How do cognitive proximity and knowledge networks affect firms’ innovation? Evidence from micro and small firms in Johannesburg, South Africa

Cognitive proximity between firms, and their embeddedness in a knowledge network, can affect firms’ innovation performance. While some studies have begun analysing this in developing countries, there is a dearth of evidence in Africa, and for small and especially micro enterprises and informal enterprises more generally. To fill this gap and to assess whether cognitive proximity and knowledge network centrality matter for firms’ innovation performance, we utilise rich new survey data covering 711 micro and small manufacturing firms in Johannesburg, South Africa. We develop and apply a new multidimensional measure of cognitive proximity, using the information on skills most needed in firms’ activities, their technological relatedness, and the types of external co-operation in which they engage. We find that the relationship between cognitive proximity and innovation follows an inverse Ushaped curve associated with the ‘proximity paradox’, in which proximity enhances the probability of innovating, but too much proximity may lead to a cognitive lock-in. Firms’ network position, measured using both degree centrality and betweenness centrality, also affects innovation outcomes. In an extension, we find interesting differences in how both cognitive proximity and firms’ network positions affect the degree of novelty in innovation outcomes.