Why are technological spillovers spatially bounded? A market orientated approach

According to empirical evidence, technological spillovers are spatially bounded. This is one of the main reasons why firms are induced to locate in close proximity despite tough competition. In this paper, we attempt to endogenize such spillovers. For that purpose, we argue that spatial proximity gives more incentives to competing firms to share knowledge. We show that spatial proximity and thus tough competition is the best way for firms to prevent free-riding in case of knowledge sharing. Indeed, fiercer competition impedes free-riding as such a behavior has a dramatic negative impact on profits. Moreover, our results have important implications for regional policy. We point out that a slight decrease in transport costs triggers spatial polarization which implies knowledge sharing and thereby enhances innovation. A more dramatic decrease in transport costs attains both the objectives of increasing innovation and regional equity. (C) 2003 Elsevier Science B.V. All rights reserved.