Geographic cluster size and firm performance

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Abstract

We examine whether there are increasing returns to locating in clusters—a fundamental premise of agglomeration theory. This premise is worth exploring because a) it has infrequently been studied; b) recent evidence suggests that diseconomies of agglomeration change over time and may alter the payoffs to firms located in clusters; and c) recent evidence suggests that there may be negative returns to agglomeration. We examine firm payoffs to clustering in the biotechnology industry, and consider five different measures of performance. Our results lend support to the view that there are increasing returns to cluster size, but also suggest that diseconomies of agglomeration play an increasingly important role as clusters evolve. We believe these results help in reconciling previous findings.

Section snippets

Executive summary

There has been increasing recognition that geographic location bears upon the competitive position of firms. This paper examines the implications of location for new technically oriented firms. Many are located in clusters of similar firms such as Silicon Valley, Seattle, Boston, Austin, and San Diego in the United States; Cambridge in the United Kingdom; Bangalore in India; Tel Aviv in Israel; and Lund in Sweden. We focus on the relationship between cluster size and organizational performance.

Review of empirical literature

There is some evidence that firm's benefit from being in clusters, even if the relationship between cluster size and firm performance is not explicitly tested. Hill and Naroff (1984) examined a sample of 102 high technology firms listed in the Million Dollar Directory from 1978 to 1981 and found that firms within the Silicon Valley and Boston clusters (both very large clusters) had significantly higher actual returns than a sample of similar firms located elsewhere. DeCarolis and Deeds (1999)

Data

We use data on 806 U.S. private and public biotechnology firms founded between 1973 and 1998. BioScan was the main source for identifying firms.6 Since BioScan was first published in 1987, to avoid problems of full left censoring we searched Lexis/Nexus for additional firm registration filings with the Securities and Exchange Commission. These two sources, along with Dow Jones

Results

Table 2 reports the results for models predicting discontinuance, while Table 3 reports the results for models predicting IPOs, private equity placements, patents, and alliances. We test the significance of individual coefficients using t-tests. Year dummy variables are in each model, but not reported.

One of the goals of this study is to discern not only whether a relationship exists between cluster size and performance, but to discover the nature of the relationship. To accomplish this, for

Discussion

The purpose of this study was to ascertain whether changes in cluster size influence firm returns. Surprisingly few studies have examined the relationship between cluster size and firm performance, despite its central importance to agglomeration theory. We examine a broad range of performance indicators to test for the robustness of our findings. Our findings suggest economies of agglomeration benefit firms in their ability to innovate through patenting, attract alliance partners, and attract

Acknowledgements

We benefited from comments from seminar participants at Purdue University and at the 2003 Lally-Darden Entrepreneurship Scholar's Retreat. Special thanks to Philip Phan and Brent Goldfarb. We are grateful to Josh Lerner for making available to us the biotechnology equity index, and to the Entrepreneurship Initiative at Purdue University for providing financial support.

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