J Knowl Econ

DOI 10.1007/s13132-015-0281-4

The Effects of Location on Firm Innovation Capacity

João J. M. Ferreira 1 & Cristina I. Fernandes 2 &

Mário L. Raposo 1

Received: 3 April 2014 / Accepted: 7 July 2015

# Springer Science+Business Media New York 2015

Abstract This research seeks to ascertain the extent of the effects of location on the
innovation capacities of companies across different industrial sectors. We thus answer
the question: Does company location near an urban centre enable innovation capaci-
ties? This article argues that company location does wield an effect on innovation
capacities, and it is therefore correspondingly relevant to fill this current gap in the
literature. Based upon a sample of 884 companies, the econometric models estimated
report location as a variable bearing influence on the innovative capacities prevailing in
companies. Our results also confirm that the greater the geographic proximity of a
company to urban centres, the greater their capacity to innovate. The study also enabled
the identification of different levels and types of innovation in accordance with the
respective company location.

Keywords Location . Innovation . Performance . Geographic proximity

Introduction

Diverse schools of thinking have proposed theories on regional economies and

explaining how regional development incorporates economic, social, institutional,
and cultural characteristics that render unique capacities that foster and drive regional
development (Cooke et al. 1997; Maskell et al. 1998), interdependent transactions
(Storper 1997), or even the building up of the regional infrastructures able to facilitate

* João J. M. Ferreira
jjmf@ubi.pt
Cristina I. Fernandes
kristina.fernandes81@gmail.com
Mário L. Raposo
mraposo@ubi.pt
1
Management and Economics Department, University of Beira Interior and NECE-Research Unit in
Business Sciences, Covilhã, Portugal
2
NECE-Research Unit in Business Sciences, Estrada do Sineiro, Pólo IV, 6200-209 Covilhã,
Portugal
 J Knowl Econ

mutual learning between regional actors (Florida 1995; Morgan 1997). One factor these
approaches share is the importance attributed to learning and innovation within the
framework of economic development alongside relational exchanges between regional
actors as a means for advancing and developing (Rutten 2003).
According to Scott (1998), space may shape and effect transactions between com-
panies in three different ways: (i) low levels of transaction scale and generally of an
economic nature when only undertaken over short distances as this prevents economies
of scale; (ii) irregular transactions and becoming more difficult to sustain over longer
distances than standardised and predictable transactions; (iii) different modes of trans-
action (for example, face-to-face encounters versus electronic transactions) and leading
to different outcomes in terms of spatial costs.
Porter (1998) defends how local clusters are destined to become commonplace as
competitive advantage closely interlinks with local characteristics including knowl-
edge, relationships and motivation, thereby rendering innovation continuously. Porter
(2003) demonstrates through empirical study the extent to which the regional econo-
mies of the USA are heavily influenced by the power of their innovative local clusters.
The role of government in local development is also verifiable through its cooperation
with clusters and the esupport provided whether through education or through other
public goods and infrastructures. The Italian industrial districts, in particular Emilia
Romagna, came to great prominence between 1980 and 1990, and the work developed
there has strongly influenced various researchers studying the role of location on
innovation (Pyke et al. 1992; Pyke and Sengenberger 1992; Cossentino et al. 1996).
The combination of flexible specialisation and the company system of organisation
would seem to have fostered global competitiveness (Lorentzen 2008). Becattini and
Rullani (1996) put forward an explanation of this competitiveness through highlighting
the importance of the local context through two mechanisms: (i) the local context as an
input into the production process to the extent that work, entrepreneurialism, the
tangible and intangible infrastructures, the institutional models and social culture are
all contributions that turn local production into something unique. Hence, the local
production system is autonomous and highly important to company competitiveness.
(ii) The local system represents a fundamental actor in converting the knowledge
necessary to companies. New knowledge, generated beyond the local context, spreads
through inter-company networks and subsequently becomes contextualised by these
companies. The new location of knowledge created by local systems nurtures the
means of this becoming codified in the global system and hence generating innovation.
The majority of research in this field has concentrated on factors determining
innovation at the company level. Companies operate in markets, and innovation is
primarily a means by which companies compete with each other within the scope of
best meeting their client needs (Von Hippel 1988). However, it soon became clear that
the feedback mechanisms and the interactions that should exist at the company level to
ensure innovation targets the market simply cannot be considered in isolation from the
surrounding environment (Malecki 1997). To this end, there has emerged a movement
within economic geography—partially inspired by sociologists such as Piore and Sabel
(1984)—that strives to pay greater attention to the surrounding environment, the
institutions presented alongside culture as possible drivers of development (Maillat
et al. 1993). This led to a certain overlapping of the different fields of innovation and
economic geography studies (Morgan 1997): with concepts such as innovative milieux
J Knowl Econ

(Crevoisier 2001) and regional systems of innovation (Cooke et al. 2004) and
correspondingly proposing the idea that the capacities of companies to innovate
is (partially) determined by local cultures, institutions and markets (Johansson
and Lööf 2008; Shearmur 2011). Furthermore, regional development is under-
stood based upon this perspective and therefore depending on the capacities of
local companies to innovate. Thus, in this sense, the location plays a major role
in the prevailing ability to innovate. Hence, this results in our research ques-
tion: (i) Do companies locating near urban centres enable innovation capacities?
Our response to this question contributes to greater academic knowledge on the
relationship prevailing between location, geographic proximity and the innova-
tive capacities of companies from different sectors of activity. Following this
introduction, we move onto our review of the literature providing a summary of
the respective theories on location as well as the different circumstances able to
boost innovation capacities. In the third section, we present a description of the
sample as well as the econometric estimations carried out before discussing the
results. Finally, we set out our final considerations.

Literature Review

Theories of Location

The location of economic activities has long since drawn particular attention from the
research community (Hayter 1997; Arauzo and Viladecans 2006). Classical theories
date back to the period between 1800 and 1900. In this period, researchers focused their
studies on the concept of land rents and maintained that distance was the primary factor
in defining the location of these estate rents as far such could be charged (Ricardo 1817;
von Thünnen 1826; Launhardt 1882). They held that the location of industry was
closely bound up with minimising costs. Despite the relevance of these seminal studies,
it was Marshall (1890) who drove a new impetus in location theories. Marshall paid
particular attention to agglomerative economies alongside the concept of the industrial
district and considering that these generate important resources when analysing the
externalities to the co-location of companies. Already into the 20th century, Weber
(1909) backed the existence of three factors serving to determine the location of an
industrial company: transport costs, labour costs and the advantages associated with
agglomeration (the economies of agglomeration). In the 1920s and 1930s and similar to
the work undertaken by Weber, researchers took up an interest not only in the
minimisation of costs but also the geographic distribution of industry and therefore
the reasons behind their location (Hartshorne 1928, 1929). Christaller (1933) put
forward a theory on central places and defending how urban centres might be
perceived as contiguous circles to each other and in which the core is the central
place to the location under study. The closer the respective location was to the core, the
higher the rent paid for that specific location. In the 1940s and 1950s, theories on the
spatial distribution of companies remained very much to the fore of research interests.
Hoover (1948) studied the spatial division inherent to the market, combining agglom-
eration and transport costs. These studies were based upon the same foundations as
their classical predecessors but increasingly displaying the characteristics of the
 J Knowl Econ

neoclassical theories that would emerge in the following decade (Wise 1949).
Correspondingly, the 1950s and 1960s did see the emergence of neoclassical theories
on the location of industries. Lösch (1954) undertook research on the market sizes and
accepted that such were as homogeneous as demand and that transport costs were
proportional to the distance to market. In this same period, and based on the same
neoclassical assumptions, other authors engaged in research demonstrating the impor-
tance of industrial location to regional economic development (Perroux 1950; Myrdal
1957; Isard 1956; Moses 1958; Miller 1961; Alonso 1964; Alexandersson 1967; Muth
1969; Mills 1970). In the 1970s and 1990s, the amount of research and approaches to
location multiplied and incorporated a more institutional dimension to the field of
study. For researchers from this period, geographic design did not merely stem from the
classical and neoclassical characteristics but rather from the newly emerging industrial
spaces (Smith 1971; Evans 1973; Hamilton 1974; Collins and Walker 1975; Bale 1976;
Hamilton and Linge 1979; Estall and Buchanan 1980; Rees et al. 1981; Scott and
Storper 1981; Taylor and Thrift 1984; Massey 1984; Galbraith 1985; Chapman and
Humphrys 1987; Barnes 1987; Chapman and Walker 1987; Watts 1987; Scott 1988;
Aydalot 1986; Storper and Walker 1989; Malecki 1991; Sayer and Walker 1992;
Storper and Scott 1992). Such spaces contain characteristics such as institutions that
provide them with the means to attain innovation (Maillat 1991) with these new means
of agglomeration attributed the name of Bneo-Marshalian nodes^ (Amin and Thrift
1992). Krugman (1991) emerged in this period to defend new models for location that
he termed a new economic geography.
The learning region emerged as a current of thinking between 1995 and
2000. This line of thought perceived that not only did companies learn but
above all regions learned and lessons which might also prove a learning
process able to drive their own economic development (Asheim 1995;
Harrington and Warf 1995; Hayter 1997; Cooke et al. 1997; Fujita et al.
2000). According to Crouch et al. (2001), there are local systems of production
that better enable company performance levels. Hence, locations are susceptible
to making the difference to the success of companies locating within their
particular surroundings. Currently, with the 21st century and globalisation-
related phenomena, the classical paradigm of industrial location has changed.
In a world with increasingly porous borders and with the growing importance
attributed to explicit knowledge and social networks, the new industrial clusters
have triggered the interest of the most diverse range of researchers (Martin and
Sunley 2003; Bathelt et al. 2004; Rosenfeld 2005). However, despite the field
of research on location being diverse and having attracted the interest of
authors as far back as 1800, contemporary research still displays a gap in this
thematic field: the lack of any studies on the personal reasons leading to
entrepreneurs deciding to locate their companies in specific locations
(McCann and Sheppard 2003). The literature therefore advanced through incor-
porating behavioural theory to explain the location of entrepreneurial activities
(Alonso and Trullén 2001; Meyer 2003; Elgen et al. 2004; Parker 2004;
Audretsch et al. 2005; Autant-Bernard et al. 2006; Van Praag et al. 2007).
According to Capello (2007), there are two bodies of theory (which he terms
Bregional economics^) that approach the economic logic underpinning company loca-
tion choices: (i) theories of location as economic mechanisms that bring about the
J Knowl Econ

distribution of activities in space; (ii) theories of regional growth and develop-

ment focusing on spatial aspects of economic growth and territorial distribution
of earnings. Hence, we would stress how more than one factor underlies any
analytical explanation of company location. The trend is towards an increasing
eclecticism and the integration of the approaches made to these issues (Arauzo
and Manjón 2004; Arauzo and Viladecans 2006; Lafuente et al. 2010; Ferreira
et al. 2010; Cheng and Hsiao 2013; Shearmur 2012; Christensen and Drejer
2013). Figure 1 presents the chronological evolution of theories on location and
identifies the landmark studies in the literature.
Galbraith (1985) identifies three factors determining the location of high-
technology companies: the evaluation of the personal and professional
personality, the culture and the way of life and the desire of the company
founder to live in a specific place. These factors gain support in the study by
Arauzo and Viladecans (2006) on the level of spatial concentration of compa-
nies in municipalities making up urban communities in Spain. According to
these authors, companies move from large cities (their traditional location) to
smaller cities and in that way improve on their levels of accessibility due to the
investment put into transport infrastructures. Indeed, smaller cities might prove
more attractive to technology-based companies as they represent quieter and
calmer environments and with the higher quality of life greatly valued by the
highly qualified individuals working in such industries. Felsenstein (1996)
maintains that urban areas contain a better physical network of infrastructures
than non-urban areas and for this reason entrepreneurs opt in their favour when
locating their companies. Currently, the idea emerging portrays how differences
in innovation performance between regions also shape the innovative capacities
and how the innovation strategies of a company stem from their region of
location (Cooke et al. 2004). Hence, given the fundamental nature of

Institutional
Classical Theories Neoclassical Theories Theories Behavioural
Theory Eclecticism

1800 1900 1920 1930 1940 1950 1960 1970 1980 1990 2000 2013 …

Marshall (1890) Miller (1961)

Fujita et al (2000)
Krugman (1991)
Ricardo (1817) Crouch et al (2001):
Weber (1909) Alonso (1964), Alonso & Trullén,
Perroux (1950) Alexanderson (2001)
Estall &
(1967)
Von Thünen (1826) Buchanan (1980)
Hartshorne (1928; 1929) Muth (1969)
Maleki (1991); Maillat,
Isard (1956); Myrdal (1991); Sayer & Walker,
Launhardt (1882) (1957); Moses (1958) Rees et al (1981); Scott
Mills (1970) & Storper (1981); (1992); Storper & Scott
Christaller (1933) Taylor & Thrift, (1992); Amitt & Thrift
(1984); Massey, (1984); (1992)
Lösch (1954) Smith (1971); Evans Galbraith, (1985)
(1973); Hamilton, (1974);
Collins & Walker (1975) Martin and Sunley, (2003); Mayer
Asheim (1995);
(2003); McCann & Sheppard,
Harrington &
(2003) Bathelt et al (2004); Elgen
Warf (1995);
et al. (2004); Parker (2004);
Bale (1976); Hamilton & Linge, (1979) Cook (1997)
Audrestch et al. (2005);
Rosenfeld, (2005); Autant-
The location of an industry Chapman & Hyphrys (1987); Barnes, Bernard et al. (2006)
is closely interrelated with (1987); Chapman & Walker (1987);
minimising costs; Watts (1987); Scott (1988) Aydalot,
(1986); Stoper & Walker (1989)
The economics of
agglomeration and the Capello (2007); Lafuente et al.,
1 concept
industrial district Hayter (1997) Van Praag & (2010); Ferreira et
Versloot (2007) al. (2010); Cheng
& Hsiao (2012);
Shearmur, (2012);
Christensen and
Drejar (2013)
Factors determining the location of an
industrial company: i) transport costs; ii) Homogenisation of markets and The new industrial spaces; Regional economics;
Learning region
labour costs; and iii) the advantages demand; “Neo-Marshallian nodes”; Theories of growth and
associated to agglomeration; Transport costs are proportional to regional development
the distance covered; New geographic economics.
The geographic distribution of industry;
Importance of industrial location to
The theory of central places. regional economic development.

Fig. 1 The evolution in theories of location

 J Knowl Econ

innovation, the state authorities should back innovation and technological

change policies in the regions and more specifically in rural areas (Doloreux
and Dionne 2008). We may therefore define our research hypothesis:

H1: Location generates a positive influence on innovation capacity.

Methodology

Data

The statistical analysis carried out seeks to determine the effect of company location on
their levels of innovation. To this end, a questionnaire was completed by a sample of
884 companies from across mainland Portugal with 27.8 % of firms from the Norte
Region, 35.7 % the Centro Region, 7.5 % the Lisboa Region, 23.3 % the Alentejo
Region and 5.7 % from the Algarve Region. We sourced the company database from
Grupo Coface. The sample incorporates companies operating in different sectors of
activity: agriculture (84 firms), services (100 firms), manufacturing (164 firms), ex-
tractive industries (47 firms), construction sector (47 firms) and knowledge-intensive
business services (KIBS) (442 firms). We structured the sample in order to ensure that
all 18 districts of mainland Portugal were equally represented in January 2014. We
administered approximately 50 questionnaires in each NUT III region, with all ques-
tionnaires responded to by the founders either face-to-face or via telephone. As regards
to agriculture, there is a greater proportion of companies from the Norte and Alentejo
regions in comparison with the other regions while in the case of services, the highest
percentages come from the regions ofthe Algarve (26 %) and Centro (14.9 %), with
manufacturing most commonly the sector in the Lisbon (50 %) and Norte (22.4 %)
regions, while the extractive industries took on a greater weighting in the Alentejo
(10.7 %) while the construction sector held the highest percentage in the Centro (7.3 %)
and Alentejo (8.7 %) regions. Finally, the KIBS firms hold a 50 % level of represen-
tation in our sample throughout all the regions.
All calculations were carried out through recourse to the pscl manual for software R
version 2.14 (R Foundation for Statistical Computing) and IBM-SPSS version 18.0
(IBM Corporation).

Definition and Measurement of Variables

To describe the company profile, we determined the absolute and relative frequencies
for the qualitative variables while we calculated the averages, standard deviations,
medians, minimums and maximums for the quantitative characteristics.
As regards to modelling the factors of location influencing innovation, we deployed
two approaches: (i) location at the NUT II level and (ii) the distance to the main
Portuguese urban poles, Lisbon and Oporto. In terms of innovation, we adopted the
number of innovations in products and/or services, the number of innovations in
processes and the total number of innovations (products/services and processes), as
they are the only types of innovation identified by the companies surveyed with
reference to 2012. In our modelling, the dependent variable correspondsto a discrete
J Knowl Econ

count variable, and we hence applied count models. These models were, respectively,
based on Poisson distribution as this random variable best adapts to the data according
to the Akaike information criterian (AIC), the Bayesian information criterian (BIC) and
the pseudo-R2 (Cameron and Trivedi 2005).
The Poisson distribution for determining the probability of an event occurring over a
−λ y
particular period of time is P ðY ¼ yÞ ¼ e y!λ , in which λ represents the average
process rate. The Poisson regression derives from the Poisson distribution
through re-parameterising the relationship between the average μ and the
regressors x (λi =exp(x'iβ).
In this model, the control variables introduced into the regression were as follows: (i)
company age, (ii) entrepreneur age, (iii) company business sector and (iv) company
turnover (up to €50,0000 vs over €500,000).
The Poisson regression parameters were estimated according to the maximum
likelihood method with robust standardised error estimation in order to eliminate
heteroscedasticity, given that regressive methods are themselves intrinsically
heteroscedastic introducing bias into estimator variance, compromising the statistically
significant validity of the estimates returned. We estimated three models for each one of
the aforementioned innovation types. In model I, the independent variables were as
follows: (i) company characteristics and (ii) NUT II location and with the incorporation
of dummy variables. We calculated model II in accordance with the following inde-
pendent variables: (i) the shortest distances between company location and the city of
Lisbon (DL) and the city of Porto (DP) (more specifically log10(DL), log10(DP) and the
squares of these variables). In model III, we applied regional dummies and the
geographic distances. In order to evaluate the respective quality of model adjustment,
we applied the pseudo-R2 proposed by Cragg and Uhler and the Vuong test of
comparison.
Table 1 conveys the descriptive statistics referring to the variables characterising the
companies. The results are representative for the sample as a whole and stratified by
NUT II.

Business Turnover and Location

The literature broadly maintains that innovative capacities bear a positive influence on
financial performance (Ferreira et al. 2010; Kostopoulos et al. 2011; Forsman 2011;
Ferreira et al. 2012). In our study, we sought to measure the extent of this impact.
Financial performance is solely measured through business turnover as carried out in
previous studies (He and Wong 2004; Fosfuri and Tribó 2008).
We correspondingly find (Table 1) that 17.2 % of companies turnover less than
€50,000 (19.4 % in the Alentejo and 12.1 % in Lisbon), 12.2 % attained a level of
turnover in the region between €50,000 and €100,000 (over 13 % in the Norte, Centro
and Lisboa regions and around 6 % in the Alentejo and Algarve regions), 10 %
turnover between €100,00 and €200,000 (16 % in Algarve and 8.5 % in Norte),
9.8 % turnover between €200,000 and €300,000€ (15.2 % in Lisboa and 7.6 % in
Centro), 8.1 % made between €300,000 and €400,000 (17.5 % in Norte and 2 % in
Algarve), 11.8 % between €400,000 and €500,000 (21.4 % in Alentejo and 1.5 % in
Lisboa) and 30.5 % recorded sales of over €500,000 (42 % in Algarve and 25.2 % in
Alentejo) (Table 1).
Table 1 Descriptive statistics by location (NUT II)

Variable description Description Norte Centro Lisboa Alentejo Algarve Total

Variable name N % N % N % N % N % N %

Company Sectors of activity

characteristics KIBS 123 50.0 % 158 50.0 % 33 50.0 % 103 50.0 % 25 50.0 % 442 50.0 %
Agriculture 42 17.1 % 15 4.7 % 0 0.0 % 27 13.1 % 0 0.0 % 84 9.5 %
Services 19 7.7 % 47 14.9 % 0 0.0 % 21 10.2 % 13 26.0 % 100 11.3 %
Manufacturing 55 22.4 % 54 17.1 % 33 50.0 % 15 7.3 % 7 14.0 % 164 18.6 %
Extractive 4 1.6 % 19 6.0 % 0 0.0 % 22 10.7 % 2 4.0 % 47 5.3 %
Industries
Construction 3 1.2 % 23 7.3 % 0 0.0 % 18 8.7 % 3 6.0 % 47 5.3 %
Business turnover
Less than €50,000 42 17.1 % 54 17.1 % 8 12.1 % 40 19.4 % 8 16.0 % 152 17.2 %
Between €50,000 33 13.4 % 44 13.9 % 4 6.1 % 27 13.1 % 3 6.0 % 111 12.6 %
and €100,000
Between €100,000 21 8.5 % 28 8.9 % 13 19.7 % 18 8.7 % 8 16.0 % 88 10.0 %
and €200,000
Between €200,000 29 11.8 % 24 7.6 % 10 15.2 % 20 9.7 % 4 8.0 % 87 9.8 %
and €300,000
Between €300,000 43 17.5 % 15 4.7 % 8 12.1 % 5 2.4 % 1 2.0 % 72 8.1 %
and €400,000
Between €400,000 9 3.7 % 45 14.2 % 1 1.5 % 44 21.4 % 5 10.0 % 104 11.8 %
and €500,000
Over €500,000 69 28.0 % 106 33.5 % 22 33.3 % 52 25.2 % 21 42.0 % 270 30.5 %
Firm size (number In numbers
of employees) Mean±SD 16.3±25.9 10.5±29.5 8.2±13.3 19.1±39.1 13.9±17.3 14.1±28.8
J Knowl Econ
Table 1 (continued)

Variable description Description Norte Centro Lisboa Alentejo Algarve Total

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Variable name N % N % N % N % N % N %

Median (Min - Max) 3 (1–110) 3 (1–99) 3 (1–77) 4 (1–120) 4 (2–89) 3 (1–120)

Company age (years) In numbers
Mean±SD 5.9±7.0 6.4±6.8 7.1±6.1 7.7±5.5 8.0±5.9 6.7±6.5
Median (Min - Max) 6 (1–27) 7 (2–30) 7 (3–29) 8 (1–27) 7 (2–30) 7 (1–30)
Entrepreneur Founder’s age (years) In numbers
characteristics Mean±SD 42.1±8 42.6±8.9 43.0±9.3 41.8±7.4 43.7±8.9 42.4±8.4
Median (Min–Max) 41 (27–73) 41.5 (24–73) 40.5 (29–60) 41 (28–61) 42.5 (30–65) 41 (24–73)
Innovative Capacity Num. product/service
innovations
Mean±SD 1.4±0.7 1.4±0.7 1.5±0.8 1.2±0.6 1.4±0.7 1.4±0.7
Median (Min–Max) 1 (1–3) 1 (1–4) 1 (1–3) 1 (1–4) 1 (1–3) 1 (0–4)
Num. process
innovations
Mean±SD 0.2±0.6 0.2±0.4 0.1±0.2 0.2±0.4 0.1±0.3 0.2±0.5
Median (Min–Max) 0 (0–4) 0 (0–3) 0 (0–1) 0 (0–2) 0 (0–1) 0 (0–4)
Total num. innovations
Mean±SD 1.7±1.1 1.5±0.8 1.6±0.8 1.5±0.7 1.6±0.7 1.6±0.9
Median (Min–Max) 1 (1–13) 1 (1–5) 1 (1–3) 1 (1–6) 1 (1–3) 1 (0–13)

SD standard deviation, Min minimum, Max maximum

 J Knowl Econ

Founding Entrepreneur, Company and Location Profiles

The need to establish a relationship between the decisions taken by entrepreneurs and
their personal characteristics, and including parental professions, gender (male or
female), race or ethnic background, level of education, years of experience in the sector
of activity and age have all been taken into consideration by a diverse range of
researchers (Mitchell et al. 2002; Lafuente et al. 2010; Ferreira et al. 2012). When
analysing company growth, two underlying factors are ever present, the founder’s age
and the size of the company under study (Cucculelli and Ermini 2012). These variables
are posited in a study by Jovanovic (1982) in which he supports the idea that small and
young companies innovate more than their older and larger-scale counterparts. These
conclusions have been returned by other authors (Evans 1987a, b; Hall 1987; Dunne
and Hughes 1994; Lotti et al. 2003; Audretsch et al. 2004). Recently, some empirical
evidence has reported a positive correlation between company growth, its age and its
innovation activities (Das 1995; Heshmati 2001; Ermini 2008; Teruel-Carrizosa 2010).
Cucculelli and Ermini (2012) even go so far as to defend innovation as the key factor to
company growth.
The average company age comes in at 6.7±6.5 years of age (with the Algarve
average of 6.7±6.5 years and 5.9±7.0 years in Norte) while the average founder age is
42.4±8.4 and peaking in the Algarve (43.7±8.9). The average firm size comes in at
14.1±28.8 (with the Algarve average of 8.0±5.9 employees, 7.7±5.5 employees in
Alentejo, 7.1±6.1 employees in Lisboa, 6.4±6.8 employees in Centro and 5.9±7.0
employees in Norte) (Table 1).

Innovation Capacity

Sundbo (1998) approaches service sector innovation through a diverse set of variables.
This approach had already been proposed by Pavitt (1984) for the manufacturing
industry. However, according to Camacho and Rodriguez (2005), a combination of
theories needs adopting due to both the most recent and the longest standing findings
from studies on service sector innovation. Innovation in this type of sector requires an
approach reaching beyond the simple introduction of new products and processes. As
regards to innovation, the sampled companies on average produced 1.4±0.7 innova-
tions in products/services in 2012, with the Alentejo the region reporting the lowest
average innovation numbers (1.2±0.6) and with Lisboa as the region with the highest
average innovation rate (1.5±0.8). As regards to the average number of innovations to
processes, these came only at a lower rate (0.2±0.5) and in a fairly similar fashion
across all regions with the average total of innovations standing at 1.6±0.9, highlight-
ing companies in the Norte region as reporting the highest rates of innovation (Table 1).

Results

Econometric Estimations

Table 2 presents the econometric model estimations for the number of product/service
innovations.
Table 2 Count models-regression coefficients (sandard error): dependent variable–number of product/services innovations

No. product/service innovations No. process innovations No. total innovations

J Knowl Econ

(1) (2) (3) (1) (2) (3) (1) (2) (3)

Control variables
Company age -0.01 (0.00)** -0.01 (0.00)** -0.01 (0.00)** 0.02 (0.03) 0.01 (0.02) 0.02 (0.02) -0.01 (0.00)** -0.01 (0.00)** -0.01 (0.00)*
BT>€400,000 0.10 (0.05)** 0.10 (0.06)† 0.10 (0.06)† 1.16 (0.05)* 1.11 (0.05)* 1.01 (0.05) † 0.05 (0.10) 0.05 (0.11) 0.07 (0.10)
Founder’s age 0.02 (0.00)* 0.01 (0.00)* 0.01 (0.00)* 0.01 (0.01) 0.01 (0.01) 0.01 (0.01) 0.01 (0.00)* 0.01 (0.00)** 0.01 (0.00)**
Firm size 0.03 (0.05) 0.04 (0.05) 0.04 (0.06) 0.06 (0.04) 0.05 (0.05) 0.06 (0.05) 0.04 (0.05) 0.04 (0.06) 0.04 (0.04)
Agriculture -0.72 (0.08)** -0.75 (0.07)** -0.73 (0.08)** -16.52 (0.80)** -15.55 (0.72)** -16.69 (0.76)** -0.81 (0.15)** -0.80 (0.13)** -0.81 (0.13)**
Services -0.73 (0.07)** -0.74 (0.07)** -0.72 (0.07)** -16.21 (0.76)** -15.42 (0.70)** -16.37 (0.72)** -0.76 (0.14)** -0.77 (0.13)** -0.76 (0.12)**
Manufacturing -0.70 (0.05)** -0.69 (0.05)** -0.70 (0.05)** 1.83 (0.41)** 1.74 (0.43)** 1.70 (0.43)** -0.51 (0.08)** -0.50 (0.09)** -0.52 (0.08)**
Extractive Industries -0.71 (0.07)** -0.74 (0.07)** -0.68 (0.07)** 4.07 (0.72)** 3.85 (0.67)** 3.91 (0.69)** -0.03 (0.13) -0.07 (0.12) -0.03 (0.12)
Construction -0.72 (0.07)** -0.74 (0.07)** -0.70 (0.07)** 4.13 (0.73)** 3.94 (0.69)** 3.99 (0.71)** -0.04 (0.13) -0.07 (0.13) -0.04 (0.12)
Logarithmic distances
log10(DL) -0.08 (0.12) 0.10 (0.13) -0.20 (0.69) 2.17 (2.44) -0.17 (0.12) 0.03 (0.14)
log10(DP) -0.02 (0.13) -0.13 (0.15) -0.37 (0.67) -0.66 (0.79) -0.32 (0.23) -0.41 (0.25)†
(log10(DL))2 0.02 (0.04) -0.03 (0.05) 0.40 (0.18)* -0.09 (0.56) 0.07 (0.04)† 0.04 (0.05)
(log10(DP))2 0.01 (0.04) 0.07 (0.05) 0.06 (0.18) 0.22 (0.24) 0.07 (0.06) 0.13 (0.07)†
Norte -0.10 (0.06) -0.01 (0.14) 1.43 (0.49)** -0.69 (0.72) 0.09 (0.08) -0.14 (0.15)
Alentejo -0.21 (0.06)** -0.25 (0.10)* 0.63 (0.48) -1.16 (0.68)† -0.10 (0.07) -0.32 (0.11)**
Centro -0.14 (0.07)* -0.11 (0.11) 0.60 (0.48) -1.11 (0.64)† -0.07 (0.06) -0.24 (0.12)*
Algarve -0.07 (0.08) -0.14 (0.13) 0.47 (0.50) -1.66 (0.81)* -0.02 (0.08) -0.32 (0.14)*
n 884 884 884 884 884 884 884 884 884
Pseudo-R2 0.110 0.108 0.110 0.477 0.480 0.486 0.108 0.108 0.114
AIC 2139.5 2141.3 2143.5 632.0 629.7 632.1 2306.0 2306.4 2309.0
Table 2 (continued)

No. product/service innovations No. process innovations No. total innovations

(1) (2) (3) (1) (2) (3) (1) (2) (3)

BIC 2202.2 2202.5 2224.8 694.3 691.9 713.4 2368.2 2368.9 2390.4
V test (M1 vs M2) 1.80* -0.39 0.06
V test (M1 vs M3) -1.25 -1.53† -0.83
V test (M2 vs M3) -2.14* -1.56† -2.04*

Note: †p<.10, *p<.05, **p<.01

BT business turnover, DL distanceto Lisbon, DP distanceto Porto, Pseudo-R2 Cragg and Uhler’s pseudo r-squared, AIC Akaike information criterion, BIC Bayesian information
criterion, V test Vuong test
J Knowl Econ
J Knowl Econ

In relation to product/service innovations, model 1 observes that, of the control

variables, company age (B=−0.01, p<.01), founder’s age (B=0.01, p<.01) and busi-
ness turnover greater than €400,000 (B=0.01, p<.01) return statistically significant
influences on the number of product/service innovations. The younger the company
and the older its founder, the greater the number of such innovations. Higher business
turnovers also drive higher innovation rates. As regards to business turnover (greater
than €400,000), model 2 for process innovation also reaches the same conclusion (B=
1.14, p<.05). These results are in keeping with the findings of Ferreira et al. (2010),
Kostopoulos et al. (2011), Forsman (2011) and Ferreira et al. (2012). In relation to the
economic sectors of activity, we find companies from the agriculture (B=−0.73,
p<.01), service (B=−0.73, p<.01), manufacturing (B=−0.71, p<.01), extractive in-
dustrial (B=−0.69, p<.01) and construction (B=−0.70, p<.01) sectors have signifi-
cantly less product and service innovation when compared with KIBS sector firms.
Hence, when verifying the influence of sector of activity on innovation capacity, KIBS
firms process more innovations in their products/services than the remaining sectors of
activity.
In the case of the model 2 findings on innovations to processes, we report that
agriculture (B=−16.48, p<.01) and service (B=−16, 10, p<.01) sector undertake
significantly less innovations to processes whilst companies operating in the
manufacturing (B=1.76, p<.01), extractive industries (B=4.07, p<.01) and construc-
tion (B=4.13, p<.01) sectors return a significantly higher number of process innova-
tions than KIBS sector firms. Hence, when analysing the sector of activity influence on
innovation process capacities, we conclude that companies in the agriculture and
service sectors innovate less than KIBS firms even while the manufacturing, extractive
and construction sectors engage in more process innovations than the KIBS sector.
In model 3, which includes the regional and distance dummy variables, we would
note how company age (B=−0.02, p<.01) and the founder’s age (B=0.02, p<.05)
generate a statistically significant influence on the number of product/service innova-
tions. We also verify how agriculture (B=−0.73, p<.01), service (B=−0.72, p<.01),
manufacturing (B=−0.70, p<.01), extractive (B=−0.68, p<.01) and construction
(B=−0.70, p<.01) sector companies report a significantly lower level of product/
service innovations than prevailing in the KIBS sector. Furthermore, when analysing the
influence of the characteristics of the founder, the company and the sector of activity on
innovative capacity levels, we verify how the fact of a company being young, its founder
older and belonging to the KIBS sector all positively influence the number of innova-
tions in products/services.
In the same model but as regards to process innovations, we report that agriculture
(B=−16.69, p<.01) and service (B=−16.37, p<.01) sector companies undertake sig-
nificantly less process innovations. Manufacturing (B=1.70, p<.01), extractive indus-
trial (B=3.91, p<.01) and construction (B=3.99, p<.01) sector firms have statistically
significant larger numbers of innovation processes than KIBS sector firms. In addition,
when analysing the influence of the characteristics describing the founding entrepre-
neurs, the company and its respective sector on innovation capacity, we encounter how
the older the company, the older the founder and belonging to the KIBS sector positive
influences the number of process innovations.
Finally, when analysing the total number of innovations in model 1, we note that the
company’s (B=−0.01, p<.01) and the founder’s (B=0.01, p<.05) ages have a
 J Knowl Econ

statistically significant influence on the total number of innovations. In relation to the

economic activities ongoing at agriculture (B=−0.81, p<.01), service (B=−0.76,
p<.01) and manufacturing (B=−0.51, p<.01) sector companies report significantly
less innovations than KIBS firms. Hence, when analysing the total number of innova-
tions, in terms of the characteristics of the founding entrepreneur, the company and its
sector, we find that young companies run by older entrepreneurs and belonging to the
KIBS sector converge to generate a positive influence on innovation numbers.
These results are in alignment with those of other studies (Mitchell et al. 2002;
Lafuente et al. 2010; Ferreira et al. 2012).
As regards to the regional dummy variables, they report that companies from the
Alentejo (B=−0.20, p<.01) and Centro (B=−0.13, p<.01) regions, on average, report a
lower number of product/service innovations than companies located in Lisbon. Model
2, including the 10-base logarithm location variables for the distances to Lisbon
and to Oporto, as well as calculation of their squares, also reports how company age
(B=−0.01, p<.01) and founder’s age (B=0.01, p<.05) hold a statistically significant
influence over the number of product/service innovations. In model 3, the findings from
the location variables demonstrate how companies in the Alentejo (B=−0.25, p<.01)
generate a lower number of product/service innovations than their Lisbon located peers.
The same model also reports that in the case of process innovations, companies located
in the Norte (B=1.43, p<.01) region have, on average, a larger number of process
innovations in relation to Lisbon located firms.
When analysing the total number of innovations, we find companies in the Alentejo
(B=−0.32, p<.01), Centro (B=−0.24, p<.01) and Algarve (B=−0.32, p<.01) regions
manage only to implement a lower number of innovations than companies located in
Lisbon. These results corroborate the empirical evidence returned in studies by
Felsenstein (1996), and by Arauzo and Viladecans (2006). We thus confirm that
proximity to urban centres drives the innovation capacities of firms and thereby
supporting the research hypothesis (H1): Location generates a positive influence on
innovation capacity.
The Vuongtest indicates how model 1 is statistically (p<.05) more explicative than
model 2 and model 3 is statistically more explanatory than both model 1 (p<.05) and
statistically significantly (p<.05) more than model 2. Hence, we may report that models
1 and 3 return better predictions of the number of product/service innovations. In
summary, KIBS innovate more in products/services than other sectors of activity.
Furthermore, the fact of founders being older and running more recently founded
companies combine to boost the total number of innovations more in the case of
KIBS sector firms than other sectors. This thus means that KIBS firms are more
innovative than the remaining sectors subject to analysis.

Conclusions

Through a cross-sectional study based on a sample containing 844 firms, this article has
addressed the critical aspect of the impact of location on the innovative capacities of
firms and their financial performance.
Based upon our review of the literature, we were able to identify the chronological
point of view to the evolution of business location theories. In these terms, our research
J Knowl Econ

findings provide a contribution to the state of the art theories of location and verifying
the current trend towards the conjugation of different theories which we designate here
as a trend towards eclecticism.
From the empirical perspective, we report how young companies founded by older
entrepreneurs return high levels of innovative capacities and are, in turn, the companies
turning in the best financial performances (Mitchell et al. 2002; Lafuente et al. 2010;
Cucculelli and Ermini 2012).
We also confirm how location does represent a variable with influence over com-
pany innovative capacities. However, in terms of the effects of location, the depth of the
empirical studies remains shallow, and as such, our research findings also contribute to
advancing this field of research. The conclusions also provide an answer to the initial
research question raised: Do locations in urban centres drive innovative capacities?
Locatingin urban areas, such as is the case with the Lisbon region, demonstrated a
positive influence on company innovation capacities. This may be explained by the
close proximity to resources (capital and human resources) and institutions that under-
pin networks fostering innovation, such as research and development entities.
The sector of activity drives differences in terms of the capacities for innovation. We
find here that the KIBS sector reports greater innovative capacities than the other
sectors subject to analysis both in terms of innovations to products/services and in
the total number of innovations. These results are in keeping with other already
completed studies (Muller 2001; Howells and Tether 2004; Toivonen 2004; Koch
and Stahlecker 2006) that refer to intensive knowledge as a variable shaping the
innovative capacities of companies and businesses. Our research points to the way in
which not only does the type of sector influence the innovative capacities of companies
but also impacts on their intrinsic capacities and, more specifically, the resources and
capacities available to the sector itself.
When analysing innovation in processes, we find that here, the KIBS sector reveals a
lower level of innovation in comparison with the manufacturing, extractive and
construction industrial sectors. Thus, future studies might benefit from examining the
additional variables characterising process-based innovations such as innovations in
product/service design, specific consumer needs, as well as the acquisition of third
party technology (Roberts and Berry 1985; Cooper 1990; Koc and Ceylan 2007).
Furthermore, this evidence recalls the need to ascertain the motives for which this
sector, as the most innovative in terms of products/services, does not register the
same behaviour in terms of process-based innovation. More specifically, do
organisational culture-related questions prevent these companies from engaging
in this innovation type? Innovation within the organisational environment in-
volves the implementation of new methodologies for distributing responsibilities
and decision making whether in terms of the division of labour or at the
structural level of new activities (Armbruster et al. 2006, 2008; Birkinshaw
et al. 2008; Camisón and Villar-Lopez 2014).
Our study also produces implications in terms of the contribution made by geo-
graphic proximity towards company innovation capacity levels. While statistically,
there are no significant differences, however, based on the logarithmic effect of
distance, we find that companies located in the region of Lisbon are more innovative
than businesses located in the remaining regions of Portugal. Indeed, this provides the
grounds for designing future research seeking to analyse the factors underpinning the
 J Knowl Econ

location decision of company founders. More specifically, further deepening the

literature on theories of location would seem to involve the need to study these factors.
Companies reporting higher business turnovers generated the highest number of
innovations, and we report a positive relationship between innovation capacity levels
and financial performance and thereby contributing towards greater economic devel-
opment in the regions where they are located.

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