Spatial Agglomeration, Innovation and Firm Survival for Italian Manufacturing Firms

Main points

• It is of no surprise that the level of innovation of a firm enhances its own survival chance. However, this capacity to innovate also improves the survival chances of neighbouring firms.
• Policy must be based on careful measurement of the spatial context and spatial limits of spillover benefits

The level of innovation in a firm improves not only its own survival chances but can also generate externalities on its neighbouring firms. This paper empirically examine the role of agglomeration economies in how innovative activity affects firm survival in Southern Italy, using spatial weights to model spillovers. Spatial Durbin probit model estimates confirm that innovation is an important determinant of firm survival not only for firms that are themselves innovative but also ones located close to other innovative firms.

However, empirical validation is challenging because of counteracting effects of competition. Definition of spatial scale and spatial weights play important roles. Careful analysis confirms that spillover benefits are enhanced by agglomeration economies, but only at a very local scale. Thus, industrial policy aimed at maximising agglomeration economies must promote innovation clusters at fine local spatial scale (for example, freeports and business parks). Further, to maximise their own survival chances, firms located close to innovative firms must themselves be innovative.