Location effects on entrepreneurial ventures
Joseph E. Coombs
To what extent does a regional environment affect a new venture’s success? If a firm simply locates in a region rich in the knowledge that it needs to succeed, will it increase its chance of success or does the venture need to directly involve itself through collaboration with the local knowledge creators in order to benefit? How does location affect the flow of financial resources into a venture? These are important questions that must be answered to meet Schumpeter’s challenge to investigate the conditions that create opportunities for, support, and impede entrepreneurial activity (Schumpeter, 1942, 1991).
Economists have recognized for decades that firms in the same industry tend to cluster geo graphically. This phenomenon has been observed in the Texas lodging industry (Chung and Kalnins, 2001), the Manhattan hotel industry (Baum and Haveman, 1997; Baum and Mezias, 1992), the biotechnology industry (DeCarolis and Deeds, 1999; Deeds, DeCarolis, and Coombs, 2000; Stuart and Sorenson, 2003; Zucker, Darby, and Armstrong, 1998), footwear production (Sorenson and Audia, 2000), Inter net software and equipment (Zacharakis, Shep herd, and Coombs, 2003), and computers (Saxenian, 1994), as well as textiles, leather goods, furniture, ceramic tiles, and automobile production (Sorenson and Audia, 2000). This observation has led to a stream of research de voted to agglomeration economies. This eco nomic explanation for observed clustering activity emphasizes the benefits of locating one’s firm within a geographic center of production. These benefits include decreased transportation costs, proximity to raw materials, and access to a labor force with unique skills (Acs, FitzRoy, and Smith, 1999; Sorenson and Audia, 2000). In particular, Krugman (1991a, 1991b) and Marshall (1920) have suggested three factors that foster the creation of industry clusters: a pooled market for specialized labor, the development of specialized intermediate goods industries, and knowledge spillovers. Arthur (1990) provides a second model of regional development described as self reinforcing expertise, in which geographic variance in technical progress exists because regions with innovative activity develop specialized resources critical to the next phase of innovation. In each of these models, knowledge spillovers play a particularly important role. By locating in a geographic cluster of similar ventures, a venture is able to take advantage of knowledge spillovers from competitors and from other institutions. In the bio technology industry, research universities are an example of an institution that can be the source of knowledge spillovers beneficial to the ventures in the local geographic cluster (Acs, Audretsch, and Feldman, 1992, 1994; Audretsch and Stephan, 1996; Jaffe, 1989; Jaffe, Trajten berg, and Henderson, 1993; Mansfield, 1995; Zucker, Darby, and Brewer, 1998).
The Influence of Increasing Cluster Concentration
While there is considerable evidence as to the benefits of being located among a cluster of similar ventures, researchers have recently noted that as clusters become more concentrated, increased competition for inputs, in particular labor, adversely affects new ventures (Deeds, DeCarolis, and Coombs, 2000; Folta, Cooper, and Baik, 2003; Hannan and Freeman, 1977; Pouder and St. John, 1996; Shaver and Flyer, 2000; Sorenson and Audia, 2000; Stuart and Sorenson, 2003). Organization ecology and sociology, in particular, inform us that competition within geographically local organization populations is more intense than outside these concentrated locations (Carroll and Wade, 1991; Hannan and Carroll, 1992). Empirical evidence tends to support this perspective. For example, Sorenson and Audia (2000) reported that shoe manufacturing plants in or near large concentrations of shoe producers are significantly more likely to fail than more isolated plants. Stuart and Sorenson (2003) established a negative relationship between biotechnology cluster density and time to initial public offering. Baum and Mezias (1992) showed that in the Manhattan hotel industry establishments that were similar in location, price, and physical size reduced each other’s survival probabilities. Deeds, DeCarolis, and Coombs (2000) demonstrated that lower geographic concentration levels supported new product development in the biotechnology industry, but increased geographic concentration overtaxed local resource stocks and negatively affected individual ventures’ new product development capabilities. Further, Shaver and Flyer (2000), following their study of the location choices of foreign Greenfield investments in US manufacturing industries, put forth the view that ventures with the best technologies, human capital, training programs, and employees have an incentive to locate away from industry clusters. They suggested it is ventures with lesser technologies, human capital, training programs, suppliers, or distributors that benefit most from being located in clusters, as they can gain access to resources from ventures endowed with the best technologies, human capital, training programs, suppliers, or distributors. Ventures with an abundance of the best re sources thus provide resources to ventures with lesser resources, but receive little in return and thus have an incentive to avoid clusters. Thus, agglomeration economics and organizational ecology provide competing views on the benefits of industry clusters. Recent work by Zucker, Darby, and Brewer (1998) on the biotechnology industry suggests a possible mediating influence at work between industry cluster characteristics and venture performance.
Knowledge Spillovers or Markets for Information?
Zucker, Darby, and Armstrong (1998) questioned the assumption that localized knowledge spillovers are freely available to ventures and that ventures have the necessary capabilities to recognize and assimilate these spillovers. Rather than being freely available, localized knowledge may be available primarily through identifiable market exchanges made between local ventures and the sources of local knowledge (i.e., scientists, university departments, research institutes, etc.). The empirical evidence supports this position. Zucker, Darby, and Armstrong (1998) reported that the significant influence of location (as measured by the number of star biotechnology scientists in a firm’s geographic location) on research productivity (measured as products in development) disappears when the star scientist variable is broken down into those with direct venture links and those without. Thus, the level of connectedness to one’s cluster mediates the relationship between simply being located in the cluster and venture performance. This research suggests an important role for networks within geographic clusters. Sorenson and Audia (2000) provided recent evidence that social networks’ importance goes far beyond facilitating know ledge transfer.
Sorenson and Audia (2000) hypothesized that heterogeneity in entrepreneurial opportunities maintains geographic clustering well past the point at which concentration begins to negatively affect venture performance. The rationale behind this intriguing insight is that entrepreneurs need contact with existing ventures in the industry. These contacts provide the entrepreneur with tacit knowledge of the industry, important social ties, and self confidence that 176 location effects on entrepreneurial ventures collectively make it possible for them to mobilize the resources required to start a new venture. Geographic clusters provide substantial opportunities for repeated contacts and thus may provide an advantage not available to entrepreneurs outside of the cluster. This could explain why we can observe higher founding rates in geographic clusters, yet also observe higher death rates.
Looking to the Future
Researchers should move beyond the advantages and disadvantages of clusters and focus instead on firm level and individual level characteristics that make operating within or outside clusters more advantageous to new ventures. Zucker, Darby, and Armstrong (1998) presented evidence that firms connected to specific sources of knowledge (i.e., star scientists) benefit more from this connection than from merely being located within a biotechnology cluster. Sorenson and Audia (2000) also suggested that personal networks within clusters allow entrepreneurs to benefit from the cluster even when the cluster itself is in decline. An interesting avenue for future research is the influence of social net works on an entrepreneur’s success when located inside or outside a cluster. Further, is it beneficial for an entrepreneur outside of a cluster to have a social network that includes individuals within an industry cluster? Lastly, there is evidence that geographic cluster effects fade over time, but only very slowly (Jaffe, Trajtenberg, and Henderson, 1993). Research may further investigate why geographic clusters tend to per sist and the conditions under which clusters can evolve to support new industries.
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