure more readable, labels have not been attributed to every dot.
“local industries” or “resource dependent industries”) tend to reveal distinc-

tive geographical concentration patterns and to contribute significantly to
the prosperity of regions. His cutting-edge work on the nature of industries
triggered the first cluster mapping initiatives. Following the pioneering
methodologies of the U.S. cluster-mapping project (http://clustermapping.
us) developed by Porter (2003a) and of the European Cluster Observatory
(www.clusterobservatory.eu), Keller (2009) performed a cluster mapping of
Switzerland that was adapted to the Swiss economy and to the statistical
data available. Based on Keller’s analysis, the figures below identify sectors
presenting cluster-like features as those that record a large effective number
of employment (respectively patent applications) and marked concentration
patterns as measured by the mean of the locational gini coefficient (defined

1
Wearing apparel
0.95
Pesticidesm agro-chemical products
0.9 Basic metals
Other chemicals
0.85
Accumulators, battery
Watches, clocks
0.8
Other transport equipment
0.75
Industrial process control equipment
Gini RTA
Electric distribution, control, wire, cable

0.7
Non-metallic mineral products
0.65 Energy machinery Pharmaceuticals

Machine-tools
0.6 Basic chemical
Signal transmission, telecommunications

0.55
es
ur Measuring instruments
at
Other electrical equipment
0.5 fe
e
ikFabricated Special purpose machinery
er-l metal products
u st
0.45 Cl
Medical equipment
0.4
0 50 100 150 200 250 300 350 400
Total patent applications
Figure 8.5 Industrial sectors and cluster-like features, patent applications data,
inventor level, 2005
Note: In order to make the figure more readable, labels have not been attributed to every dot.
as the gini coefficient of the regional location quotients (LQs)11 or RTAs).

In other words, these sectors show not only a sufficient size to generate
and benefit from the positive externalities associated with agglomeration
of economic and innovative activities but also idiosyncratic geographical
features (spatial concentration). As illustrated, pharmaceuticals, watches,
clocks and basic chemicals are among the sectors that demonstrate both
at the productive and innovative level cluster-like characteristics, namely
relatively high levels of employment and patent applications and an uneven
distribution across the Swiss territory
Based on the main results of Chapter 7, this chapter extended the anal-
ysis of the Swiss geography of invention and examined in more detail the

specialization patterns of the sectoral distribution of inventive activity. Built

on a progressive analytical framework, this chapter revealed the idiosyn-
cratic features of inventive activity at the sectoral level in Switzerland and
identified the country’s main inventive clusters.
As we have seen, each sector presents not only a distinctive propensity to
patent but also unique concentration patterns. For instance, while sectors
such as pharmaceuticals, food and beverages, and watches and clocks all had
a large number of patent applications and showed uneven spatial distribu-
tion over the period 1977–2008, the inventiveness of sectors such as indus-
trial process control equipment, wood products, and lighting equipment was
lower and their inventive activity more evenly distributed across the Swiss
territory.
As the regional breakdown of the number of patent applications overes-
timates the inventive activity of large and economically powerful regions,
analyses in relative terms were conducted to unveil the specialization
patterns of inventive activity at the sectoral level. Through the use of RTA
indexes, the inventive specialization of employment basins was emphasized
and Switzerland’s main inventive clusters pointed out. Based on this meth-
odology, it appeared that the employment basin of Geneva was particularly
specialized in inventive activity in watches and clocks, Lausanne in food
and beverages, Bellinzona in general-purpose machinery and machine tools,
Lugano in basic chemical, Lucerne in general-purpose machinery, furniture,
and consumer goods, St. Gallen in fabricated metal products, Winterthur-
Schaffhausen in motor vehicles and special-purpose machinery, Zurich in
other electrical equipment, Aarau-Olten in electrical distribution, Basel in
pharmaceuticals and basic chemicals, Biel/Bienne in watches and clocks and
machine tools, and Neuchâtel in office machinery and computers, watches
and clocks, and electronic components.
Although in-depth case studies would be necessary to determine whether
these regional specializations and spatial concentrations should be consid-
ered as clusters in the sense of Porter’s definition (sufficient size, large
number of actors, academic and research institutions, interactions, etc.),
they nevertheless confirm the tendency of innovative activity to concen-
trate in certain locations as stated by several authors cited in the second part
of this research.

9
Clusters and the New Geography of
Invention – An Empirical Analysis of
Pharmaceutical Patents Applied for
in the Basel Employment Basin
Based on what has been developed in the previous chapter, it clearly

appears that the pharmaceutical sector occupies a prominent place in
the Swiss invention landscape. Besides contributing to a large number of
patent applications, it also exhibits unique geographical patterns under-
lining a particularly strong concentration in the employment basin of
Basel. However, the globalization of the economy has deeply altered the
innovation process. As explained in the second part of this book, firms
can now draw on the specific profile of many different types of environ-
ment and tap into foreign knowledge by instituting a global network of
subsidiaries and partnerships. The globalization of competition and the
increasing importance of knowledge and innovation as the main sources
of competitive advantage have led firms to rethink and rearticulate their
innovation processes.
In this new economic reality, the pharmaceutical industry of the Basel
employment basin represents an exclusive “laboratory” for exploring the
transformation of the innovation process in a region widely recognized as
one of the world’s leading life sciences clusters. Based on an in-depth anal-
ysis of pharmaceutical patent applications at the EPO by applicants located
in the Basel employment basin, the goal of this chapter is therefore to assess
the new geography of innovation and the importance of pharmaceutical
clusters in that process. In order to do so, this chapter has been divided
in three sections. Section 9.1 emphasizes some idiosyncrasies of innova-
tion in the pharmaceutical sector as well as making some observations on
the Swiss pharmaceutical industry. Section 9.2 evaluates the internation-
alization of the inventive process of pharmaceutical actors active in the
Basel employment basin and Section 9.3 investigates the role of pharma-
ceutical clusters worldwide as sourced of knowledge and innovation. This
208

Clusters and the New Geography of Invention 209
chapter has also been enriched by insights from interviews conducted with
two executives of two Swiss pharmaceutical companies established in the
U.S., Mr. Jeffrey Lockwood, Global Head of Communications at Novartis
Institutes for BioMedical Research, and Mr. Mark Noguchi, Global Head of
Alliance Management for Roche Partnering.1 Their comments have been
extremely valuable in giving a qualitative dimension to patent-based results
and providing a better understanding of the current challenges of pharma-
ceutical firms in the management of their innovation process in a global
economy.
9.1 Notes on innovation in the pharmaceutical sector and

the Swiss pharmaceutical industry
As noted by Scherer (2010, p. 541): “The discovery and development of new

pharmaceutical substances are among the most interesting of innovation
processes.” Although ethical considerations have occasionally darkened the
image of the pharmaceutical industry, the ultimate goal of research in phar-
maceuticals is to make a difference in people’s lives. As stated, for example,
by Roche in its annual report (2012c, p. 22), its mission has almost never
changed since its foundation and is “to improve health and help patients
live longer, better lives”. Evidence has clearly confirmed that progress in the
pharmaceutical industry has contributed to curing diseases and increasing
life-expectancy (Long et al., 2006; Murphy and Topel, 2006; Lichtenberg,
2007; Scherer, 2010, p. 541). The nature of innovation in pharmaceuticals
has nevertheless significantly evolved over time, and innovation in the
pharmaceutical sector shows idiosyncratic characteristics (Cockburn, 2004;
Gertler and Levitte, 2005; Cooke, 2008).
On the one hand, the discovery of new drugs requires extremely high
R&D investments, and these are mainly undertaken by private firms (Drews,
1997; Gilbert et al., 2003; Munos, 2009; Paul et al., 2010; Pammolli et al.,
2011). As noted by Scherer (2010, p. 541), “pharmaceutical R&D/sales ratios
were nearly five times those of their all-manufacturing counterparts” in the
U.S. Similarly in Switzerland, pharmaceuticals accounted for more than
50 percent of total R&D expenditure in manufacturing in 2008 (OECD,
2012a, Internet source). The significance of these investments is explained
not only by the strengthening of the regulatory environment surrounding
the preclinical and clinical phases necessary to the introduction of new drugs
to the market but also by a radical evolution of the innovation process in
pharmaceuticals (Drews, 1997, p. 72; Horrobin, 2000, p. 341; Gassmann and
Reepmeyer, 2005, pp. 233–234; Gassmann et al., 2008, p. 1; Scherer, 2010,
p. 543; Kaitin and DiMasi, 2011, pp. 183–184).
While the pharmaceutical industry grew “at a time of unusual scientific,
political and economic opportunity” (Drews, 1997, p. 72) between the
19th and 20th centuries, in which new and effective drugs were developed

through trial-and-error research, the accumulated scientific knowledge

progressively increased the complexity of pharmaceutical research and
reduced the productivity of R&D (Drews, 1997, p. 72; DiMasi et al., 2003,
pp. 151–152; Gassmann et al., 2008, p. 1; Scherer, 2010, p. 547). Nevertheless,
recent advances “in computer-aided structurally based drug design, low-cost
molecular manipulation and screening, DNA screening [and] recombinant
genetics” have opened up new perspectives that could lead to a new golden
age of pharmaceutical discovery in the years to come (Scherer, 2010, p. 550).
These new opportunities were confirmed by Jeffrey Lockwood (Novartis). As
he noted, the past ten years have witnessed a “tsunami” of new insight and
data (such as the sequencing of the human genome), which is now available
to the research community and has revolutionized the understanding of how
disease works. As mentioned by Lockwood, the pharmaceutical industry is at
a turning point of its existence and one of the main challenges for pharma-
ceutical companies is now to figure out how to translate these new discov-
eries and knowledge into effective medicines.
This new reality has triggered another transformation of the pharmaceu-
tical industry. While R&D activities used to be conducted mainly within
the firms’ home countries in relative secrecy, the increased complexity of
pharmaceutical research has led pharmaceutical firms to collaborate with
external actors in order to increase the probability of success of their inno-
vation process (i.a. Vernon, 1966; Caves, 1971, 1982; Buckley and Casson,
1976; Patel and Pavitt, 1999; Cantwell et al., 2004; Criscuolo, 2004; Cooke,
2005b, 2006; Khilji et al., 2006; Waxell and Malmberg, 2007). Pharmaceutical
companies started to couple their knowledge with academic science devel-
oped in universities and governmental research institutions (Nightingale
and Mahdi, 2006, p. 73; Hunter and Stephens, 2010, p. 87; Scherer, 2010,
p. 550). The increased interactions between the different actors of the phar-
maceutical world not only defined a new model of innovation based on
the concept of open science but also stimulated entrepreneurship through
the creation of many small, specialized biotech firms founded by academic
scientists (Kettler, 2000; Khilji et al., 2006, p. 529; Hunter and Stephens,
2010, p. 87; Scherer, 2010, p. 552). This new ecosystem articulated around
co-operation and partnership strengthened the role of clusters or “biore-
gions” in the innovation process of pharmaceutical firms (Cooke, 2005b,
p. 1137; Cooke, 2006, p. 1275).
Nevertheless, the innovation process of big pharmaceutical compa-
nies is not confined to a single cluster in a single country but is now truly
global in nature. As stated by Scherer (2010, p. 551), “In recent years, many
pharma companies have opened new laboratories in the vicinity of top
academic institutions in order to facilitate cooperation.” This phenomenon
can be illustrated by the decision of Novartis to establish its Institutes for
BioMedical Research (NIBR) in the midst of the Boston pharmaceutical

cluster in Cambridge (MA, U.S.A.) in 2003 (Gugler and Michel, 2010, p. 7).
In other words, pharmaceutical companies have progressively disaggregated
their value chain and scattered their value activities across the world in order
to tap into the specific knowledge profile of different types of environment.
This internationalization of the pharmaceutical industry was confirmed
by Mark Noguchi (Roche). As he noted, big pharmaceutical companies are
organized as a global network that does not compete for resources but tries
to access different talent pools to gain different perspectives and experiences
on similar problems and challenges. Cooke (2005b, p. 1129) explained this
mutation of the pharmaceutical industry and the formation of these global
knowledge networks through his theory of “regional knowledge capabili-
ties”. As he noted, pharmaceutical companies overcome inherent knowl-
edge asymmetries between regions by taking advantage of open innovation
and embedding activities in key pharmaceutical clusters worldwide (Cooke,
2005b, p. 1140). In his analysis of the Basel bioscience region, he stressed
(Cooke, 2005b, p. 1142):
It is thus evident how Swiss big pharma conducts its research. Firms
seek out compatible regional knowledge capabilities, found in locations
with both the assets and the knowledge “leakage” associated with “open
innovation”. Contractual partnership “cluster” to “cluster” is formed
through inter-firm and inter-research institute collaborations, balancing
corporate knowledge asymmetries while stimulating the globalization of
biosciences and bioregional nodes in the process. It is an almost perfect
case of “ground-up globalization” (or “Globalization 2”) stimulated ulti-
mately by the imperative of moderating asymmetric knowledge.
In other words, pharmaceutical companies tend to organize their global

network in order to access and gather the necessary complementary knowl-
edge to increase the success of their innovation process.
Finally, another idiosyncrasy of innovation in the pharmaceutical industry
resides in the primacy of patents in the innovation process (Grabowski, 2002,
p. 850; Cockburn, 2004, p. 13; Scherer, 2010, p. 560). Unlike other industries
in which patents are often used for defensive purposes, patents are impor-
tant cogs in the innovation process in the pharmaceutical sector (Hall, 2008).
Studies by Mansfield (1986), Levin et al. (1987), Cohen et al. (2002), and
Arundel (2003) have demonstrated that – except in pharmaceuticals – patents
are not often considered as the most suitable means to appropriate returns on
innovation. Similarly, Arora et al. (2003) found out that pharmaceuticals and
biotechnology were among the only sectors in which the chance of getting a
patent fostered R&D expenses. As noted by Scherer (2010, p. 560), the impor-
tance of patents in the pharmaceutical sector is explained not only by the
consequent R&D investments necessary in the discovery process of a new

product or by the uncertainty surrounding the approval of a new drug but also
by the relative ease of imitation of a pharmaceutical innovation once released.
While replicating a Boeing 787 or an Airbus A380 would be particularly chal-
lenging because of the experience accumulated by these two companies in
the aircraft industry, imitating an Aspirin or a Dafalgan would cost a generic
company only a few hundred thousand dollars, even though the development
costs could have been astronomical for the original inventor (Scherer, 2010,
p. 561). As a consequence, patents are an interesting indicator of the configu-
ration of the innovation process in the pharmaceutical industry.
9.1.1 The pharmaceutical industry in Switzerland

As shown by Table 9.1 and confirmed in various studies and reports (i.a. Carrin
et al., 2003; FSO, 2007; Interpharma, 2011; Swiss Biotech, 2011; BaselArea,
2012; Scienceindustries, 2012), the pharmaceutical industry is an important
driver of the Swiss economy. In 2010, the pharmaceutical sector directly or
indirectly contributed to almost 6 percent of the Swiss nominal GDP (total
gross value added: almost CHF30,000 million), employed more than 135,000
in employment people (3 percent of total), and accounted for 31.4 percent of
total exports (CHF60,638 million) (Interpharma, 2011, p. 5).
Although cluster initiatives have been implemented in life sciences in the
regions of Zurich (Mednet), Lake Geneva (BioAlps), and Ticino (BioPolo)
(FSO, 2007, p. 6), previous analyzes have clearly emphasized that inven-
tive activity in the pharmaceutical industry is strongly concentrated in the
Basel employment basin. None of these emerging clusters can yet withstand
comparison with the Basel region. As noted by BaselArea (2012, p. 4), the
Basel pharmaceutical cluster (often referred to as the Swiss section of the tri-
national cluster of the BioValley) includes more than 900 companies active
in life sciences; Roche and Novartis – two of the world’s largest pharmaceu-
tical companies – are headquartered in Basel.
Table 9.1 Direct and indirect importance of the pharmaceutical industry in

Switzerland in 2010
Direct Indirect
contribution* contribution* Total
Gross value added (GVA) in millions CHF 14,800 14,400 29,200

% of total 2.9 2.8 5.7
Employment Total number 36,700 98,600 135,300
% of total 0.8 2.2 3.0
Exports In millions CHF 60,638 – –
% of total 31.4 – –
Note: *Based on data collected and estimates from Polynomics and BAK Basel Economics
(Interpharma, 2011, p. 5).
Source: Interpharma (2011, p. 5).

The life sciences industry of the region reports sales worth more than
EUR100 billion worldwide and profits higher than EUR20 billion (BaselArea,
2012, p. 4). It also employs (directly or indirectly) around 36,000 people,
including 15,000 scientists, professors, researchers, and PhD students scat-
tered across companies and top research institutions such as the University
of Basel, the Friedrich Miescher Institute, and the department of Biosystems
Science and Engineering of the ETH based in Basel (BaselArea, 2012, p. 4).
Furthermore, approximately 120 suppliers and 140 service providers support
the cluster throughout the value chain (BaselArea, 2012, p. 4). This unique
environment has generated the creation of more than 150 successful life
sciences start-ups over the last few years (BaselArea, 2012, p. 4). Many
studies have documented the success of the Basel pharmaceutical cluster
and stressed its importance, as an exclusive source of information, to the
analysis of the evolution of the innovation process in an industry at the
knowledge frontier (i.a. Zeller 2002, 2004; Chiesa and Chiaroni, 2005;
Cooke, 2005b, 2006; Keller, 2009; Metrobasel, 2009; PWC, 2010; European
Cluster Observatory, 2013).
9.2 The internationalization of inventive activities – evidence

from pharmaceutical patent applications lodged by applicants
located in the Basel employment basin
As reported by the two executives of Novartis and Roche in the U.S., inno-
vation is at the core of their business and all the products that they taken
to R&D must be innovative and deliver value to patients through improved
efficacy and better safety. The evolution of the pharmaceutical industry –
driven by increased competition and new opportunities offered by globali-
zation – has nevertheless forced pharmaceutical companies to adapt their
innovation process.
This section evaluates the internationalization of the inventive process
by analyzing the origin of pharmaceutical patent applications lodged at the
EPO by applicants located in the Basel employment basin in 1985, 1995,
and 2005. For the sake of offering readers the most recent data, results for
the year 2008 are also presented. As patent documents record the name and
address of the inventor(s), patent data are a good means to assess the inven-
tive activity of firms. Assuming that the region of residence of the inventor(s)
coincides with the geographical location of the invention, this information
allows us to identify where the invention process was mainly carried out.
Similar approaches were adopted by Cantwell (1992), Patel and Vega (1999),
Le Bas and Sierra (2002), and Michel (2009).
Patents were selected at the applicant level and the origin of the
invention was determined by analyzing the country of residence of
inventor(s). As shown by Table 9.2, the number of patent applications in

the pharmaceutical sector by applicants located in the Basel employment

basin increased from 125 in 1985 to 141 in 1995 and 505 in 2005. The
number fell to 433 in 2008, but again it is uncertain whether this decrease
corresponds to a slight diminution of the inventive activity in the phar-
maceutical sector of the Basel employment basin or just to the fact that
the database is still incomplete. As has been noted in previous chapters,
rather than an indication of a tremendous growth of inventive activity, the
marked increase between 1995 and 2005 should be primarily interpreted as
the result of a growing propensity to patent at the EPO (Paci and Usai, 2000,
p. 99). An analogous trend can be observed in the total number of patent
applications lodged at the EPO by applicants located in Switzerland (1,721
in 1985, 2,140 in 1995, and 4,954 in 2005). However, the share of phar-
maceutical patents in the total number of patent applications at the EPO
by applicants in the Basel employment basin increased from 32 percent in
1985 to 35 percent in 1995 and 47 percent in 2005 (47 percent in 2008),
suggesting a potential increase in inventive activity in the pharmaceutical
sector of the Basel employment basin. Furthermore, as many patents are
developed by several inventors, Table 9.2 shows that the number of inven-
tors exceeds the number of patents for the three years under review (341
in 1985, 584 in 1995, 2,634 in 2005, and 2,093 in 2008). A trend towards
an increase in the number of inventors per patent seems to be discernable.
While a mean of 2.71 inventors per patent was recorded in 1985, this rate
increased to 4.11 in 1995 and 5.21 in 2005 (4.83 in 2008), suggesting an
increase in the number of interactions and collaborations in the innova-
tion process of pharmaceutical companies in line with the evolution of the
industry (Section 9.1).
Regarding the internationalization of inventive activity, Table 9.2 unveils a
constant growth in the level of internationalization of the inventive process.
While more than 62 percent of the inventors of pharmaceutical patents
lodged at the EPO by applicants located in the Basel employment basin were
still residing in Switzerland in 1985, this rate sank to some 42 percent in
1995 and to only 27 percent in 2005 (28 percent in 2008). In other words,
pharmaceutical patent applications lodged at the EPO by applicants located
in the Basel employment basin were increasingly developed in foreign loca-
tions (from 38 percent in 1985 to 58 percent in 1995, 73 percent in 2005,
and 72 percent in 2008). Moreover, while Switzerland remained the main
source of invention until 1995, this tendency was even reversed in 2005 as
the majority of inventors of the 505 patents applied for (30.37 percent) were
located in the United States. A similar observation can be made in 2008. It
is worth noting that developed economies remained the main sources of
invention between 1985 and 2008 and that the share of inventors residing
in developing countries was relatively low.2 It evolved from 0.29 percent
in 1985 (one inventor in India (IN)) to 1.7 percent in 1995 (three in India

Table 9.2 Countries of residence of the inventors of the pharmaceutical patents applied for at the EPO in the Basel employment
basin in 1985, 1995, 2005, and 2008
1985 1995 2005 2008
Nbr % in % in total Nbr % in % in total Nbr % in % in total Nbr % in % in total

of total foreign of total foreign of total foreign of total foreign
Cntry invts invts invts Cntry invts invts invts Cntry invts invts invts Cntry invts invts invts
CH 212 62.17 – CH 249 42.64 – US 800 30.37 42.04 US 769 36.74 51.2
US 57 16.72 44.19 US 114 19.52 34.03 CH 731 27.75 – CH 591 28.24 –
DE 34 9.97 26.36 DE 98 16.78 29.25 DE 498 18.91 26.17 DE 299 14.29 19.91
JP 10 2.93 7.75 GB 34 5.82 10.15 FR 203 7.71 10.67 FR 120 5.73 7.99
FR 9 2.64 6.98 FR 32 5.48 9.55 GB 141 5.35 7.41 GB 68 3.25 4.53
GB 8 2.35 6.20 JP 12 2.05 3.58 AT 102 3.87 5.36 IT 60 2.87 3.99
2014-05-25
AT 4 1.17 3.10 AT 10 1.71 2.99 JP 56 2.13 2.94 AT 50 2.39 3.33
NL 3 0.88 2.33 SE 8 1.37 2.39 CA 26 0.99 1.37 CN 44 2.10 2.93
CA 2 0.59 1.55 CA 7 1.20 2.09 CN 19 0.72 1.00 CA 25 1.19 1.66
IN 1 0.29 0.78 DK 4 0.68 1.19 ES 17 0.65 0.89 IN 16 0.76 1.07
SE 1 0.29 0.78 IN 3 0.51 0.90 IT 13 0.49 0.68 SE 14 0.67 0.93
BE 2 0.34 0.60 IN 9 0.34 0.47 JP 10 0.48 0.67
BG 2 0.34 0.60 NL 7 0.27 0.37 ES 7 0.33 0.47
IT 2 0.34 0.60 AU 4 0.15 0.21 SI 7 0.33 0.47
MX 2 0.34 0.60 SE 3 0.11 0.16 BE 5 0.24 0.33
NL 2 0.34 0.60 DK 2 0.08 0.11 NO 5 0.24 0.33
CZ 1 0.17 0.30 BE 1 0.04 0.05 AU 2 0.10 0.13
SK 1 0.17 0.30 GR 1 0.04 0.05 HU 1 0.05 0.07
SI 1 0.17 0.30 NO 1 0.04 0.05
Total 341 100 100 Total 584 100 100 Total 2,634 100 100 Total 2,093 100 100
Nbr of patent appl.: 125.8329 Nbr of patent appl.: 141.9999 Nbr of patent appl.: 505.8331 Nbr of patent appl.: 433.1666

(IN), two in Bulgaria (BG), two in Mexico (MX), and one in each of Czech
Republic (CZ), Slovakia (SK) and Slovenia (SI))3 to 1.06 percent in 2005 (19 in
China (CN) and 9 in India (IN)) and 2.86 percent in 2008 (44 in China (CN)
and 16 in India (IN)).
The rise of China and India as sources of knowledge over the last few
years highlights the growing importance of these two countries in today’s
economy. The role of China as a new research location was indeed empha-
sized by the representatives of Novartis and Roche in the U.S. As the geog-
raphy of innovation has evolved, China and India have steadily grown in
importance in the innovation strategy of pharmaceutical firms. As a matter
of fact, both Novartis and Roche opened discovery centers and different
types of activity in China and India. According to their websites, Novartis
and Roche have respectively 48 and 4 locations in China and 19 and 4
locations in India (Novartis, 2012, Internet source; Roche, 2012a, Internet
source). Moreover, Noguchi (Roche) noted that China was very strong in
small molecule chemistry and an increasingly sought-after location for
research in that area.
The increasing internationalization of the inventive process observed
above is confirmed by data on the total R&D expenditure of Swiss firms
abroad (Economiesuisse, 2010; FSO, 2011, p. 9). As shown in Figure 9.1, the
pharmaceutical sector is by far the largest contributor to total foreign R&D
expenditure with CHF10,560 million in 2008 (67 percent of the total R&D
expenditure of Swiss firms abroad). Moreover, the total R&D expenditure of
Swiss pharmaceutical firms abroad constantly increased between 2000 and
Metallurgy
Machines
Food
ICT
R&D
Chemicals
High tech instruments
Other
Pharmaceuticals
0 2000 4000 6000 8000 10000 12000
2008 2004 2000
Figure 9.1 Total business enterprise R&D expenditure of Swiss firms abroad by sector
2000, 2004 and 2008
Source: Personal elaboration based on FSO (2013c, Internet source).

2008, stressing the growing internationalization of research in the pharma-

ceutical sector.
As emphasized by the FSO (2011, pp. 7–8), the R&D process of Swiss firms
is particularly internationalized. To give an international comparison, while
the ratio between the R&D expenditure of local firms abroad and within
their home country varies between 2 percent and 30 percent in most OECD
countries, this ratio lies at 132 percent in Switzerland (FSO, 2011, p. 8).
Although this high rate can be partially explained by the strength of the
pharmaceutical sector in Switzerland and its particularly international orien-
tation (see Figure 9.1), it nevertheless raises some questions (FSO, 2011, p. 8).
On the one hand, this high level of internationalization of R&D activities
should be seen as a good sign for the Swiss economy. First, because of the
inherent characteristics of the Swiss market, Swiss firms have traditionally
had to expand their business across national borders. Second, it tends to
suggest that Swiss firms are already aware of the new opportunities offered
by the globalization of the economy and that they already take full advan-
tage of the geographical dispersion of their research activities across different
types of environment. On the other hand, it raises the question of whether
firms will keep conducting research in Switzerland or even retain a physical
presence in Switzerland at all. The recent decision of the German pharma-
ceutical group Merck Serono (resulting from the acquisition by Merck of the
Swiss biotechnology company Serono in 2007) to relocate its headquarters
from Geneva to Darmstadt and to rationalized its research activities between
Darmstadt (DE), Boston (MA, U.S.A.), and Beijing (CN) fed this debate.
Although Switzerland is still the most competitive country in the world, this
example should be a strong reminder to Swiss policy makers that firms are
increasingly mobile and that nothing should be taken for granted in today’s
economy. As will be emphasized again in the remainder of this thesis, policy
makers and regional leaders have a tremendous responsibility to maintain
Switzerland’s top framework conditions.
9.3 The role of clusters and cross-cluster relationships

in the global inventive strategy of firms – evidence from
pharmaceutical patent applications lodged by applicants
located in the Basel employment basin
As propounded in the second part of this book, the globalization of the

economy and the resulting strengthening of competition have forced firms
to re-evaluate their strategies in order to maintain a competitive edge in the
wider economy. As acquiring new knowledge, developing new products, and
implementing new processes are at the core of any firm’s competitiveness,
the management of innovation plays a crucial role in the success of compa-
nies. In line with the evolution of the world economy, innovation has also

become global in nature and the previous section clearly demonstrated an

internationalization of the innovation process. MNEs now have the ability to
tap into the specific knowledge profile of different types of environment and
to internalize the benefits of the management of geographically dispersed
activities. As clusters provide an environment conducive to productivity
growth and offer firms access to tacit knowledge and new ideas, they are a
powerful source of inspiration and innovation (Gertler and Levitte, 2005).
The goal of this final section is therefore to assess the importance of clus-
ters in the global innovation strategy of firms by thoroughly analyzing the
geographical features of pharmaceutical patent applications lodged by appli-
cants in the Basel employment basin.
Each inventor of the 505 patents applied for in 2005 was assigned to
their region of residence. As two inventors could not be identified in this
way, 2,632 (instead of 2,634) inventors were allocated. European regions
were divided up at the NUTS 2 level of the European commission (or at a
level matching data from the European Cluster Observatory, see below) and
non-European regions at an equivalent level.4 Based on this methodology,
96 regions were identified. Each European and U.S. region (85 of the 96
regions) was then classified as either a “pharmaceutical cluster region” (in
italic in the following tables and figures) or a “non-pharmaceutical cluster
region”. This classification was made in accordance with the last update of
two different sources: European regions were broken down on the basis of
data from the European Cluster Observatory (2013, Internet source) and
U.S. regions were classified according to the U.S. cluster mapping under-
taken by the Institute of Strategy and Competitiveness at the Harvard
Business School (U.S. Cluster Mapping, 2013, Internet source). In order to
rely on official data resulting from in-depth statistical analyzes and since no
similar formal cluster mapping project was known at the time of writing,
extra European and U.S. regions have been classified as “non-pharmaceu-
tical clusters”. It is important to keep in mind that results presented below
can therefore be slightly underestimated. Table 9.3 displays the outcome
of this analysis.
Before we interpret these results, four remarks should be made. First, some
of the regions classified as “pharmaceutical cluster regions” do not satisfy
the definition of clusters in its strictest sense, as outlined in Chapter 5.
Discrepancies in the definition of clusters and the state of statistical research
on clusters do not yet allow the formal identification of clusters that have
the necessary critical mass to generate the expected positive agglomeration
effects. While cluster initiatives flourish all around the world and many
regions try to stimulate their competitiveness by implementing cluster poli-
cies, only a few of these efforts are truly successful (Hospers and Beugelsdijk,
2002, p. 391; Martin and Sunley, 2003, p. 23; Cooke, 2006, p. 1275). As
stated by Cooke (2006, p. 1275): “Silicon Valley remains unique in the scale

Table 9.3 Region of residence of inventors of the pharmaceutical patents lodged at

the EPO by applicants in the Basel employment basin in 2005
Cntry Region Nbr of invts % in total invts
US California * 315 11.97
US New Jersey 274 10.41
US Massachusetts 97 3.69
US New York 17 0.65
US North Carolina 14 0.53
US Pennsylvania 12 0.46
US Colordo 12 0.46
US Georgia 11 0.42
US Indiana 7 0.27
US New Hampshire 6 0.23
US Connecticut 5 0.19
US Ohio 4 0.15
US Illinois 4 0.15
US Minnesota 3 0.11
US Alabama 3 0.11
US Utah 2 0.08
US Vermont 1 0.04
US Maryland 1 0.04
US District of Columbia 1 0.04
US Texas 1 0.04
US Kentucky 1 0.04
US Louisiana 1 0.04
US South Carolina 1 0.04
US Washington 1 0.04
US West Virginia 1 0.04
US Wisconsin 1 0.04
US Delaware 1 0.04
US Florida 1 0.04
US Michigan 1 0.04
CH Northwestern Switzerland 668 25.38
CH Espace Mittelland 36 1.37
CH Zurich 12 0.46
CH Lake Geneva Region 10 0.38
CH Eastern Switzerland 3 0.11
CH Central Switzerland 2 0.08
DE Freiburg 268 10.18
DE Oberbayern 164 6.23
DE Karlsruhe 22 0.84
DE Rheinland-Pfalz 14 0.53
DE Darmstadt 11 0.42
DE Köln 5 0.19
DE Düsseldorf 4 0.15
Continued

Table 9.3 Continued
DE Tübingen 3 0.11
DE Stuttgart 2 0.08
DE Thüringen 2 0.08
DE Mittelfranken 2 0.08
DE Niederbayern 1 0.04
FR Alsace 187 7.1
FR Île de France 9 0.34
FR Languedoc-Roussillon 5 0.19
FR Aquitaine 1 0.04
FR Haute-Normandie 1 0.04
GB Surrey, East and West Sussex 71 2.7
GB Berkshire, Buckinghamshire 28 1.06
and Oxfordshire
GB Essex 10 0.38
GB Bedfordshire and 8 0.3
Hertfordshire
GB West Yorkshire 7 0.27
GB Inner London 5 0.19
GB Outer London 4 0.15
GB Gloucestershire, Wiltshire 4 0.15
and Bristol/Bath
GB North Yorkshire 1 0.04
GB East Wales 1 0.04
GB Derbyshire and 1 0.04
Nottinghamshire
GB Eastern Scotland 1 0.04
AT Wien 56 2.13
AT Tirol 40 1.52
AT Niederösterreich 2 0.08
AT Vorarlberg 2 0.08
AT Kärnten 2 0.08
JP Southern-Kanto 49 1.86
JP Tokai 6 0.23
JP Shikoku 1 0.04
CA Ontario 21 0.8
CA Quebec 3 0.11
CA British Columbia 1 0.04
CN Shanghai 18 0.68
CN Shandong 1 0.04
ES Cataluña 13 0.49
ES Región de Murcia 3 0.11
ES Comunidad de Madrid 1 0.04
Continued

Table 9.3 Continued
IT Toscana 5 0.19
IT Lombardia 5 0.19
IT Veneto 1 0.04
IT Trentino Alto Adige 1 0.04
IT Piemonte 1 0.04
IN Maharashtra 9 0.34
NL Utrecht 6 0.23
NL Zuid-Holland 1 0.04
AU Queensland 3 0.11
AU Western Australia 1 0.04
SE Stockholm 3 0.11
BE Prov. Vlaams-Brabant 1 0.04
DK Hovedstaden 1 0.04
DK Southern Denmark 1 0.04
GR Attiki 1 0.04
NO Nord-Norge 1 0.04
Total 2632 100
Note: * Regions in italic have been identified as “pharmaceutical cluster regions.”

of both its local and global impact.” Second, the State of Massachusetts
(U.S.), home of one of the world’s largest life science clusters, in the Boston
area, is not identified as a biopharmaceutical cluster in the last update of
the U.S. cluster mapping (even though biopharmaceuticals was identified
as a strong cluster in Massachusetts in a former update, see Gugler et al.,
2011a). This result is surprising as Michel Porter himself (and his team) –
who is (are) in charge of the U.S. cluster mapping project – often refer(s) to
the Boston Life-Science Cluster as a classic example of cluster (i.a. Ketels,
2002; Porter, 2003b), dozens of scientific articles document it (i.a. Zeller,
2001; Powell et al., 2002; Feldman, 2003; Coenen et al., 2004; Owen-Smith
and Powell, 2004; Porter et al., 2005; Cooke, 2005b, 2006; Moodysson et al.,
2008), reports or websites constantly praise the region as a leading life
science cluster (i.a. Jones Lang LaSalle, 2011; http://bostonlifescience.com),
and representatives of pharmaceutical firms acknowledge the uniqueness of
the region for research in pharmaceutics (i.a. interviews with representatives
of Swiss pharmaceutical firms in the U.S.; Novartis, 2012). After contacting a
person in charge of the project, it is worth noting that states are not always
the best regional unit of analysis and that biopharmaceuticals is identified
as a strong cluster in the Boston Economic Area. However, in order to be

consistent with the databases used and apply a similar geographical unit
across the U.S., inventors located in Massachusetts will be counted as part
of a “non-pharmaceutical cluster region”. This decision nevertheless tends
to underestimate the role of clusters in the following analyzes. Third, as the
address of inventors may be their home address rather than the address of
the location where the patent was developed, the regionalization of inven-
tors may induce erroneous geographical allocation. For example, it is likely
that some inventors assigned to other Swiss regions than north-western
Switzerland work in the Basel employment basin. Similarly, it is probable
that some inventors recorded in Connecticut work in the New York/New
Jersey pharmaceutical cluster. Finally, it is important to note that clusters
often overlap political boundaries. The tri-national cluster of the BioValley,
encompassing the Basel region in Switzerland, Alsace in France, and Freiburg
in Germany is the archetype of the “boundary-free” cluster.
In the light of these remarks, Table 9.3 reveals that almost 78 percent of the
inventors of the 505 pharmaceutical patent applications lodged by applicants
in the Basel employment basin in 2005 (2,049 out of 2,632) were located
in regions identified as “pharmaceutical cluster regions”. This percentage
could even be slightly higher if we assume that inventors recorded in clus-
ters’ neighboring regions work in these latter and categorize Massachusetts –
which recorded 97 inventors (3.7 percent) – as a “pharmaceutical cluster
region”. In any case, less than 25 percent of inventors were residing in “non-
pharmaceutical cluster regions.”
Regarding the inter-cluster distribution, 42.7 percent of inventors
were established in the BioValley region (25.4 percent in north-western
Switzerland, 10.2 percent in Freiburg, Germany, and 7.1 percent in Alsace,
France), 22.4 percent in California and New Jersey in the U.S., and 6.2 percent
in Oberbayern, Germany, which are widely recognized among the world’s
leading pharmaceutical clusters (i.a. Zeller, 2001; Chiesa and Chiaroni, 2005;
Cooke, 2006; European Cluster Observatory, 2013; U.S. Cluster Mapping,
2013). Regarding inventive activity in extra-European and U.S. regions, 49
inventors (1.86 percent) were established in Southern Kanto in Japan and
the presence of 18 inventors in Shanghai, China (0.68 percent) and 9 inven-
tors in the Maharashtra region in India (0.34 percent) reflects the emergence
of China and India as sources of knowledge and innovation.
These data tend to support the fact that pharmaceutical clusters play an
important role in the global inventive process of pharmaceutical firms located
in the Basel employment basin. Figure 9.2 illustrates and sums up the outcome
of this analysis by emphasizing the concentration of inventors in the phar-
maceutical clusters of the BioValley, California, New Jersey, and Oberbayern
(and in the non-pharmaceutical cluster region of Massachusetts).
To provide more insight into the role of clusters in the global innova-
tion process, Table 9.4 shows the distribution of the 2,632 inventors by
applicant. As can be seen, the great majority of applicants (who applied

Country of Regional
residence in % concentration in %
0–1 >10
1 – 10 >3
>10
New Jersey Massachusetts
2014-05-25
California
Alsace Northwestern Freiburg Oberbayern

Switzerland
Figure 9.2 Geographical distribution (countries and main regions) of inventors of the pharmaceutical patent applications lodged
at the EPO by applicants in the Basel employment basin in 2005

Table 9.4 Distribution of inventors of the pharmaceutical patents applied for at the
EPO in the Basel employment basin by applicants in 2005
% of invts
located in
Nbr of % in total a foreign
Applicant invts invts country
Novartis 1175 44.64 74.3

Roche 1004 38.15 78.29
Actelion Pharmaceuticals 78 2.96 37.18
Sandoz 67 2.55 100
Ciba 63 2.39 76.19
Speedel Experimenta 55 2.09 0
Syngenta 34 1.29 32.35
Santhera Pharmaceuticals 20 0.76 65
Basilea Pharmaceutica 20 0.76 60
Arpida 16 0.61 37.5
Lonza 16 0.61 50
Independents 14 0.53 78.57
Polyphor 13 0.49 38.46
Auris Medical 10 0.38 100
ADD Advanced Drug Delivery Technologies 7 0.27 57.14
Acino Pharma 7 0.27 14.29
Solvias 7 0.27 57.14
OncoScore 5 0.19 0
Clariant 4 0.15 100
Drossapharm 3 0.11 0
Thommen Medical 3 0.11 66.67
Bayer Consumer Care 3 0.11 100
SwissCo Development 2 0.08 50
Covalys Biosciences 2 0.08 100
Cerecon 1 0.04 0
Epipharm 1 0.04 0
Energy4Life 1 0.04 0
Jagotec 1 0.04 100
Total 2632 100
for pharmaceutical patents in the Basel employment basin in 2005) were

private firms (99.47 percent of inventors were linked to private firms and
only 14 inventors (0.53 percent) were independents). As also shows, some
83 percent of inventors (2,179 out of 2,632) were linked to the two Swiss phar-
maceutical giants Novartis and Roche. This share could even be increased
if we were to consider the intertwined history of Novartis, Ciba, Sandoz,
Syngenta, and Solvias. Regarding the degree of foreignness, measured by the
percentage of inventors located in foreign countries, this varied between

100 percent for Sandoz, Auris Medical, Clariant, Bayer Consumer Care,
Covalys Biosciences, and Jagotec and 0 percent for Speedel Experimenta,
OncoScore, Drossapharm, Cerecon, Epipharm, and Energy4Life. Novartis
and Roche were respectively associated with 74 percent and 78 percent of
inventors in foreign countries.
Table 9.5 illustrates the geographical distribution of inventors of the
pharmaceutical patents lodged at the EPO by applicants (enterprises and
independents) located in the Basel employment basin in 2005. On average,
75 percent of their inventors were located in pharmaceutical cluster regions
(in italic in Table 9.5). Of the 1,901 inventors in foreign countries, 1,371
(or 72 percent) were located in pharmaceutical cluster regions. These high
numbers reveal the critical importance of clusters in the global innovation
strategy of applicants active in the pharmaceutical industry in the Basel
employment basin.
Regarding the spatial distribution of inventors linked with the two
Swiss pharmaceutical giants Novartis and Roche, which owned the over-
whelming majority of patent applications, the two firms respectively
reported 71 percent and 87 percent of their inventors in regions identified
as pharmaceutical clusters. Aside from their inventive activity in Switzerland
and in the home cluster of the BioValley, 52 percent of Novartis’ inven-
tors and 79 percent of Roche’s were located in foreign pharmaceutical clus-
ters. As shown in Table 9.5, Novartis’ inventors in foreign pharmaceutical
clusters were particularly concentrated in California and New Jersey (U.S.)
while Roche’s were mostly located in California (U.S.), Oberbayern (DE) and
New Jersey (U.S.). It is worth noting that the importance of New Jersey as
a source of innovation for Roche is likely to decline in the near future as
the company recently decided to close its site in Nutley (NJ) (Roche, 2012b,
Internet source). Although Roche plans to keep a center occupying approxi-
mately 240 employees on the East Cost (location to be determined), the
closing of the Nutley site represents a loss of 1,000 jobs for New Jersey. This
decision has been taken in order for Roche to concentrate its U.S. activities
in California, where Roche (through its Genetech organization) is already
strongly implanted, and to consolidate its R&D activities in Switzerland and
Germany (Roche, 2012b, Internet source). Although the great majority of the
foreign inventive activity of Novartis and Roche was still mostly distributed
across Europe and the U.S., pharmaceutical clusters from developing coun-
tries are likely to play a growing role in the upcoming years as both compa-
nies have recently undertaken significant investments in those regions. As
illustrated in Table 9.5, 1.5 percent of Roche’s inventors were already located
in Shanghai.
Data highlighted in Table 9.5 tend therefore to confirm that pharma-
ceutical actors in the Basel employment basin aim to enhance their global
knowledge assets by taking advantage of pharmaceutical clusters worldwide,

Table 9.5 Geographical distribution of the pharmaceutical patent applications

lodged at the EPO in the Basel employment basin by applicants in 2005
Nbr of
Company Country Region invts %
Novartis CH North-western Switzerland 281 23.91
US California 160 13.62
US Massachusetts 96 8.17
GB Surrey, E and W Sussex 68 5.79
FR Alsace 60 5.11
AT Wien 49 4.17
GB Essex 10 0.85
US New York 10 0.85
– Other cluster regions 52 4.43
– Other regions 61 5.19
Roche CH North-western Switzerland 201 20.02
US California 155 15.44
FR Alsace 83 8.27
GB Berks, Bucks and Oxfon 21 2.09
CA Ontario 18 1.79
Roche (suite) DE Karlsruhe 17 1.69
CN Shanghai 15 1.49
US Colordo 12 1.2
DE Darmstadt 10 1
– Other cluster regions 25 2.49
– Other regions 46 4.58
Actelion CH Northwestern Switzerland 45 57.69
Pharmaceuticals FR Alsace 17 21.79
DE Freiburg 5 6.41
GB Gloucs, Wilts and N Som 4 5.13
CA Quebec 3 3.85
Sandoz AT Tirol 40 59.7
AT Wien 7 10.45
ES Cataluña 4 5.97
AU Queensland 3 4.48
AT Vorarlberg 2 2.99
AT Kärnten 2 2.99
AU Western Australia 1 1.49
IT Trentino Alto Adige 1 1.49
Continued

Table 9.5 Continued
Nbr of
Ciba DE Freiburg 15 23.81
FR Alsace 8 12.7
JP Tokai 6 9.52
GB West Yorkshire 5 7.94
GB Eastern Scotland 1 1.59
JP Shikoku 1 1.59
US Pennsylvania 1 1.59
US Delaware 1 1.59
Speedel CH North-western 55 100
Experimenta Switzerland
Syngenta CH North-western Switzerland 22 64.71
GB Berks, Bucks and Oxon 2 5.88
CH Zurich 1 2.94
US Illinois 1 2.94
US Texas 1 2.94
Santhera CH North-western Switzerland 7 35
Pharmaceuticals DE Karlsruhe 4 20
DE Düsseldorf 3 15
DE Köln 3 15
Santhera ES Cataluña 2 10
Pharmaceuticals BE Prov. Vlaams-Brabant 1 5
(suite)
Basilea FR Alsace 10 50
Pharmaceutica
CH Northwestern Switzerland 8 40
CN Shanghai 2 10
Arpida CH Northwestern Switzerland 10 62.5
FR Alsace 5 31.25
CN Shanghai 1 6.25
Lonza CH Lake Geneva Region 7 43.75
ES Cataluña 7 43.75
ES Comunidad de Madrid 1 6.25
Independents US Georgia 7 50
US Ohio 2 14.29
Polyphor CH Northwestern Switzerland 4 30.77
FR Alsace 3 23.08
CH Zurich 2 15.38
Continued

Table 9.5 Continued
Nbr of
DE Freiburg 2 15.38
Auris Medical FR Languedoc-Roussillon 5 50
DE Stuttgart 2 20
DE Tübingen 2 20
FR Haute-Normandie 1 10
ADD Advanced CH Northwestern Switzerland 3 42.86
Drug
Delivery DE Freiburg 3 42.86
Technologies
DE Rheinland-Pfalz 1 14.29
Acino Pharma CH Zurich 4 57.14
CH Eastern Switzerland 1 14.29
FR Alsace 1 14.29
Solvias GB Surrey, E and W Sussex 3 42.86
CN Shandong 1 14.29
OncoScore CH Northwestern Switzerland 5 100
Clariant GB West Yorkshire 2 50
GB North Yorkshire 1 25
US North Carolina 1 25
Drossapharm CH Northwestern Switzerland 3 100
Thommen DE Thüringen 2 66.67
Medical
Bayer Consumer FR Île de France 2 66.67
Care
FR Aquitaine 1 33.33
SwissCo CH North-western Switzerland 1 50
Development
DE Oberbayern 1 50
Covalys DE Darmstadt 1 50
Biosciences
DE Freiburg 1 50
Cerecon CH North-western Switzerland 1 100
Epipharm CH North-western Switzerland 1 100
Energy4Life CH North-western Switzerland 1 100
Jagotec DE Freiburg 1 100
Total 2632

multi-locating their innovation activities across the globe and building

cross-cluster relationships. This importance of pharmaceutical clusters was
confirmed in the interviews with the two executives of Novartis and Roche.
Three main points emerged from these discussions.
First, the main reason why these firms target pharmaceutical clusters is the
availability of smart people and a qualified workforce. As every pharmaceu-
tical firm possesses basically the same research infrastructures (laboratories,
machines, robots, test tubes, beakers, etc.) the only way to make a difference
and come up with innovations is to have the right people. The presence of
significant research-based universities and institutes in areas like Boston and
California makes these regions particularly appealing and gives these areas
the required intellectual capital to create new medicines.
Second, as interactions are crucial in the innovation process, the vibrant
environment of a cluster is the perfect place to initiate collaborations with
different types of partner such as universities, research centers, small biotech
companies, and individual scientists. Moreover, since proximity facilitates
interactions and access to tacit knowledge, clusters provide unique advan-
tages over widely spread groupings. The benefits of clusters in research were
nicely illustrated by Jeffrey Lockwood (Novartis). According to him, the “cafe-
teria effect” found in leading clusters is particularly valuable to researchers
and he informally described it as follows: “‘Hey, let’s have a sandwich and
talk about this problem we are having over at my place, and maybe we can
go to my lab afterwards and we can work on it’ rather than ‘Hey, I have to
get my car and drive to you’ or ‘I have to get on a plane’ or ‘we have to do a
conference call’.” Furthermore, not only does the intensity of competition
in clusters – resulting from the agglomeration of a large number of actors in
related industries – make companies sharper but constant comparison with
direct rivals also makes sure that your research goes in the right direction
and that you conduct the best science.
Finally, despite the crucial importance of clusters, innovation in the phar-
maceutical sector is now a global effort. Although innovations are initiated
locally, they are pursued and developed and their value maximized globally.
While some regions used to be specialized in certain types of research – Basel,
for example, was traditionally very strong in small molecule chemistry and
southern San Francisco and California in large molecules therapies – improved
communication and transport have progressively triggered a “cross-pollina-
tion” of knowledge. For example, one of the firms interviewed undertakes
oncology research in Emeryville (California), in Cambridge (Massachusetts),
and in Basel (Switzerland) and research on muscles and bones in both Basel
and the U.S. As mentioned by both interviewees, their firm seeks comple-
mentarity between locations and different views on similar issues. Getting
a lot of people looking at a problem from different angles is particularly

valuable in the innovation process and greatly contributes to increasing

its probability of success. The global innovation network implemented by
pharmaceutical firms makes cross-cluster relationships particularly valuable
because it allows firms to combine widely differing perspectives.
This chapter explored the geography of invention in a globalized economy

by analyzing the origin of pharmaceutical patent applications lodged at the
EPO by applicants located in the Basel employment basin. In an era in which
knowledge has increasingly become the main source of competitive advan-
tage, companies from innovation-driven economies, such as Switzerland,
aim to constantly enhance their technological assets by sourcing knowl-
edge from the most specialized knowledge hubs around the world. The
management of global innovation strategy is therefore a key issue in firms’
competitiveness. As patents are important steps in the innovation process of
pharmaceutical firms, they present a unique way to assess the evolution of
innovation in the pharmaceutical industry.
In line with the global trend, this chapter put forward striking evidence
of the internationalization of the innovation process. Although developed
economies still account for the lion’s share, China and India are progres-
sively positioning themselves as upcoming destinations for R&D invest-
ments in the pharmaceutical sector. Furthermore, despite the widening of
implantation opportunities, innovative activity appears to be particularly
concentrated within specialized clusters.
On the one hand, this chapter emphasized that the large majority of inven-
tors of pharmaceutical patents lodged by applicants located in the Basel
employment basin were located in pharmaceutical clusters. On the other
hand, it also stressed that firms were multi-locating their inventive opera-
tions in several pharmaceutical clusters around the world to tap into the
specificities of different environments and clusters. Regarding the specific
case of firms established in the Basel employment basin, foreign clusters and
cross-cluster relationships seem to play an important role in MNEs’ perpetual
quest for new knowledge and competencies.

Conclusion to Part III
Invention is at the basis of innovation, increased productivity, competitive-
ness, and economic growth. Understanding the spatial pattern of inventive
activity is therefore of tremendous importance both for firms and for govern-
ments if they are to implement the most suitable practices and policies to
sustain innovation in the long term. Although Switzerland is one of the
world’s most innovative and prosperous countries, the rapid evolution of the
economy has set new challenges, which must be faced in order to maintain
and improve the country’s competitiveness and innovative position.
In order to offer a clear picture of the Swiss geography of invention,
Chapter 7 examined the spatial distribution of inventive activities in
Switzerland and the inventive performance of Swiss regions at different
geographical levels. Through original cartographic profiles derived from an
in-depth analysis of patent applications lodged at the EPO by applicants and
inventors in Switzerland, this chapter stressed the uneven distribution of
inventive activity across the Swiss territory. Although the country as a whole
boats top inventive performances, the marked regional inequalities identi-
fied reflect Switzerland’s remaining inventive potential.5
Based on these insights, Chapter 8 assessed the specialization patterns of
the sectoral distribution of inventive activity. As emphasized, each sector
shows not only idiosyncratic propensities to patent but also unique concen-
tration patterns. However, as region size influences the results derived from
an analysis of the number of patent applications lodged, analyzes in rela-
tive terms were conducted in order to reveal the inventive specializations of
regions. Following this methodology, 19 sectors presented distinctive inven-
tive concentration patterns in 12 different employment basins.
Together, Chapters 7 and 8 provide a detailed picture of the specific char-
acteristics of inventive activity in Switzerland and offer a unique tool for
policy makers and regional leaders to evaluate the inventive performance of
their region and take the most adequate measures to sustain innovation and
prosperity in the long run. Although selectivity was necessary in the presen-
tation of the results, the databases constructed represent an exclusive source
231

of information to conduct in-depth regional analysis and evaluate in more

detail the inventive profile of Swiss regions.
Finally, as the pharmaceutical sectors appeared particularly concentrated
in the Basel employment basin, Chapter 9 explored the evolution of the
innovation process in a globalized economy by the analyzing the region
of residence of inventors of pharmaceutical patents lodged by applicants
in the Basel pharmaceutical cluster. This chapter provided new insights not
only into the internationalization of the innovation process but also into
the role of foreign pharmaceutical clusters as sources of new knowledge. As
the role of clusters in the new geography of innovation was still relatively
under-studied, this chapter significantly contributed to an understanding of
how MNEs manage their global innovation strategy and take advantage of
leading pharmaceutical clusters around the world by establishing research
activities in these unique sources of knowledge and innovation.

General Conclusion
Three main lessons can be drawn from this analysis of the intertwined
relationships between innovation, clusters, and firms in today’s global
economy.
First, this book firmly underlines the crucial role of innovation in economic
growth and competitiveness. Through a thorough theoretical construct, this
research clearly emphasizes the causal link between innovation and produc-
tivity, prosperity, and competitiveness. In an economy in which competitive
advantage increasingly relies on knowledge, innovation is a sine qua non for
sustained productivity growth and high standards of living in the long term.
At a time of great economic instability, with many countries still struggling
to recover from the last financial crisis and facing huge challenges to reduce
unemployment and stabilize their budgets, continued support for innova-
tion is one of the keys to a brighter future and should therefore be at the core
of any growth strategy.
Second, this book examined in detail the complexity of the innovation
process. While preaching the economic virtues of innovation is noble, a
failure to explain its mechanisms would leave policy makers with unanswered
questions. As emphasized throughout this book, innovation is an uncertain
process. However, the inherent characteristics of the innovation process
tend to make innovative activity concentrate spatially. To that extent, it has
been carefully demonstrated that clusters play a crucial role in the reduc-
tion of the inherent uncertainty surrounding the innovation process and
in the stimulation of innovation. By encouraging constant interactions and
facilitating face-to-face contact and access to tacit knowledge, clusters offer
an environment particularly conducive to innovation, productivity growth,
and new business formation. Although implementing targeted cluster poli-
cies on the basis of the specific strengths of an economic area can have a
positive impact on economic performance, it would be illusory to believe
that clusters are the solution to every economic woe. As argued, the competi-
tiveness of a region or a country is a direct reflection of the competitiveness
of its firms. In other words, no region or country can be competitive unless
233

its firms are competitive. This microeconomic vision of competitiveness

does, however, not reduce the role of the state in the stimulation of compet-
itiveness. Governments assume a crucial responsibility for the creation of
the best business environment for firms to thrive. This statement has deep
implications for countries currently facing economic difficulties: without an
in-depth reassessment of their business environment and serious efforts to
implement business-friendly framework conditions, it will be particularly
challenging for them to revive growth. In a thorough analysis of the spatial
distribution of inventive activity in Switzerland based on patent applications
at the EPO, this book provided unique insights into the inventive perform-
ance of Swiss regions and exclusive evidence of the specialization patterns
of inventive activity. This empirical investigation not only confirmed the
idiosyncratic distribution of inventive activity across the Swiss territory but
also identified the country’s main inventive clusters. From a policy stand-
point, the numerous analyses conducted offer policy makers a powerful tool
to evaluate the inventive profile of their region and implement suitable poli-
cies to boost innovation and sustain prosperity in the long term.
Third, this book added a “pinch of internationalization” to cluster theory.
Despite the enduring importance of location in today’s global economy, clus-
ters are not isolated islands. Firms can now source knowledge and comple-
mentary assets from a wider range of locations and the pressure to constantly
innovate, intensified by global competition, has prompted them to increas-
ingly establish their research activities in foreign locations. While MNEs
have the special ability to tap into the specific knowledge profile of different
types of environment and to internalize the benefits of the management of
geographically dispersed activities, few researchers had investigated the role
of clusters in this global knowledge sourcing process. Through a detailed
analysis of pharmaceutical patents sought by applicants located in the Basel
employment basin, this book provided not only new insights into the inter-
nationalization of the innovation process but also unique evidence of the
importance of foreign pharmaceutical clusters as sources of new knowledge.
These results have two main implications. First, at the firm level they raise
awareness in the managerial community of the attraction of clusters in the
innovation process and stress the potential benefits of a physical presence
in clusters as part of the global innovation strategy of firms. Second, at the
policy level they further emphasize the crucial importance for governments
to create the best possible business environment. Globally competitive firms
require educated and skilled people, efficient administrative and physical
infrastructures, and top-class research and academic institutions to sustain
and develop a competitive edge. In an era in which firms are increasingly
mobile, a deterioration of framework conditions can lead them to reassess their
location strategy, leave a region, and thereby further lessen its competitive-
ness. This conclusion is particularly important for a country like Switzerland.
While firms – and especially foreign MNEs – often praise Switzerland for

Conclusion 235
its business environment, government decisions obstructing firms’ activity

can have disastrous consequences and quickly erode Switzerland’s competi-
tiveness. Policy makers therefore have huge responsibilities in maintaining
high-level framework conditions.
While this book fuels the debate on crucial economic issues and contributes
to a better understanding of the relationship between innovation, clusters,
and firms, it also raises further research questions. On the one hand, more
research should be conducted on the impact of both patents and clusters
on economic performance. Based on the rich patent application database
elaborated for this study it would be particularly interesting to build addi-
tional regional datasets to test the impact of patent applications on various
economic variables and to try to capture the role of clusters and agglomera-
tion on innovative activity and economic performance. On the other hand,
it would also be particularly interesting to extend the analysis of the role
of clusters in the innovation process of MNEs. While this research focused
on the analysis of a sample of pharmaceutical patent applications made by
applicants in the Basel employment basin, it would be insightful to gener-
alize this analysis to other sectors and other regions and to compare whether
firms located in clusters tend to be more inclined to source knowledge in
other foreign clusters than firms located in non-cluster regions.

Notes
Introduction
1. Some passages of this thesis – exclusively written by the author – have been used in
Gugler et al. (2011). This conference paper was presented – and never published –
at the 2011 meeting of the Academy of International Business (AIB) in Nagoya
(Japan) in order to obtain feedback to improve the quality of this research.
1 Preamble to the Study of Innovation

1. Schumpeter’s groundbreaking contribution to bringing innovation into main-
stream economics will be investigated in more detail in Chapter 2.
2. A qualitative distinction between the first innovation and its subsequent
introduction(s) in new contexts may nevertheless be discussed.
3. Although innovation could once have been reduced to the simple satisfaction of
human needs, it is at best no more than a half-truth (Williams, 2000, p. 8). As put
forward in some detail in Chapter 2, it is now well established in the literature that
innovation is crucial for economies as they approach the frontiers of knowledge
and the possibility of integrating and adapting exogenous technologies tends to
disappear (Aghion and Howitt, 1992; Grossman and Helpman, 1991a, b; Lucas,
1988; Romer, 1990). For innovation-driven economies adopting existing technolo-
gies is no longer sufficient to increase productivity and, in the long run, innova-
tion is the only means to expand standards of living (Sala-I-Martin et al., 2009,
p. 7). Innovation is therefore no longer a simple means to satisfy a need but rather
a sine qua non condition to maintain a competitive edge.
4. As the term “innovation” is often associated with closely related notions such as
intellectual property, invention, patent, R&D, science, technical progress or tech-
nology, Appendix 1 provides a brief glossary of these concepts. Some of these
notions will naturally receive greater attention within this text as they are at the
core of this research.
5. The notion of patent will be analyzed in detail in Chapter 3.
6. Similarly, many inventions in the automotive industry (such as the electric car, the
solar car or the hydrogen engine) seem to take a disproportionately long time to
enter the market because they are being purposefully delayed by the oil and auto-
motive industry lobbies.
7. Other examples of radical innovations are those which make a particular tech-
nology or know-how obsolete overnight. The development of digital printing and
digital photography has, for instance, particularly challenged the offset printing
industry and the photographic film industry (think about Kodak’s struggle to tran-
sition towards digital technologies).
8. The term “product” is used to cover both goods and services.
9. For more detail about the definitions of the different types of innovation, please
refer to the OECD (2005).
236

Notes 237
10. Not to be confused with Vernon’s famous product life-cycle theory (Vernon,
1966). Although related, Vernon’s theory did not intend to develop a theory of
technological evolution per se but an explanation of foreign production and FDI
activity.
11. The SPRU innovations database lists significant technological innovations intro-
duced into the United Kingdom. It was developed by the Science Policy Research
Unit (SPRU) at the University of Sussex, UK.
12. A good literature review on organizational innovation has been provided by Lam
(2005).
13. Statistics on R&D are collected on the basis of the standard established by the
OECD Frascati Manual (2002, p. 30): “R&D comprise creative work undertaken on
a systematic basis in order to increase the stock of knowledge, including knowledge
of man, culture and society, and the use of this stock of knowledge to devise new
applications.”
14. The Patent Cooperation Treaty (PCT) provides the facility to seek patent rights
in a large number of countries by filing a single international application with
a single patent office. In other words, PCT patents can be seen as a “worldwide
patent application” (OECD, 2009b, p. 64).
15. The role of universities and other institutes of higher learning in the innova-
tion process must nevertheless not be underestimated. They play a key role in
science – defined as “the unfettered search for knowledge for the sake of understanding”
(Feldman, 2004, p. 5) – which can be the source of many innovations. Moreover,
without specific government incentives, private firms are less likely to engage in
basic research due to its very uncertainty and the unpredictable returns on invest-
ment (Feldman, 2004, p. 5ss).
16. Copyright requirements did not permit to reproduce the value chain model in
multiple sections of this book.
2 Innovation and Economic Performance

1. The dynamics of the system described by Smith and Ricardo can be summarized
as follows: capital accumulation leads to an increase in work demand which
transiently causes an upward pressure on wages until demography picks up. A
larger pool of workers brings about a larger demand for grains thus inducing the
cultivation of less productive lands, generating a rise in grain price, land income
and nominal wages (minimum living wage). Wages and land income grow at the
expense of profit, which decreases until no further investment is undertaken.
The cessation of capital accumulation stops the demographic growth and leads
to a stabilization of the whole economic system, defined as the stationary state
(Guellec and Ralle, 2003, p. 27–28).
2. It is worth noting that Smith was not the first thinker to stress the benefits of
the division of labor. In his book on the history of economic thought, Friboulet
(2009, p. 43) reported that Plato, Aristotle, Hutcheson and Mandeville already
recognized, to some extent, the virtues of the division of labor.
3. Economic evolution was described by Schumpeter as “the changes in the economic
process brought about by innovation, together with all their effects, and the response to
them by the economic system” (Schumpeter, 1939, vol. I, p. 86).
4. For detailed information on Marx’s works, please refer to the three volumes of his
book “Capital: A Critique of Political Economy” (Marx, 1954/1956/1959).

238 Notes
5. As noted by Schumpeter (1939, p. 103–104): “The failure ... to visualize clearly entre-
preneurial activity as a distinct function sui generis, is the common fault of both the
economic and the sociological analysis of the classic and of Karl Marx.”
6. It is worth noting that the notion of “cluster” used by Schumpeter refers more
to a series of innovations (geographically concentrated or not), triggered by an
important discovery (such as the invention of the Internet, which has generated
a wide array of inventions and innovations in many different fields), rather than
the concept of “cluster” popularized by Porter (1990, 1994) to reflect the benefits
of agglomeration. Although related, the notion of “cluster” used by Schumpeter
is distinct from Porter’s concept of “cluster” central to this thesis and rooted in
the works of Marshall (1890/1916) and early economic geographers such as von
Thünen (1826), Weber (1909/1929) or Hotelling (1929) (cf. Chapter 5).
7. Maddison (2001) provided a rich analysis reviewing the major stylized facts about
growth.
8. It is worth noting that there had been attempts to model the growth process since
the late 1930s. However, technological change was not integrated as a poten-
tial factor of sustained growth in the long run. The Keynesian growth model
of Domar (1947) and Harrod (1948) is particularly representative. Economic
growth was explained in terms of productivity of capital and intensity of saving
(Lecaillon et al., 2008, p. 232ss.). According to these authors, a balanced growth
of the economy was unlikely to be reached as it implied a parallel increase in the
rate of investment and of the ratio between the share of savings and the produc-
tivity of capital (Lecaillon et al., 2008, p. 233). Although Harrod and Domar were
very pessimistic about the possibility of a lasting growth in the long term, they
developed a production function in which output (Y) was a function of capital
(K), which set the foundation of subsequent exogenous and endogenous growth
models (Guellec and Ralle, 2003, p. 30).
9. K encompassed both human and physical capital.
10. The marginal product F'(k) is positive but diminishes as K increases because of the
decreasing marginal productivity of capital.
11. It is worth noting that post Second World War growth models (Domar, 1947;
Harrod, 1948) and the Cobb-Douglas function (Cobb and Douglas, 1928; Douglas,
1976) (explaining growth of production (output) as a function of two factors
(capital and labor raised to the power α and β –constant values representing capital
and labor elasticity, determined by available technology) and a factor A capturing
total factor productivity (or the non-explained share of productivity growth –
implicitly technological progress) have been particularly popular among scholars
and business cycle research institutes to evaluate and forecast production’s poten-
tial growth rate (OECD, 2012b). For instance, in Switzerland the explanation of
growth has long relied on a Cobb-Douglas framework (i.a. IMF, 2005; Minsch and
Sturm, 2011).
12. Please refer to Jones and Manuelli (2005) for a synthetic presentation of neoclas-
sical models of growth.
13. AK models have been named after the production function they rely on. As
emphasized in equation (1), output in AK models is a function of a fixed coef-
ficient “A” and capital “K”.
14. Landes (1998) estimated that while the divergence in productivity and income
per capita between the richest and the poorest country in the world 250 years ago
was approximately 5:1, this ratio has increased roughly to 400:1 today.
15. A good literature review has been provided by Pianta (2005).

Notes 239
16. Literature reviews have been provided by Petit (1995), Chennells and Van Reenen
(1999) or Spiezia and Vivarelli (2002).
17. The work of Sauvy (1981) presented in Chapter 1 (Section 1.1) can be included in
this stream of research.
18. The debate on compensation mechanisms dates back to Ricardo and Marx and
refers to the idea that the economic system has the ability to counterbalance
the initial labor-saving effects of some innovations (Pianta, 2005, p. 580). For
instance, Spiezia and Vivarelli (2002, p. 102) put forward that new machines
could trigger compensation mechanisms: “the same process innovations that displace
workers in the user industries create jobs in the capital sectors where the new machines
are produced.” Decrease in prices, new investment, decrease in wages, increase in
income or new products are other examples of sources of compensation mecha-
nisms (Pianta, 2005, p. 581).
19. While classical economists such as Smith were interested in understanding growth
patterns at country level, this issue has been relatively overlooked in neoclassical
economics, more concerned with developing mechanical equilibrium models of
static resource allocation and efficiency (Cantwell, 2005, p. 543).
20. Please refer to Cantwell (2005) for an in-depth literature review.
21. These 12 pillars are: institutions, infrastructure, macroeconomic environment,
health and primary education, higher education and training, goods market
efficiency, labor market efficiency, technological readiness, market size, business
sophistication and innovation (WEF, 2012, p. 4–8).
3 The Measurement of Innovation

1. For detailed information about these categories, please refer to OECD (2002,
p. 30ss.).
2. As emphasized by the OECD (2002, p. 22), indicators of R&D facilities could be
envisaged but are seldom collected and indicators of national R&D effort can be
derived for international comparison from gross expenditure on R&D (GERD) to
GDP.
3. However, it does not mean that returns on investment in R&D are low. It just
signifies that innovating may require important R&D investment (as discussed in
this section).
4. Hall et al. (2010, p. 1052ss.) provides an in-depth review of an impressive number
of econometric studies analyzing returns on R&D at firm, industry and country
levels.
5. Other less common indicators could have been presented but because of their
minor impact on the assessment of innovation activity they are not developed here.
Among these indicators are: bibliometric data, technometric indicators, synthetic
indicators developed for scoreboard, such as those of the Global Competitiveness
Report (WEF, 2011), or small-scale databases elaborated by researchers for specific
research projects such as the MERIT-CATI database or the DISKO surveys (Smith,
2005, pp. 152–153).
6. An overview of their analyses can be found in OECD (1994).
7. An important legal issue concerns the exhaustion of patent rights and parallel
imports. As noted by the European Union (2013, Internet source): “The term
parallel imports is used when products manufactured and marketed by the patent
holder in one country are imported by another company. The legal principle here
is “exhaustion”, the idea that once [for example] a pharmaceutical company has

240 Notes
sold its product its patent rights are exhausted and it no longer has any rights over
what happens to the product. This therefore allows any other company to buy
the product in a country where the selling price is lower and import it in order to
profit financially from the difference in prices. The TRIPS agreement points out
that disputes relating to these parallel imports cannot be handled by the WTO.
This means in effect, as stated in the Doha Declaration, that each member of the
WTO remains free to establish its own regime for exhaustion.” As noted by the
Swiss Federal Institute of Intellectual Property (2013b, Internet source), there are
three basic variants of patent rights’ exhaustion: the national exhaustion, the
regional exhaustion and the international exhaustion. For further details please
refer to Swiss Federal Institute of Intellectual Property (2013, Internet source) or
WIPO (2013, Internet source).
8. A recent paper by De Rassenfosse (2010, pp. 7–9) investigates in more details the
propensity to patent. He identified 6 dimensions influencing patent propensity: (1)
Invention characteristics and the invention process, (2) Firm’s characteristics, (3)
Firm’s attitude towards the use of patents, (4) Regime of appropriability, (5) Market
factors, and (6) IP-related policies. Please refer to this article for further information.
5 The Clustering of Innovative Activity

1. This framework has been used to design the New Global Competitiveness Index
(GCI), reported by the World Economic Forum (WEF) in its Global Competitiveness
Report (GCR) (WEF, 2008).
2. The ineluctable interdependent relationship between firms’ and regions’ competi-
tiveness has also been emphasized by Ketels (2008, p. 112): “The more productive
companies can be at a location, the more successful this location will be in compe-
tition with other locations. And the more productive the companies located there,
the higher the level of prosperity the location can sustain.”
3. Although the benefits of agglomeration had long been acknowledged in the
economic literature and the word “cluster” had already been used by some authors,
Porter was the one who truly popularized the notion of cluster (see Note 22).
4. See Gordon and McCann (2000) or Malmberg et al. (1996) for a good review of the
antecedents of cluster theory.
5. The ground-breaking work of Krugman and Porter was influenced by and trig-
gered a wide array of research on the phenomenon of spatial agglomeration and
the role of location in economics. The literature on growth pole and backward
and forward linkages (Hirschman, 1958), agglomeration economies (Weber,
1909/1929; Lösch, 1954; Lloyd and Dicken, 1977; Goldstein and Gronberg, 1984;
McCann, 1995; Ciccone and Hall, 1996; Fujita and Thisse, 1996), economic
geography (Amin and Thrift, 1992; Stoper, 1997; Stoper and Salais, 1997), urban
and regional economics (Scott, 1991; Glaeser, 1994; Henderson, 1996), regional
science (Giarratani, 1994; Markusen, 1995), industrial districts (Becattini, 1987;
Harrison, 1992; Pyke and Sengenberger, 1992), and social networks (Nohria,
1992; Fukuyama, 1995; Burt, 1997; Harrison and Weiss, 1998) can here be cited
(Porter, 1998a, p. 207).
6. Although innovation scholars had identified the characteristics of the innovation
process before the 1990s (Chapter 4), it was only with the revival of geographical
questions in economics that they started to embrace spatial and innovation issues
in a common perspective.

Notes 241
7. In a more recent paper, Foray et al. (2011) nevertheless pointed out the difficul-
ties faced by policy makers in the implementation of smart specialization-oriented
policies.
6 The Geography of Innovation in a Globalized Economy
1. The enduring role of location in a globalizing economy has also been conscien-
tiously studied in the literature on the regional nature of multinational enterprises.
Rugman has been one of the most important contributors to this literature (i.a.
Rugman and Hodgetts, 2001; Rugman, 2005; Rugman and Collinson, 2005, 2008;
Rugman and Oh, 2006, 2007, 2008; Rugman and Verbeke, 2004a, b, 2008a, b;
Rugman et al., 2007).
2. According to the OECD (2008c, pp. 48–49) “Foreign direct investment reflects the
objective of establishing a lasting interest by resident enterprise in one economy
(direct investor) in an enterprise (direct investment enterprise) that is resident in
an economy other than that of the direct investor. The lasting interest implies the
existence of a long-term relationship between the direct investor and the direct
investment enterprise and a significant degree of influence on the management of
the enterprise. The direct or indirect ownership of 10 percent or more of the voting
power of an enterprise resident in one economy by an investor resident in another
economy is evidence of such relationship.”
3. BRIC countries = Brazil, Russian Federation, India and China. Figures are at current
prices and current exchange rates. FDI data for the Russian Federation was not
available before 1992.
4. It is worth noting that because of differences in their collection processes, OFDI
and IFDI are not directly comparable with each other (Dunning and Lundan, 2008,
p. 30; Gugler and Tinguely, 2011a/b). This explains, for instance, why the aggre-
gated figures differ between tables 6.1 and 6.2.
5. Rugman (1981, 1982, 2008), Rugman and Verbeke (2009), and Verbeke (2009)
provided interesting alternative and complementary theories of MNE activity.
They nevertheless do not supplant Dunning’s eclectic paradigm in the explanation
of MNE activity.
6. Given the fact that firms from factor-driven economies such as India or efficiency-
driven economies such as China are beginning to perform strategic asset-seeking
investments in innovation-driven economies and to compete with established
Western firms, it would be better to speak of “firms that have reached the knowl-
edge frontiers”. Nevertheless, the terminology used above and developed by the
World Economic Forum (WEF, 2008) reflects the general idea.
7. Although diversifying the research base is particularly important for increasing the
probability of success of the innovation process, it is worth noting that this kind of
investment is often primarily undertaken to penetrate the high-potential Chinese
market.
8. It is important to note that although clusters provide an environment conducive
to innovation, firms may still be interested in the knowledge produced by “non-
cluster” regions.
9. It is worth noting that the capacity of firm X to constantly extend its competitive
position and knowledge base is dependent on its ability to manage an increasingly
complex network of geographically dispersed activities.

242 Notes
Part III
1. Please refer to chapter three for detailed information on the strengths and weak-
nesses of patent data as an indicator of inventive/innovative activities.
7 Geographical Distribution of Inventive Activities
and Inventive Performance in Switzerland
1. Detailed methodological information will follow in the next section.
2. For information, among the 131,010 entries recording inventors established in
Switzerland and the 93,788 entries recording applicants established in Switzerland,
respectively 3,009 (or 2.3 percent) and 1,309 (or 1.4 percent) were misallocated.
3. Although having similar information would be utopic, multiple columns recording
the different elements of an address (zip code, city, street, street number, etc.)
would be much more convenient from an analytical standpoint.
4. I would like to address special thanks to my friend and colleague Mr. Michael
Keller for his precious help in the cleaning process.
5. Our classification relies on the 2010 official classification of geographical levels in
Switzerland (Les niveaux géographiques de la Suisse 2010) provided by the Swiss Federal
Statistics Office. As the number of municipalities sharply decreased in Switzerland
between 1977 and 2010 (because of mergers), inventors and applicants located in a
defunct municipality have been reallocated to the new municipality as in 2010.
6. An extract of the first page of a patent application at the EPO is presented in
Appendix 2.
7. Switzerland is a member state of the European Patent Organization (www.epo.
org/about-us/organisation/member-states.html).
8. While implementing a new policy at the level of single political jurisdiction is already
challenging, if the region of analysis encompasses multiple jurisdictions, the task is
even more complicated. Furthermore, it is worth noting that important discrepan-
cies exist between similar types of political jurisdiction. For example, the political
reality of Zurich, which has almost 400,000 inhabitants and is the economic heart
of Switzerland, can be difficult to compare with the political reality of a munici-
pality like Bure in the canton of Jura, which records only 600 inhabitants.
9. Cantons can be compared to States in the U.S. and districts to Counties. In 2010,
Switzerland recorded 26 cantons and 150 districts.
10. Main regions and employment basins correspond to analytical regions designed
by the Swiss Federal Statistics Office (FSO). In 2010, Switzerland recorded 7 main
regions and 16 employment basins. While main regions are groups of cantons
and have been created to match the NUTS 2 level of the Eurostat classification of
regions, employment basins are an aggregation of the 106 spatial mobility regions
elaborated on the basis of commuter flows. For more information about these
analytical regions, please refer to FSO (2013a).
11. Although main regions and employment basins go beyond official political juris-
dictions, they still represent arbitrary geographical breakdowns. Furthermore,
the innovation process tends to spill over national borders. This analysis does
not account for inventors located in neighboring foreign regions and may there-
fore underestimate the inventive performance of Swiss border regions such as
Geneva or Basel. This issue will nevertheless be taken into account in chapter
nine.

Notes 243
12. Although the inventor’s address provided in a patent document can be his
professional address (OECD, 2009b, p. 63), the patent analysis performed in the
following sections has shown that inventors regularly list their private address.
13. For more information about reference date, please refer to OECD (2009b).
14. Full databases can be obtained by contacting the author of this thesis.
15. In absolute terms, they nevertheless still recorded a large number of patent appli-
cations over the period 2000–2008.
16. The gini coefficient is a widely used measure of statistical dispersion measuring
the inequality of a distribution. It ranges from 0 to 1. A value of 0 represents
perfect equality and a value of 1 total inequality. It is graphically measured as
a ratio of the area between the line of perfect equality and the observed values
represented by the Lorenz curve. Please refer to Dorfman (1979, p. 146), Audretsch
and Feldman (1996), or Milanovic (1997) for more information.
17. No data available before 1981. As mentioned by the Federal Statistics Office (FSO,
2012c), data on population levels started to be compiled in 1981.
18. This breakdown is explained by data availability at the time of writing. Employment
data come from the Business Census performed by the Federal Statistics Office and
harmonized employment data (NOGA, 2008) were available only for the years
2001, 2005, and 2008 (FSO, 2012d).
19. Basel-City, Basel-Country, Neuchâtel, Schaffhausen, St.Gallen, Vaud, Zug, and
Zurich.
20. The canton of Valais had 109,927 employees (full-time equivalent (FTE)) in 2005,
the canton of Basel-Country 100,489, and the canton of Solothurn 95,666 (FSO,
2013b).
21. Please refer to Gugler et al. (2010) for an overview of the main issues related to the
lack of regional statistical data in Switzerland.
8 Sectoral Distribution of Inventive Activity and

Specialization Patterns – Towards an Identification
of Switzerland’s Main Inventive Clusters
1. This chapter focuses on the identification of “inventive clusters” and not clusters
in their strictest sense (cf. Chapter 5, Section 5.1). As emphasized in previous
chapters, clusters are more than strong concentrations of inventive activity.
Further investigations would therefore be necessary to determine whether the
inventive clusters identified in this chapter have the critical mass to be defined as
clusters in Porter’s sense.
2. Patents applied for at the EPO are classified under the International Patent
Classification (IPC) system, which is the system most commonly used to classify
patents by technical classes (OECD, 2009b, p. 24).
3. NACE (or Nomenclasture statistique des activités économiques dans la Communité
européenne) is the official European statistical classification of economic activi-
ties (Eurostat, 2012, Internet source).
4. 919.4997 (or 1.1 percent) patent applications had to be removed from the appli-
cant database and 622.9725 (or 1.02 percent) from the inventor database.
5. Data for the periods 1977–2008 and 2000–2008 can be generated on request.
6. Results at the level of cantons, districts, and main regions can be generated on
request. Refer to note no. 73 for more information about employment basins.
7. Full rankings can be generated on request.

244 Notes
8. As sector (33.5) Watches, clocks ranked 11th at the applicant level, it does not
appear in table 7.9. Nevertheless, the employment basins of Neuchâtel, Biel/Bienne,
and Geneva form the top three with respectively 27.74 percent, 25.55 percent,
and 21.90 percent of total patent applications – explaining why Geneva is cited.
9. Calculations have been made at all geographical level of analysis (cantons, districts,
main regions, and employment basins). Detailed regional inventive profiles can
be generated on request.
10. RTA indexes have been calculated for all geographical level (districts, cantons,
main regions, and employment basins) and for the periods 1977–2005 and 2000–
2005 and the year 2005. Detailed regional inventive profiles can be generated on
request.
11. Location quotients are the equivalent of RTA indexes and were used by Keller
(2009) to measure the sectoral specialization patterns of the Swiss economy on
the basis of employment data.
9 Clusters and the New Geography of Invention – An

Empirical Analysis of Pharmaceutical Patents Applied
for in the Basel Employment Basin
1. In order to facilitate the discussion, a semi-structured form of interview was
adopted (Ba Rgn and While, 1994; Wengraf, 2001; Flick et al., 2004). A set of ques-
tions articulated around four themes – (1) General questions about the interviewee,
(2) In-house innovation management, (3) Cluster, environment, and innovation,
(4) Cross-cluster relationships and the management of the innovation network –
was prepared and questions were posed in accordance with the direction taken by
the interview. The interview protocol can be consulted in Appendix 4.
2. Countries identified in Table 9.2 have been classified as developed or developing
on the basis of UNCTAD (1995, 2005, 2008).
3. Czech Republic (CZ), Slovakia (SK) and Slovenia (SI) were considered as devel-
oping countries by UNCTAD in 1995 (UNCTAD, 1995).
4. AU: States, CA: Provinces, CN: Provinces, IN: States, JP: Prefectures, U.S.A.:
States.
5. It is worth specifying that eliminating regional inequalities in terms of inven-
tive performance is not possible because of the structural reality of each region
(Appenzell Innerrhoden cannot be compared to Zurich). It has nevertheless been
clearly shown that regions with similar profiles show marked inventive discrepan-
cies, which points to Switzerland’s remaining inventive potential.

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Appendices
Appendix 1: Glossary of the Principal Notions Surrounding the Concept
of Innovation
Intellectual property: “Intangible property resulting from inventive activity, e.g.

patents, trademarks and copyrights.” (Rutherford, 1992, p. 230).
Invention: “A discovery of a new product or process of production which is often
crudely measured by patent statistics. Economists have analyzed the rate of
invention as a function of the business cycle, the type of market or the organiza-
tion of scientific research.” (Rutherford, 1992, pp. 237–238).
Patent: “A legally registered and protected invention which is the property of its
inventor for a period of a year. Patents create a formidable technological barrier
to entry, establishing and maintaining monopoly power. Since patents allow
monopoly profits to accrue to their inventors, they are a major private incentive
to research and development. Non-patentholders can only use patented tech-
nical knowledge by licence. Although the patent system may encourage inven-
tors, it has been criticized on the grounds that all scientific knowledge should
be a free good and that the considerable legal costs of registering and protecting
a patent exclude the poor inventor from using the system.” (Rutherford,
1992, p. 343).
Research and development (R&D): “The activity of inventing new processes
and products and applying them in industry, especially those which are science
based and dependent for their survival and long-term growth on innovation.
The study of this is often termed ‘the economics of science’.” (Rutherford, 1992,
p. 392).
Science: “The intellectual and practical activity encompassing the systematic study
of the structure and behavior of the physical and natural world through observa-
tion and experiment.” (Oxford Dictionaries, 2013, Internet source).
Technical progress: “The use of new techniques and/or the introduction of new
products. Historically, technical progress has taken the form of the saving of
labor and raw materials, mechanization and the use of inventions; in most cases,
changes in the capital stock are necessary to achieve it. Technical progress can
be measured by considering changes in the proportion of output using a partic-
ular technique, e.g. of steelmaking, by increases in speed or by improvements in
product quality. Technical progress is a major determinant of economic growth.”
(Rutherford, 1992, p. 457).
Technology: “The application of scientific knowledge for practical purposes, espe-
cially in industry.” (Oxford Dictionaries, 2013, Internet source).
Note: In-depth definitions of some of these concepts can be found in The New Palgrave Dictionary of
Economics (2008).
Source: Rutherford (1992) and Oxford Dictionaries (2013, Internet source).
289

290 Appendices
Appendix 2: Extract of the First Page of a Patent Application at the EPO
32
30
28 range >1000 bp
RFU
26
24
range 500 - 1000 bp
range < 200 bp
22 range 500 - 1000 bp
20
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Minutes
Source: European Patent Office (2013b, Internet source).

Appendices 291
Appendix 3: Map of the Geographical Regions Analyzed
A. Cantons
Canton Canton
AG Aargau NW Nidwalden
AI Appenzell Innerrhoden OW Obwalden
AR Appenzell Ausserrhoden SG St. Gallen
BE Bern SH Schaffhausen
BL Basel-Country SO Solothurn
BS Basel-City SZ Schwyz
FR Fribourg / Freiburg TG Thurgau
GE Geneva TI Ticino
GL Glarus UR Uri
GR Graubünden / Grison VD Vaud
JU Jura VS Valais / Wallis
LU Luzern ZG Zug
NE Neuchâtel ZH Zurich

292 Appendices
B. Districts (1/4)
No District Canton No District Canton
1 Canton Geneva GE 19 District de Sierre VS
2 District de Nyon VD 20 Bezirk Leuk VS
3 District de Morges VD 21 Bezirk Visp VS
4 District du Jura-Nord vaudois VD 22 Bezirk Raron VS
5 District du Gros-de-Vaud VD 23 Bezirk Brig VS
6 District de l'Ouest lausannois VD 24 Bezirk Goms VS
7 District de Lausanne VD 25 District de la Veveyse FR
8 District de Lavaux-Oron VD 26 District de la Gruyère FR
9 District de la Broye-Vully VD 27 District de la Glâne FR
10 District de la Riviera-Pays- VD 28 District de la Broye FR
d'Enhaut
11 District d'Aigle VD 29 Bezirk See / District du Lac FR
12 District de Monthey VS 30 District de la Sarine FR
13 District de Saint-Maurice VS 31 Bezirk Sense FR
14 District de Martigny VS 32 District de Neuchâtel NE
15 District d'Entremont VS 33 District du Val-de-Ruz NE
16 District de Conthey VS 34 District de Boudry NE
17 District de Sion VS 35 District du Val-de-Travers NE
18 District d'Hérens VS 36 District du Locle NE

Appendices 293
B. Districts (3/4)
No District Canton No District Canton
77 Wahlkreis Werdenberg SG 92 Bezirk Münchwilen TG
78 Wahlkreis Rheintal SG 93 Bezirk Frauenfeld TG
79 Wahlkreis Rorschach SG 94 Bezirk Steckborn TG
80 Wahlkreis St. Gallen SG 95 Bezirk Diessenhofen TG
81 Wahlkreis Wil SG 96 Bezirk Stein SH
82 Wahlkreis Toggenburg SG 97 Bezirk Reiat SH
83 Wahlkreis See-Gaster SG 98 Bezirk Schaffhausen SH
84 Kanton Appenzell Innerrhoden AI 99 Bezirk Schleitheim SH
85 Bezirk Hinterland AR 100 Bezirk Oberklettgau SH
86 Bezirk Mittelland AR 101 Bezirk Unterklettgau SH
87 Bezirk Vorderland AR 102 Bezirk Andelfingen ZH
88 Bezirk Arbon TG 103 Bezirk Winterthur ZH
89 Bezirk Bischofszell TG 104 Bezirk Pfäffikon ZH
90 Bezirk Kreuzlingen TG 105 Bezirk Hinwil ZH
91 Bezirk Weinfelden TG 106 Bezirk Meilen ZH

294 Appendices
C. Main regions
D. Employmentbasins

Appendices 295
Appendix 4: Interview Protocol
Important note: as a semi-structured form of interview was chosen, not every

question presented below was asked.
General As a starting point, could you explain your position and give a
description of your daily duties/challenges?
Could you briefly outline your background (education and previous
work experience)?
In-house Regarding the sums spent in R&D and the nature of the pharma-
innovation ceutical industry, innovation is crucial to develop competitive
management advantages and sustain high level of productivity and growth.
• Can you tell me a little bit more about the prevalence of
innovation for your company?
• The pharmaceutical industry is known for being particularly
competitive. How would you evaluate the competitiveness of
the pharmaceutical industry and the role of innovation to that
extent?
• Could you point out any significant change in the nature of
competition and innovation in your industry?
• In terms of sums spent in R&D (past, present, future)?
• In terms of the outcome of the innovation process? Is it harder
to come up with successful innovations?
As innovation is the result of the combination of different types of
knowledge, capabilities, skills and resources, the innovation process
is not only highly uncertain and unpredictable but also among the
most complex processes both technically and socially.
• How do you try to reduce the inherent uncertainty of the inno-
vation process and thus increase the probability of success of the
innovation process?
• Feedbacks, interactions and collaborations between people
involved in the innovation process are crucial to the success of
the innovation process. How do you insure knowledge transfer
between people involved in the innovation process within your
company?
• Roche: According to your annual report, interdivisional collab-
oration between your two divisions (pharmaceuticals and
diagnostics) is particularly encouraged to foster innovation
in both divisions. Similarly, scientific freedom and diversity
of approaches (in terms of diversity of views, cultures and
approaches) are advocated to stimulate creativity and
innovation. As a consequence, your company pays particular
attention to gender diversity and your innovation strategy has
been articulated around the attraction of talents, dialogue and
performance feedbacks, supporting employees’ development
and ultimately rewarding innovation.
• Could you tell me a little bit how this strategy has been
developed and how is it concretely implemented?

296 Appendices
• This strategy has been designed to encourage scientific

breakthroughs. What are, according to your experience,
the main factors increasing the probability of success of the
innovation process?
• As this strategy puts a special emphasis on diversity of
approaches, how do you bring together different knowledge
held within your enterprise and take the most out of it to
bolster your innovation process?
Cluster, Your company is the archetype of a multinational enterprise.
nearby • How operating in different environments affects your innovation
environment process?
and • What is the importance of location in your innovation
innovation strategy?
• How do you take advantage of the specificities of each
environment where you operate?
• The US seem to play an important role in your innovation
strategy. What does a presence in the US signify both in terms of
innovation and market opportunities?
According to my patents analysis, pharmaceutical clusters (regions
where the pharmaceutical industry is particularly concentrated)
seem to play an important role in your innovation strategy.
• Could you comment these results?
• US pharmaceutical clusters seem to be an important source of
knowledge and innovation for your company. What do these
regions specialized in the pharmaceutical industry bring to your
company?
• Concretely, does your location here in […] provide you specific
advantages that, for example, the Basel region in Switzerland
does not offer you?
• Is […] specialized in any particular field of research? If yes, which
one(s)? In contrast, in which field of research is the Basel region
specialized?
• Do you intendedly target clusters when you decide to establish
new subsidiaries?
• As some of your subsidiaries are located in regions identified as
pharmaceutical cluster regions and some others are not, does
location tend to matter more for some activities than others?
R&D? Manufacture? What activities do you tend to locate in
clusters?
• What are the advantages of being part of a pharmaceutical
cluster in terms of innovation?
• How do you concretely take advantage of the dynamic
environment of clusters? How do you benefit from the presence
of rival firms, suppliers, companies in related industries, a pool
of specialized employees, academic and research institutions
and business associations?

Appendices 297
• Openness (to new ideas, new processes…) and absorptive

capacities are crucial to take advantage of external knowledge.
How do you tap into knowledge held within clusters?
• Although clusters may provide an environment conducive to
innovation and productivity growth, do they also represent a
threat in terms of knowledge outflow to nearby competitors? To
what extent the benefits of being part of a cluster (agglomeration,
knowledge spillovers) outweigh the potential costs of knowledge
outflow to rival firms? Could the potential knowledge outflow
to nearby competitors incite you to move away from clusters in
order to protect cutting-edge technologies?
Roche: By referring to your annual report, the importance of
setting up a rich innovation network by interacting and developing
collaborations with outside partners such as universities, research
institutes or biotech companies is at the core of your innovation
strategy (more than 150 outside partners so far).
• How being part of clusters does contribute to enrich your
innovation network and how does proximity with outside
partners affect your innovation capacities?
• How do you develop your absorptive capacities in order to take
advantage of knowledge created by your external partners?
Cross- According to my patent analysis, having a presence in multiple
cluster pharmaceutical clusters seems to play an important role in your
relationships global innovation strategy.
and the • How do these cross-cluster relationships contribute to improve
management your innovation performances?
of the • Does the presence in multiple clusters allow you to tap into
innovation different types of knowledge and capabilities? If yes, could you
network give me some examples of specific knowledge or capabilities
that you target in different clusters?
• Through the years your company has built an impressive global
innovation network by establishing research activities in many
different locations around the world. How do you deal with the
complexity of your global innovation network and what are
the main challenges to insure the efficiency of your innovation
process?
• Regarding the internal management of your global innovation
process, how do you make sure that knowledge developed in
one of your subsidiary benefits your whole company? In other
words, how internal knowledge transfers are supported?
• Market opportunities and new sources of economic growth
are an important driver of location choices. How do economic
considerations determine the location of your research activity?
Are market opportunities a prerequisite to the establishment of
research activities in a particular location?
Source: Personal elaboration

Index
Abernathy, W., 78 availability of, 91, 96
Abramovitz, M., 45 human, 16, 37, 39, 40
academic institutions, 92 physical, 37
agents, 43 public, 37
agglomeration economies, 106 Carty, J.J., 77
Aghion, P., 33 Casson, M.C., 22
aircraft industry, 76 catch-up development, 44–6, 69
Alcon, 115 catch-up innovation cycle, 9
alliance capitalism, 119–20 chain-linked model of
Apple, 9–10, 85 innovation, 80–4
applied research, 54, 77, 78 Chandler, A.D., 15
architectural innovation, 15 change
Aristophanes, 10 organizational, 29
Arrow, K.J., 36 pace of, 1
Asheim, B.T., 97 China, 45, 216, 241n6
Asian economies, catching-up circular model of innovation, 101–2
by, 45–6 classical economics, 25–6
Audretsch, D.B., 105 clusters, 31, 42, 71, 86–108
automobile industry, 106 advantages of, 95–7, 107–8
collaboration in, 94–5
barriers to entry, 96 competition in, 94–6
Basel pharmaceutical cluster, 3, 95, concept of, 92–3, 238n6
133–4, 208–32, 235 defined, 2, 94
basic research, 54, 77, 78 empirical evidence on, 104–7
Bichowsky, F.R., 77 global innovation strategy of MNEs
BioValley, 222, 225 and, 123–30
Birkinshaw, J., 21 innovation and, 2–3, 28
Blanchard, O., 35 pharmaceutical, 217–30
Boston Life-Science Cluster, 221 relationships between actors in, 94
bottleneck issues, 84 Switzerland, 193–206
BRIC countries, 110, 241n3 unique environment of, 96–7
Brock, W., 35 Cobb-Douglas production
Bush, V., 77 function, 33
business cycle, 8, 28 collaboration
business enterprises in clusters, 94–5
innovation and, 21–3 in innovation process, 119–20
R&D expenditures by, 17–18 collective consumption goods, 37
value chains, 20–2 co-location, 95, 96
business environment, 91–2, 96–7, commercialization, 78
234, 235 communication technology, 87, 98
Community Innovation
Cantwell, J., 48 Survey (CIS), 66–7
capital company sophistication, 90
accumulation, 25, 32, 36, 36, 237n1 compensation mechanisms, 47, 239n18
299

300 Index
competition economic development, innovation

in clusters, 94–6 and, 7, 44–6
global, 110, 127, 133, 234 economic growth
imperfect, 116 development and, 45
level of, 91 endogenous, 35–43
monopolistic, 39, 41, 116 exogenous, 31–5
competitive advantage, 20–3, 71, innovation and, 3, 29–43, 69,
84, 88, 110, 119, 133 73, 233
competitiveness neoclassical model of, 31–5
innovation and, 43–9, 233 patterns of, 30
location and, 86–97 economic performance
macroeconomic, 90, 234 competitiveness and, 44–9
microeconomic, 90–2, innovation and, 24–51, 69
107, 233–4 economics, of innovation, 2, 5–6
sources of, 88–97 economies of scale, 44, 88, 107, 115
computers, 1, 12 Edison, T., 79
Concorde, 76 Edquist, C., 101
cost leadership strategy, 21 education, 16, 54
cost savings, 14 efficiency, 110
cotton spinning, 1 efficiency-seeking investment, 114–15
creative destruction, 27, 41, 42, 50 electricity, 1, 30
cross-border co-operation electric light bulb, 79
modes, 119 electronic industry, 9, 63
cross-border transactions, 110 embeddedness, 102–3
cross-cluster relationships, 217–30 employment, 14, 46–8, 69
customer feedback, 78, 84 endogenous growth theory, 36–43
customers, 98 endowments, 89–90
entrepreneurs, 8, 29, 96
DeBresson, C., 66 equilibrium, 26, 43
demand conditions, 91 European Cluster Observatory, 105, 218
design, 79 European Commission, 66–7
developing countries, European Patent Office (EPO), 3, 17, 18,
catching-up by, 44–6 134, 138, 143–9, 150
development, 77 evolutionary dynamics, 27
Diamond, J., 11 exchange rate theories, 117
diamond model, 88–93, exogenous growth, 31–5
117–18 experimental development, 54
differentiation strategy, 21 explicit knowledge, 98–9
diffusion, 76, 78
diversity, 40 face-to-face relationships, 98–9,
division of labor, 25, 40, 93 101, 124
Dixit, A., 41 factor (input) conditions, 91
Doha Declaration, 239n7 Fagerberg, J., 5, 10, 86
dominant design, 14 feedback, in innovation process,
Dunning, J.H., 116, 117, 119 78–9, 83–4
Dvorak keyboard, 11 Feldman, M.P., 73, 104, 105, 106
firms
eclectic paradigm, 117–18 continuous interactions between, 98
economic activity, spatial in related industries, 91, 98, 105
concentration of, 2, 86–108 strategy of, 91

Index 301
first mover advantage, 84 human capital, 16, 37, 39, 40

Fordism, 15 human resources, 91
foreign affiliates, 122–3
foreign direct investment (FDI), imitation, 63
109–118, 120, 121, 241n2 incremental innovation, 12, 42
Frankel-Romer model, 36 India, 216, 241n6
Frascati Manual, 53, 57 indoor plumbing, 1
Freeman, C., 100 industrial organization, 7, 41
Fribourg, Switzerland, 95 industrial revolutions, 1, 30
innovation
General Agreement on Tariffs and clusters and, 2–3, 28, 31, 42, 71,
Trade (GATT), 59 86–108
general equilibrium, 43 competitive advantage and, 21
generic drugs, 63 competitiveness and, 48–9, 233
geographical distribution, of Swiss concentration of, 104–7
inventive activities, 137–80 defined, 8–10, 15–16
geography of innovation, 71–2, demand for, 79
109–32 diffusion of, 27
see also clusters economic development and, 44–6
Germany, 44 economic growth and, 3, 29–43, 69,
Gerschenkron, A., 44, 45 73, 233
Gertler, M.S., 97 economic performance and,
global competition, 110, 127, 24–51, 69
133, 234 economics of, 2, 5–6
Global Competitiveness Report (GCR), employment and, 46–8
48, 134 geography of, 71–2, 109–32
global financial crisis, 6 history of, 9–10
globalization, 1–2, 11, 48, 71, 72, implementation of, 16–22
87, 88, 109, 125 incremental, 12, 42
of innovation process, 119–3 indicators, 52–3
MNEs and, 111–18 vs. invention, 10–12, 65
Godin, B., 77, 78, 83 location and, 86–97
Gordon, R.J., 1 management of, 21, 75
government, role of, 91–2, 234 marketing, 16
Gow, I., 57 measurement of, 52–70
Griliches, Z., 58 organizational, 15–16
Gross Domestic Product (GDP), in pharmaceutical sector, 209–13
30, 109 process, 13–16
Grossman, G., 41, 42 product, 13–16
Gross National Product (GNP), 30 radical, 12, 42, 236n7
growth hubs, 28 sources of, 98
growth theory, 25, 31–5, 50, 238n8 spatial concentration of, 2
spatial features of, 17
Hansen, M.T., 21 study of, 1, 5–6, 7, 25–9,
Helpman, B., 41, 42 71, 99–100
home-base augmenting (HBA), 122 success rate by industry, 79
home-base exploiting (HBE), 121 surveys, 66–7
Hommen, L., 101 systems of, 97–104, 107–8
horizontal differentiation, 40, 42 types of, 12–16, 22–3, 27
Howitt, P., 33 innovation cycles, 1, 28

302 Index
innovation process, 1–3, 8–9, 27, Koopmans, T.C., 35

28, 29, 43, 65–6 Krugman, P., 93–4
analysis of, 76–80
aspects of, 74 labor
as “black box”, 74–6 costs, 115
chain-linked model of, 80–4 division of, 25, 40, 93
characteristics of, 97–9 labor markets, 46–8
circular model of, 101–4 learning by doing, 36, 80
cognitive nature of, 73–85 learning through interacting, 99
complexity of, 233–4 linear model of innovation, 76–80, 85
forces driving, 75–6 location, role of, 86–104, 107,
globalization of, 119–3 133, 241n1
linear model of, 76–80, 85 location-specific advantages, 117–18,
systemic view of, 83 119–20, 121
input costs, 88 Lundan, S.M., 116, 117
input measures, 53–6, 57
institutional change, 29 macroeconomic environment, 90, 234
intellectual property rights, 39, 92 macroeconomics, 7
see also patents Malmberg, A., 97–8
internal combustion engines, 1 Mankiw, N.G., 37, 38
internalization advantages, 117 marketing innovations, 12, 16
Internet, 1 market pull, 75
invention, 10–12, 61, 62, 65, 231 market-seeking investments, 114
inward FDI (IFDI), 111, 113 Marshall, A., 93
Marx, K., 26–7
Jaffe, A.B., 104, 105–6 Marx-Schumpeter model of
Japan, 44, 45, 100 technological competition, 27
Jobs, S., 85 Massachusetts, 221
joint ventures, 2 Maxcy, G., 121
measurement of innovation, 52–70
Kaldor, N., 36 input measures, 53–6, 57
Kells, S., 57 object approach to, 66–7
Kelvin, Lord, 68 output measures, 56–67
Ketels, C.H.M., 109 subject approach to, 66–7
Kline, S.J., 8, 12, 24, 65–6, 74, 75, 76, Mees, C.E.K., 77
80–2, 83, 84, 86, 101 Mensch, G., 29
knowledge microeconomic environment, 90–2,
characteristics of, 38 107, 234
cost of, 39 Mirman, L., 35
as cumulative, 39 modular innovation, 15
explicit, 98–9 monopolistic competition, 39, 41, 116
external sources of, 85, 86–7, 97–104 Mowery, D., 75
generation of, 16, 17, 38, 122–3 Mudambi, R., 21
outflow, 124 multinational enterprises (MNEs), 72,
spatial attributes of, 106–7 109–11, 235
spillovers, 2, 104–6, 124 clusters and, 123–30
tacit, 98–9, 106–7, 119, 122, globalization and, 111–18
124, 125 internationalization of R&D
knowledge economy, 25, 50, 68, by, 120–3
71, 115 motivations of, 114–15

Index 303
national system of innovation, 100–1 Pianta, M., 14, 47

natural resources, 89–90, 91, 114 political jurisdictions, 141
neoclassical economics, 26, 93, 239n19 population growth, 32, 33, 34
neoclassical growth theory, 31–5 Porter, M., 2, 20–3, 82, 88–95, 102–3,
network effects, 107 117–18, 137, 221, 238n6
new growth theory, 35–43 primary activities, 21
Novartis, 115, 124, 126, 213, process innovation, 13–16
216, 221, 225 Procter and Gamble, 115
novelty, 8, 65 product innovation, 13–16
production, 2, 76, 78, 87
Obama, B., 50–1 production function, 41
offshoring, 2 production technology, 13
OLI paradigm, 117–20, 126–7 productivity, 48–9, 56, 88–91, 95, 104
openness, 84, 101–4 productivity growth, 25
organizational change, 29 product life cycles, 9, 29, 78, 120–1,
organizational innovations, 15–16 237n10
organizational memory, 84 products, adaptation to local markets, 9
organizations, 17 product technology, 13
Oslo Manual, 66 profits, 27
output measures, 56–67 property rights, 38, 39
outward FDI (OFDI), 111, 112 prosperity, 48, 49, 89, 90
ownership-specific advantages, 117, public capital, 37
120, 121, 123 public goods, 37, 38, 39
quality improvement, 42
patent applications, 3, 17, 18, 59–60
in Basel pharmaceutical cluster, QWERTY keyboard, 11
208–32
evolution of number of, from radical innovation, 12, 42, 236n7
Switzerland, 143–9 railroads, 1
sectoral distribution of, in rationality, 43
Switzerland, 181–93 redundancy, 32
spatial distribution of, in regional innovation systems, 100–4
Switzerland, 149–79 regionalization, 2
patent citations, 105–6 related industries, 91, 98, 105
Patent Cooperation Treaty (PCT), 17 research and development (R&D), 16,
patent flooding, 63 17, 78
patents, 10, 39, 134 expenditures on, 79
data on, 138–42 funding, 17, 18, 54
defined, 57 as input measure of innovation, 53–6
economic foundations of, 60 internationalization of, 110–11,
exhaustion of rights, 239n7 120–3, 213–17, 230, 234
as measure of innovation, 57–65 outputs of, 19
strengths and weaknesses of, 61–4 returns on, 56
path dependency, 84 as source of innovation, 110–11
Pavitt, K., 80 types of activities in, 54
Perez, C., 29 research institutions, 92, 100
performance, 76 retail industry, 15
pharmaceutical sector, 63, 80, 133–4, Ricardo, D., 26
182, 208–32 Roche, 213, 216, 225
physical capital, 37 Rogers, M., 57, 78

304 Index
Romer, P., 41 Basel pharmaceutical cluster,

Ronstadt, R., 121 133–4, 208–32
Rosenberg, N., 8, 12, 24, 65–6, 74–6, geographical distribution of inventive
80–4, 86, 101 activities in, 137–80
Rothwell, R., 79 innovation in, 3
routines, 84 main inventive clusters in,
193–206
Samuelson, P.A., 37, 38 number of patent applications
Sauvy, A., 14 from, 143–9
Schmookler, J., 9, 13 pharmaceutical industry
Schumpeter, J.A., 1, 7, 8, 10, 12–13, 15, in, 209–13
16, 26–9, 42, 43, 50, 75, 237n3, sectoral distribution of inventive
238n5, 238n6 activity in, 181–93
Schumpeterian models of growth, 41 spatial distribution of patent
science, 79, 82, 83 applications in, 149–79
science policies, 56–7 specialization patterns in,
Science Policy Research Unit 193–206, 231
(SPRU), 66
sectoral distribution, of Swiss inventive tacit knowledge, 98–9, 106–7,
activities, 181–93 119, 122, 124, 125
self-service stores, 15 Taiwan, 45
semiconductor industry, 63 tax breaks, 90
Sidrauski, M., 35 tax havens, 115
Silicon Valley, 2, 94, 95, 218 tax optimization, 115
Singapore, 45 Taylor, M.P., 38
skilled workers, 16, 47, 68 teamwork, 16–17, 75
small and medium enterprises (SMEs), technological congruence, 45
19, 55 technological innovation, 15
smart specialization, 102 technological progress, growth and,
Smith, A., 25, 93, 237n1, 237n2 31–5, 35–43, 88
social capability, 45 technology life-cycle theory, 14
Solar Impulse, 10 technology push, 75–6
Solow, R.M., 31–5 technology spillovers, 17
Solow-Swan model, 31–2, 33–5, 36 teleportation, 12, 75
South Korea, 45 trade barriers, 133
spatial concentration, 2, 86–108 Trade-Related Intellectual Property
specialization patterns, 193–206, Rights (TRIPS), 58–9
231, 234 trade theories, 88, 115–16
stationary state, 25 training, 54
steady state, 34, 35 transportation technology, 87
steam engines, 1
Stevens, R., 77 uncertainty, 97–8, 100
Stiglitz, J.E., 41, 87 United Kingdom, 44
strategic asset-seeking investments, United States, 44, 46
115, 120 universities, 100, 105, 106, 237n15
structural evolution, 44 Uruguay Round, 59
supplies, 98 users as innovators, 78
supporting activities, 21 US Small Business Administration,
Swan, T.W., 31–5 66, 105
Switzerland, 90, 234–5 Utterback, J., 78

Index 305
value chain model, 20–3, 82, wages, 47, 49, 89, 106
102–4, 118, 120 The Wealth of Nations (Smith), 25
value creation, 110, 119 Western Europe, 46
value system, 103–4 Woolworths, 15
Van de Ven, A., 74 workforce skills, 47, 68
Veblen, T., 44, 45 World Bank, 45
Vernon, R., 29, 78, 116, 120–5, 237n10 World Investment Report (WIR), 110
Verspagen, B., 5 World Trade Organization (WTO), 59
vertical differentiation, 41 writing, 11


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The New Geography of Innovation

Clusters, Competitiveness and Theory

Please respect intellectual property rights

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

List of Abbreviations and Acronyms xvii

Part I The Economics of Innovation 5

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

Part II The Nature of the Innovation Process and

4 The Cognitive Nature of the Innovation Process 73

5 The Clustering of Innovative Activity 86

6 The Geography of Innovation in a Globalized Economy 109

Conclusion to Part II 131

Part III The Distribution of Inventive Activity –

7 Geographical Distribution of Inventive Activities and

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

7.2.2 Evaluation of the spatial distribution of patent

9 Clusters and the New Geography of Invention – An Empirical

Conclusion to Part III 231

General Conclusion 233

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

7.1 Number of patent applications per 10,000 inhabitants at

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

7.19 Spatial distribution of patent applications per 10,000

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

8.1 Sectors showing strong specializations in certain

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

8.4 Sectoral distribution of patent applications at the EPO by

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

WIPO World Intellectual Property Organization

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

construct, Part II progressively introduces an analytical framework depicting

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

As put forward by Fagerberg and Verspagen (2009, p. 218): “Innovation is

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

the organization of their internal structure is particularly important in the

Innovation is defined by the OECD (2005, p. 46) as “the implementation of

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

the extent of innovation in the electronic industry of the newly indus-

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

Box 1.1 Nondiffusion of the Dvorak Keyboard

Although the distinction between invention and innovation may seem

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

organize business (Schumpeter, 1934, p. 66). The economic literature has

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

analyzing the relationship between innovation and employment (i.a. Sauvy,

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

However, the distinction between product and process innovation has

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely

marketing innovations. It defined the former as “the implementation of

1.2 Innovation and implementation

10.1057/9781137367136 - The New Geography of Innovation, Xavier Tinguely