The "geographical agglomeration-private R&D expenditure" effect: Empirical evidence on Italian data

Recent theoretical contributions show that geographical proximity, by increasing the payoff from free-riding on knowledge accumulation, may reduce the relative profitability of individual R&D activity vis-a-vis imitation and other alternative forms of technological innovation which exploit more efficiently the presence of geographical spillovers. As a consequence, these models predict that aggregate R&D effort is likely to be lower for firms agglomerated in "industrial districts" than for isolated firms. In this paper we provide partial support to this theoretical hypothesis by showing that geographical agglomeration reduces private R&D expenditures and has a negative impact on the decision to invest in R&D. We also find that a marginal increase in agglomeration within the industrial district has the effect of increasing the quality of innovation but not of individual R&D expenditures. These findings seem to confirm that innovation in industrial districts is influenced more by agglomeration externalities than by higher individual R&D effort, emphasising once again the importance of technological spillovers as channels of knowledge accumulation and diffusion in these areas.