"What are the mechanisms underlying the diffusion of knowledge spillovers?

How can these

mechanisms explain the different innovative performance at the regional and local level?”
 ABSTRACT

The essay is an informative commentary on the mechanisams underlying the diffusion of

knowledge spillovers and how can these mechanisams be used in explaining the different
innovation performance at regional and local level. The argument presented is constructed
on a wide definition of knowledge and knowledge spillovers as subtracted from previous
literature. The wide scope on the term “knowledge spillovers” provides a comprehensive
analysis covering all possible spillower mehanisams.

The purpose of the essay is to provide an informative insight into the locational drivers of
innovation. In the process the analyiss is based on the new ecopnomy models of ecomonc
growth which reckognise knowledge as one of the most significant inputs in creating
sustainable economic growth.

Keywords: knowldge, knowledge spillowers, regional economics, innovation

INTRODUCTION

The economic theory of the firm recognised the importance of knowledge as a resource as early as
the 1950s, but treated the same as a non-rival production asset. In the process, ‘knowledge
spillovers’ were portrayed as an externality through which agents investing in research or
technology intentionally or unintentionally transfer their knowledge to other agents improving
their innovation efforts. The importance of the knowledge and knowledge spillovers intensified
with the emergence of the new economy models of economic growth (Barro and Sala-i-Martin
1995, Romer1986), which added knowledge to the standard inputs in the production process with
the rationale that once a steady-state is reached (neoclassical models), growth in per-capita income
can only be sustained by a growth in the stock of knowledge, innovation. As a result, the new
growth theory introduced the concept of knowledge spillovers unfolding in time, while the later
regional models of economic growth, added the space bounding - location (Capello 2007). In the
process the ambiguous understanding of the knowledge and knowledge spillovers i.e. externalities,
caused a lot of debate among researchers. The scope of “knowledge” was approached in a various
ways, from a multidimensional construct with more complex characteristics compared to
information and as an object that can be stored and manipulated and thus transferred (Alavi and
Leidner 2001), up to a process which cannot be separated from the owner, i.e. the individual
(Davenport and Prusak 2000). The both views resonate along the explicit–tacit dimensions of
Polanyi (1967). For the purpose of the text and in line with the new economy models of growth,
the discussion will take the stand that the knowledge spillovers are time and space (location
bounded) (Capello 2007, Jaffe 1989, Acs, Z. J.et.al.1992, 1994). In the process, the analysis will
make a distinction between pure knowledge spillovers (knowledge as a public good) and the
market or efficiency driven externalities.

The aim of the essay is to provide an informative analysis on the scope of the knowledge spillovers,
first by identifying general knowledge spillover mechanisms and later discussing how they can
explain different innovative performance at the regional and local level. In the process, a
distinction is made between explicit knowledge that can be codified and easily communicated and
transferred and tacit knowledge which is unarticulated knowledge unconsciously used by the
individual, and thus difficult to communicate and transfer (Polanyi 1967).
COMMON MECHANISMS USED FOR KNOWLEDGE TRANSFER

Knowledge transfer is a critical element that occurs at various levels of interaction, between
individuals, from individuals to explicit sources, from individuals to formal and informal groups,
between groups, across groups, and from the group to the organisation or the society (Davenport
and Prusak 2000).

Within the industry, the most common market driven mechanism for knowledge transfer are the
labour mobility of individuals and the trade or transfer of goods, services and production which,
in one way or another, carry production- related knowledge (Almeida and Kolgut 1999, McCann
and Simonen 2005, Doring and Chnellenbach 2006). These mechanisms are mainly used in the
knowledge transfer processes of the large Multinational companies across the various markets in
which they operate and increasingly used by the global supply chains (networks and strategic
alliances) (Fosfuri et al. 2001, Singh 2007).

Within the organisation, or within its subsidiaries, knowledge is transferred through personal
communication (telephone, email, face-to-face communication training seminars and courses and
similar), codified communication (written reports, databases) and embodied transfer (rules,
procedures and directives) (ABou-Zeid 2002). The mechanisms of knowledge transfer among
organisations are a cause of indirect spillovers and include arrangements as technology transfer,
R&D collaborations, strategic alliances (Das et.al. 2003), learning alliances and marketing
alliances (Jennex 2007:306).

The transfer of the public knowledge from the universities and their R&D centers to the industry
and the society in general, is characterized through more specific transfer mechanisms as are
published articles on the research findings and participation on conferences, lecturing, mobility of
researchers, creation of networks of research centers, collaborative projects with the industry,
Science parks and incubators, informal meetings, patents, licensing and face to face contacts
(Howlett 2010:32, Storper and Venables 2004, Jennex 2007:306, Autant-Bernard et.al.2007,
Fischer 2009, Ponds Et.al. 2010). The most successful knowledge transfer agent still is the
Graduate student (Howlett 2010:33).
Often cited as the weakest link in the innovation process and a subject of many government
policies, the knowledge spillovers from the universities to the local/regional business community
are extremely complex. At the same time researchers argue whether the codified (published)
public knowledge represents a tacit or explicit knowledge, because the actual knowledge spillovers
depend on the absorptive capacity of the receptor (Davenport and Prusak 2000). If the reader
cannot understand the significance of the findings which are usually presented in the language of
the profession, he cannot use it (Breshi and Lissoni 2001). Therefore, the “tacit” characteristic of
the “pure” knowledge makes it impossible to identify a general set of successful underlying
mechanisms that can be used in its diffusion across the industries and society. It is this
characteristic of the “pure” knowledge that is the most common critique on the location knowledge
spillovers which tries to explain the different innovative performance at regional and local level
through the process of knowledge spillovers.

LOCALIZED KNOWLEDGE SPILLOVERS

For understanding the impact of knowledge transfer mechanisms on the different innovation
performance of geographic regions it is important to distinguish between market and efficiency
externalities and “pure knowledge” spillovers based on informal contacts and meetings. In this
regard it is very important to note that the most cited research in the area (Jaffe 1989) about the
real effects of academic research has many limitations. Although the findings indicate that the
local concentration of R&D activities and spending are positively related to the increase of
innovation seen through the number of patents (indicator of applied knowledge), Jaffe’s quasi-
experiment has a weak internal validity. Why? The findings of Jaffe, later modified by Acs, Z.
J.et.al.(1992) with a different set of measures for the innovation, have failed in providing answers
on the causality of the results i.e. what is the actual connection between the R&D activities,
knowledge transfer and the innovation performance of the region and why is there a connection.
'It is important to emphasise that spillover mechanisms have not been modelled. (Jaffe, 1989:968).

Regardless, regions and locations de facto show differences in the innovation performance;
however, in an absence of a more sustained empirical research, the conclusions are subjective.
In explaining the regional differences in information performance the onion model of
Benckenbach F. et.al. (2009:62-65) is a good start. The first layer (outer) of the model is made
out of the political, legal, geographical and cultural attributes determining the interaction of the
agents in the region. The second level is made by the existing institutions and structure in that
region that provide an opportunity for the agent who wants to innovate or imitate an opportunity
to acquire the knowledge (existence of scientists, firms, science parks, incubators, clusters). The
third layer represents the actual knowledge transfer collaboration which will happen faster if the
required knowledge is identified and the legal context and the institutions in the region guarantee
that transaction costs will not be made among companies due to opportunism. For example trade
or technology secrets.

The model is based on previous research findings of: Zucker (1998) and Darby and Zucker (2002)
who found that networks of firms and industries clustered within regions interact more heavily
with collocated university-based scientists than with those in other regions; Acs et al. (1994), who
found that geographical coincidence is significant only for small firms, because the university
R&D substitutes the internal R&D function; the findings of Feldman and Audretsch (1999:220)
who found that the “concentrations or agglomerations of firms in related industries provide a pool
of technical knowledge and expertise and a potential base of suppliers and users of innovations”.

DISCUSSION AND CONCLUSION

The area of knowledge transfer and the mechanisms used in the processes are argued to be
important element which influences the economic growth at regional level (Capello 2007).
Regional economics point that the differences in the innovation performance among different
locations and regions provide a strong evidence to support the claim (Jaffe 1989, Acs, Z.
J.et.al.1992, 1994, Maurseth and Verspagen 2002, Feldman and Audretsch 1999, Darby and
Zucker 2002, Doring and Chnellenbach 2006). However, in terms of the actual identification of
the underlying mechanisms for the knowledge spillovers, the findings are mixed, not conclusive
and even misleading (Breshi and Lissoni 2001). In simple words, and as argued by Breshi and
Lissoni (2001), the knowledge spillovers are actually market or efficiency drawn externalities
which main purpose is to acquire knowledge identified as a shortage for the organisation in making
its production process more efficient, and not actually making the companies more innovative.
Therefore, as Breshi and Lissoni (2001) argue it is difficult to claim that knowledge transfer
mechanisms increase regional innovation, although they are important for the regional economic
growth. Their argument is sustainable.

First in the contemporary world, a company requiring a knowledge, has identified its need and can
easily buy that knowledge from anywhere in the world. As a result the company does not have to
be co-located to a R&D institution or located in an urbanised knowledge region to acquire the
knowledge. However, it co-locates to R&D institutions, or in urban regions only when there are
efficiency or market driven externalities for that, i.e. there is an availability of educated labour, or
a sophisticated market it wants to target or follow (an important buyer – the international suppliers
of MNEs).

Second, the existence of science, parks, R&D centres does not imply that all companies in the
region will participate in the innovation virtues circle. Again only the ones who have identified
the knowledge shortage will participate and these are the ones that can actually buy the knowledge
from anywhere in the world.

Third, the knowledge spillover does not simply happen among local firms that are co-located to
each other. The position of the company depends on its knowledge absorptive capacity (Davenport
and Prusak 2000). If the company has a higher absorptive capacity the more connected it is locally
and the more central in the network is its position. Usually these companies are the MNEs and the
international SMEs. These companies bring new knowledge into the region, while the role of the
policy is to facilitate the absorptive capacity of the local firms that can benefit from that
knowledge, mainly through provision of educations schemes, meetings and conferences and
sometimes availability of public research.
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