The contribution of knowledge intensive business services to successful innovation in manufacturing firms the importance of geographical proximity

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1 The contribution of knowledge intensive business services to successful innovation in manufacturing firms the importance of geographical proximity Ina Drejer and Anker Lund Vinding DRUID, IKE Department of Business Studies Aalborg University Fibigerstraede 4 DK-9220 Aalborg O id@business.auc.dk, alv@business.auc.dk Abstract submitted to the DRUID Summer Conference 2003 on Creating, Sharing and Transferring Knowledge: The role of Geography, Institutions, Organizations The proposed paper is related to conference themes B and C. 27 February 2003 Economic analyses have traditionally focussed on manufacturing, based on the central placement of manufacturing in economic theory. Services, on the other hand, have either been neglected altogether, or perceived as an unproductive set of social activities, which kept resources away from productive activities (a perception that can be dated back to Smith 1776/1986). Services have been characterised as intangible and ephemeral, contrary to manufacturing products, which are tangible and at least to some extent durable. But many business services provided today perform complex functions, which can have an effect that lasts just as long or longer as the lifetime of a physical (manufacturing) product. During the recent years there has been an increasing interest in the role of services in economics though, as a consequence of the increasing size of the service sector. Subscribers to the concept of a new service economy (e.g. Roberts et al. 2000) point to the role of services in the creation and dissemination of knowledge and innovation, and the rising significance of knowledge-intensive 1

2 business services in these creation and dissemination processes as a main feature characterising the service economy. Miles et al. (1995) describe certain services, e.g. consultancies and training services, as carriers of new technology. These types of service providers arise as specialised economic agents in a developing division of labour, with the mission of producing, nurturing and disseminating knowledge. Antonelli (1998) describes knowledge intensive business services as providers of access to scientific and technological information, as well as dynamic sources of quasi-generic knowledge and interfaces between client firms internal tacit and implicit knowledge and the generic knowledge available within the economic system. A feature which is often stressed in relation to services, in particular knowledge intensive services, is the importance of a close relation and a high level of interaction between service provider and user (e.g. Miles et al. 1995). This could imply that the geographical location of firms is a determining factor for their use of knowledge intensive service inputs. The present paper explores the geographical dimension of the use of knowledge intensive services as inputs to innovation in manufacturing firms. The starting point for the analysis is two opposing, empirically based assessments of the relation between geography and the use of business service inputs for innovation. The first is represented by Mueller (1999) who suggests that interrelations between small and medium sized firms one the one side and providers of knowledge intensive business services on the other may contribute actively to reducing regional inequalities in terms of access to innovation resources. That is, the local availability of knowledge intensive business service providers in regions with no or little traditional innovation infrastructure can improve the development patterns of so-called peripheral regions. However, as pointed out by e.g. Tervo and Niittykangas (1994), business service providers tend to concentrate in major urban areas. And when business service providers are found in small urban 2

3 areas or rural districts, they are usually relatively standardised and mostly based on local market demand (Rusten, 1997). This leads to the second assessment of geographical aspects of the use of business service inputs for innovation, represented by Makun and MacPherson (1997). Makun and MacPherson propose that their findings of firms located in peripheral regions establishing fewer linkages to knowledge intensive service providers of innovation inputs can explain why the probability of successful product innovation taking place outside national core regions is relatively low. The firms outside the core regions express problems in terms of finding, evaluating and/or obtaining suitable innovation inputs, mainly due to a weak local supply, i.e. according to this knowledge intensive business services can increase regional inequalities. The above-mentioned conflicting results calls for a further investigation of the role of physical location for the use of knowledge intensive service inputs in innovation. The definition of core and periphery region is one important aspect of such an investigation. The present paper explores the use of knowledge intensive service inputs to innovation at a more detailed geographical level than presented in the above-mentioned studies, with an explicit focus on the distinction between firms located inside and outside larger urban areas respectively. We thus analyse whether firms located geographically far away from larger urban areas have less opportunity to collaborate with, and thus benefit from inputs from, these service providers. This is explored in two dimensions: (i) whether urban firms tend to collaborate more with knowledge intensive business service providers in relation to innovation than non-urban firms; and (ii) whether urban firms that do collaborate with knowledge intensive business service providers achieve better innovation performance than noncollaboration firms as well as non-urban collaborating firms. The latter dimension includes an approximation of whether the type/quality of collaboration with service providers differs according to geographical location. 3

4 The empirical analysis is carried out on Danish survey data on collaboration on product development in manufacturing firms. The results of the analysis could have important implications for regional business development policies in terms of detecting the innovation potentials in collaborating with knowledge intensive service providers (i.e. do firms that collaborate with these achieve better innovation performance?), as well as in terms of detecting whether firms located in non-urban regions face barriers for such collaborations. References Antonelli, C. (1998), Localized Technological Change, New Information Technology and the Knowledge-Based Economy: The European Evidence, SI4S Topical Papers , STEP, Oslo. Makun, P. and A.D. MacPherson (1997), Externally-assisted Product Innovation in the Manufacturing Sector: The Role of Location, In-house R&D and Outside Technical Support, Regional Studies, Vol. 31, No. 7, pp Miles, I., N. Kastrinos (with K. Flanagan), R. Bilderbeek and P. den Hertog (with W. Huntink and M. Bouman) (1995), Knowledge-Intensive Business Services. Users, Carriers and Sources of Innovation, EIMS Publication No. 15. Mueller, E. (1999), There is no territorial fatality! (or how innovation interactions between KIBS and SMEs may modify the development patterns of peripheral regions), Working Papers Firms and Region No. R3/1999, Fraunhofer Institute Systems and Innovation Research. Roberts, J., B. Andersen and R. Hull (2000), Knowledge and Innovation in the New Service Economy, pp in in B. Andersen, J. Howells, R. Hull, I. Miles and J. Roberts (Eds.), Knowledge and Innovation in the New Service Economy, Edward Elgar, Cheltenham. Rusten, G. (1997), Outsourcing strategies and geography. Business service use by manufacturing firms, SNF Working Paper No. 49/1997, Foundation for Research in Economics and Business Administration, Bergen. Smith, A. (1776/1986), The Wealth of Nations, Books I-III, Harmondsworth, Penguin (Penguin Classics Series.) 4

5 Tervo, H. and H. Niittykangas (1994), Development in the Growth, Location and Turbulence of Business Services in Finland, Papers in Regional Science, Vol. 73, No. 1, pp