Innovation and Strategy in Space: Towards a New Location Theory of the Firm

Traditional location theory suggests that individual firms freely scan the environment and select a location which minimizes production costs (see Garafola and Fogerty 1988). According to this theory, locational advantage reflects conventional natural advantages associated with land, labour and capital. Emphasis is given to production and specifically to the exploitation of economies of scale, but the theory does not accommodate the increased importance of innovation, or the ability to produce higher quality products. In order to engage in innovation, firms must coordinate a variety of activities both within their functional boundaries and with their external environments. An important dimension of innovation is product variety, which is defined as the adaptation of new products to specific market segments. Product variety becomes critical to competitive strategy in a global economy, as it offers firms a way to increase market share through improved time-to-market acceptance. Business strategists have focused on questions of coordination in an increasingly borderless world. Less attention however, has been paid to developing a locational theory which would consider the geographic organization of the firm’s activity. Location may offer firms an effective way to organize resources in light of the increased importance of product variety in innovation. In addition, such a theory should also consider the potential of new technologies in communication and production for altering locational dynamics and requirements.