What made southwest German firms innovative around 1900? Assessing the importance of intra- and inter-industry externalities

This paper investigates the impact of clustering on the innovative activity of firms. The study, one of the few using firm-level data, is based on a newly constructed dataset, including information on patents and 2407 manufacturing firms located in the state of Baden at the turn of the 20(th) century. The analysis assesses the importance of intra- and inter-industry externalities, among other determinants, for the innovative activity of firms in the sample. The results show that both types of externalities were important, with the former being more important for the whole sample and the latter for small firms. Moreover, consistent with Winter's theory of `technological regimes', our results show that firms differ in the type of knowledge base they utilize in their innovative activity, a result rich in policy implications.