Geography and Strategy: Volume 20

To a large extent, the recent interest in the geographic distribution of economic activity marks a return to earlier times. Both of the two primary disciplines – economics and sociology – that inform the study of strategy began with explicit consideration of the importance of geography. On the economics side, one need only look as far as the classical economist Adam Smith, whose seminal work on the Wealth of Nations (1776) sought to explain why some nations had grown more prosperous than others. As most recall, this inquiry led him to develop his theories regarding the importance of the division of labor in improving productivity (though less well known, the third book discusses a variety of legal and social factors, presaging the arguments of institutional economists and sociologists).

Globalization has shifted the comparative advantage in the OECD countries away from being based on traditional inputs of production, such as land, labor and capital, towards knowledge. This has triggered a divergence between the competitiveness of firms and the competitiveness of locations. As the strategic management of firms dictated a response to globalization of outward foreign direct investment combined with employment downsizing at high cost locations, public policy has responded by developing the strategic management of places. Policy to promote entrepreneurship has emerged as playing a central role in the strategic management of places, because entrepreneurial activity is the conduit between investments in knowledge and economic growth at the particular location. However, due to the two sources of market failure associated with investments in knowledge and entrepreneurial activity identified in this paper, private agents will tend to under invest in entrepreneurial activity. A major goal of the strategic management of places is to pursue policies that will compensate for this market failure by promoting knowledge-based entrepreneurship as a vehicle for the employment growth and global competitiveness. The purpose of this paper is to explain why and how globalization has triggered the emergence of a new type of public policy – the strategic management of places – and the central role that entrepreneurship plays in this new policy.

The origin and nature of meaningful, persistent firm-specific differences is a central issue in the study of business strategy. I investigate in this paper the role of characteristics physically external to firms, but embodied in their local geographic areas, in driving differences in firms’ organizing strategies. Specifically, I examine the extent to which location-specific characteristics affect the organization of pharmaceutical firms’ research laboratories bringing both qualitative and quantitative evidence to bear on this issue. Analyses of the histories of several late 19th century drug makers suggest that differences in local institutions, labor markets, and demand structures played important roles in affecting case firms’ strategic evolution. For example, while Mulford (Philadelphia PA) exploited the strength of nearby universities and the city’s public health system in organizing around leading-edge capabilities in bacteriology, Sterling (Wheeling WV) found that its local environment rewarded investments in marketing and distribution. Panel data analysis on a sample of firms from the late 20th century provides complementary evidence, demonstrating that the scientific orientation of modern drug discovery laboratories is positively and significantly correlated with measures of the strength of the local scientific and technical base. Together, these analyses suggest that location-specific characteristics may be important in driving firm heterogeneity and, ultimately, competitive advantage.

Studies consistently find regions dense in concentrations of similar firms to be fecund sources of new firms of the same kind. This pattern persists even in industries with negative returns to geographic concentration. Why do these patterns persist? On the one hand, social networks may constrain entrepreneurs’ opportunities, making it difficult to mobilize resources in more attractive locations. On the other hand, nascent entrepreneurs may systematically misperceive opportunities in such a way as to lead them to continue founding attempts in overcrowded regions. To distinguish between these two processes, we analyze a unique set of data on television stations that contains information on both attempts to start new stations, as well as successful foundings. Our exploratory analysis suggests that nascent entrepreneurs do consistently misinterpret information related to population dynamics. These patterns could easily contribute both to industrial agglomeration and to the fragility of Red Queen dynamics. We discuss the implications of these results both for future research and for public policy.

Organizations create their environments by constructing interpretations and then acting on them as if they were true. This study examines the cognitive spatial boundaries that managers of Manhattan hotels impose on their competitive environment. We derive and estimate a model that specifies how the attributes of managers’ own hotels and potential rival hotels influence their categorization of competing and non-competing hotels. We show that similarity in geographic location, price, and size are central to managers’ beliefs about the identity of their competitors, but that the weights they assign to these dimensions when categorizing competitors diverge from their influence on competitive outcomes, and indicate an overemphasis on geographic proximity. Although such categorization is commonly conceived as a rational process based on the assessment of similarities and differences, we suggest that significant distortions can occur in the categorization process and examine empirically how factors including managers’ attribution errors, cognitive limitations, and (in)experience lead them to make type I and type II competitor categorization errors and to frame competitive environments that are incomplete, erroneous, or even superstitious. Our findings suggest that understanding inter-firm competition may require greater attention being given to the cognitive foundations of competition.

Clusters of foreign manufacturing plants are traditionally explained by characteristics of the entry location such as immobile resources or agglomeration advantages, but an alternative explanation is that social or economic relations among firms in the home country facilitate interorganizational learning about entry locations. Such interorganizational learning reduces uncertainty, leading to heterogeneous diffusion of the plant location choices among organizations that are socially proximate in the home country. We examine this hypothesis through analysis of the effect of industry, lending ties, and board interlocks among Japanese firms on their entries into Europe, and find that shared industry and structural equivalence in the board interlock network are strong predictors of mimetic nation choice. The findings suggest that nation choices follow an innovation diffusion pattern, and that Japanese firms have paths of influence like those of U.S. firms.

The influence of agglomeration externalities on a firm’s profits depends on the efficiency benefits it derives from collocating and on the contributions it makes to its competitors production processes. We examine the economics of firm location choice with a duopoly model that allows for asymmetric contributions by firms to production externalities. In the model, the magnitude of a firm’s contributions to industry agglomeration externalities is determined by its R&D levels and by how closely it locates to the other firm. Through numerical simulations, the effects of firm heterogeneity on industry geographical organization are evaluated. Specifically, the relationships between industry agglomeration strength, R&D investment, location choice timing and Nash equilibria industry structures are explored. The findings from this exercise indicate that geographic collocation tends to occur in industries with symmetry in firm R&D spending and where high R&D firms are the initial entrants. Moreover, we find that under some industry conditions, strengthened agglomeration economies encourage firms to locate more distant from each other rather than collocate. Finally, our simulations also show that firms’ profits tend to increase yet total welfare decreases as agglomeration economies strengthen.

A significant portion of academic research on marketing strategy focuses on how national brands of repeat-purchase goods are managed or should be managed. Surprisingly little consideration is given in this tradition to the extended role of geography, i.e. distance and space. For instance, manufacturers of brands in non-durable product categories are well aware of the fact that their national brands perform very different across domestic U.S. markets. This holds even for product categories with limited product differentiation. In this chapter, we outline various processes through which the influence of geography on performance of national brands materializes. We discuss a number of alternative explanations for the emergence and sustenance of spatial concentration of market shares. Several of these explanations are modeled empirically using data from the United States packaged goods industry. This chapter closes with avenues for further academic research on spatial aspects of the growth of new products.

Because clustering of organizational activities in space induces – and at the same time emerges from patterns of imperfect connectivity among interacting agents, the study of geography and strategy necessarily hinges on assumptions about how agents are linked. Spatial structure matters for the evolutionary dynamics of organizations because social systems are prime examples of connected systems, i.e. systems whose collective properties emerge from interaction among a large number of component micro-elements. Starting from this proposition, in this paper we explore the value of the claim that a wide range of interesting organizational phenomena can be represented as the outcome of processes that occur in overlapping local neighborhoods embedded in more general network structures. We document how patterns of spatial organization are sensitive to assumptions about the range of local interaction and about expectation formation mechanisms that induce temporal interdependence in agents’ choice. Within the lattice world that we define we discover a concave relation between the sensitivity of individual agents to new information (cognitive inertia) and system-level performance. These results provide experimental evidence in favor of the general claim that the evolutionary dynamics of social systems are directly affected by patterns of spatial organization induced by network-based activities.

We develop a model to analyze the growth of social organizations as a spatially nested mixed-influence diffusion process. Drawing on gravity models and threshold models, we split the social system into social units and model the diffusion process as a system of differential equations. The diffusion of a new organizational form in a social unit is a function of an internal process within the unit and external processes in the surrounding units. The model is confronted with data on the growth of trade unions in Stockholm, Sweden, between 1890 and 1940.

This paper examines the diffusion of a multinational bank’s quality initiative across functional and geographic boundaries. It demonstrates substantial regional differences in the volume and institutionalization of TQM activities, with slow development and little staying power in the U.S. and rapid expansion in Asia and Latin America. Event history analysis of quality team formation demonstrates that positive feedback occurs primarily within business divisions operating within national boundaries.

The organization of R&D in geographic space has been identified as an important but neglected determinant of innovative performance. This study uses data on 21 U.S.-based pharmaceutical companies to investigate the potential impact of geographic organization on innovative output. Three dimensions of geographic organization are assessed: (1) centralization versus decentralization of laboratories in the United States; (2) localized spillovers among competing labs in the U.S.; and (3) globalization of laboratory networks. The findings point to the importance of international spillovers that pharmaceutical companies have harnessed through ownership of foreign laboratories. Thus, foreign labs appear beneficial for innovation, but no evidence is found of more localized spillovers among commercial labs. The analysis shows some benefits of centralization within the U.S., suggesting that an organization with one or two domestic laboratories may be optimal.

Social scientists have recently turned their attention to the important consequences of industrial districts or so-called agglomeration economies on economic growth and firm performance. This paper explores an important but unanswered question involving agglomeration economies: does geographic location within an agglomeration affect firm performance? I assess this question by examining the effects of different geographic office locations (by zip code) on the failure rates of all corporate law firms located in Silicon Valley from 1969 to 1998. Empirical estimates reveal that Silicon Valley corporate law firms benefit from the increased volume of client referrals that comes from being near mutualistic firms that offer a different range of legal services, the lower labor costs and more specialized division of labor that come from being near a large joint supply of lawyers, and the increased business that comes from being near important clients (i.e. venture capital firms).

In addition, corporate law firms that locate in certain municipalities of Silicon Valley, including Palo Alto, San Jose, and Santa Clara, have significantly increased failure rates, even controlling for many firm-specific differences. Younger corporate law firms (under the age of 11 years) are helped disproportionately by being near important environmental resources and harmed disproportionately by being in certain perilous areas of Silicon Valley. All told, a law firm’s office location within Silicon Valley has significant consequences for its survival.

Why do nations succeed in particular industries? Why do certain industries prosper in one country, but languish in others? Several recent attempts to address these core questions in the study of geography and strategy are based on the notion of domestic rivalry as the essence of the persistence of competitive advantage of nations. Starting from the claim that rivalry between countries typically implies competition among organizational populations across national boundaries, in this paper we make a first attempt to develop empirical connections between a central problem in international business and the conceptual and analytical categories of corporate demography. Relying on information on the founding of 719 independent motorcycle producers operating in Belgium, Italy and Japan during the period 1898–1993, we build on recent results in organizational ecology to link a selected number of essential but underspecified aspects in current theories of international business to observable patterns of competition within and among organizational populations. The results of the analysis invite a new interpretation of the evolutionary forces that shape the competitive advantage of nations.