How Do Cognitive Proximity and Knowledge Space Position Affect Firms' Innovation? Evidence From Micro and Small Manufacturing Firms in South Africa

Cognitive proximity between firms, and their position in relation to other firms in a knowledge space, can influence firms' innovation performance. While some studies have begun analysing this in developing countries, there is a dearth of evidence in Africa, and more generally for small and especially micro enterprises as well as for informal enterprises. To fill this gap, we utilise rich new survey data covering 711 micro and small manufacturing firms in Johannesburg, South Africa. We develop and apply a novel multidimensional measure of cognitive proximity, using information on the skills most needed in firms' activities, firms' proximity in an industrial space, and the types of external co‐operation in which they engage. We find that cognitive proximity is positively associated with innovation outcomes. Although this relationship is increasing for most of the sample, there is evidence of an inverted‐U relationship for firms located at higher percentiles, suggesting that too much proximity may lead to a cognitive lock‐in. Firms' knowledge space position is also associated with differential innovation outcomes. In extensions of the model, we find interesting differences in how both cognitive proximity and knowledge space positions are associated with the degree of innovation novelty and also vary according to whether the firm is formal or informal.