Introduction

As we showed in Chapter Two, neoclassical growth theory had no mechanism to explain the relationship between entrepreneurial activity and economic growth (Solow, 1956). Because scale economies operate at the establishment level, in the traditional Solow model economic growth relied on physical capital investment in larger establishments. However, capital accumulation can explain only a small amount of the variation in economic growth across regions (Ciccone and Hall, 1996).

Recent theories of economic growth focus on the importance of knowledge and view knowledge externalities, as opposed to scale economies, as the primary engine of economic growth (Romer, 1986). This suggests that if the domestic economy is endogenously growing, and if we believe in competitive markets, then knowledge spillovers must feature in the economic landscape. This concept of spillovers solves the technical problem in economic theory of reconciling increasing returns (which are generally needed to generate endogenous growth) with competitive markets.

The concept of knowledge spillovers leads to several theoretical issues. First, a large body of recently emerged literature has been studying the spatial extent of knowledge spillovers with particular attention to spillovers from industrial and academic research. At different levels of spatial aggregation (such as states, metropolitan areas, counties) in different countries (e.g., the United States, France, Germany, Italy, Austria), and with the application of different econometric methodologies (e.g., various spatial or aspatial methods), many of these studies conclude that geographical proximity to the knowledge source significantly amplifies spillovers between research and innovating firms.