Innovation: Location Matters

Innovation has become the defining challenge for global competitiveness. Traditional thinking about the management of innovation focuses almost exclusively on internal factors — the capabilities and processes within companies for creating and commercializing technology. Although the importance of these factors is undeniable, the external environment for innovation is at least as important. For example, the United States has been an especially attractive environment for innovation in pharmaceuticals in the 1990s, while Sweden and Finland have seen extraordinary rates of innovation in wireless technology.

Michael Porter, a leading thinker on competitiveness and Bishop William Lawrence University Professor at Harvard University, and Scott Stern, professor of management at the MIT Sloan School of Management, describe how managers can understand the role of location in innovation and evaluate the innovative capacity of both countries and regions. Using data from the Organization for Economic Cooperation and Development and emerging nations over the past quarter century, their findings show the striking degree to which location matters for successful innovation at the global technology frontier. Their analysis sheds light on why individual nations have registered sharp differences in innovative performance.

The strong effect of location on innovation holds important implications for companies and creates a new broader agenda for innovation management. Choosing R&;D location and managing relationships with outside organizations should not be driven by input costs, taxes, subsidies or even the wage rates for scientists and engineers, as they often are. Instead, R&;D investments should flow preferentially to the locations with the greatest innovative capacity. Taking active steps to harness and extend locational advantages takes on equal weight with R&;D process management. Locational advantages — rooted in proprietary information flows, special relationships with local companies, and preferential access to local institutions — are competitive advantages that are difficult for outsiders to overcome. They can help explain an apparent paradox of globalization: Ideas and technologies that can be accessed at a distance cannot serve as a foundation for competitive advantage. Effective management of locational advantages may ultimately prove more sustainable than simply implementing corporate best practices.