Fertile Valley

In a pivotal scene from the film The Social Network, the Hollywood retelling of Facebook’s founding, an exasperated Mark Zuckerberg exhorts business partner and Harvard classmate Eduardo Saverin to join him in Silicon Valley.

“You’ve gotta move here, Wardo. This is where it’s all happening,” the Zuckerberg character pleads.

Whether this piece of dialogue is true or not, the sentiment behind the statement is perhaps more accurate than Zuckerberg—or the movie’s writers—could have known.

In a recent paper examining performance differences within geographic business clusters, Assistant Professor of Strategic Management Brian McCann, MBA’04, finds that younger firms, as well as those with a “deeper knowledge stock” (i.e., more patents), gain the biggest boosts from geographic clusters.

By locating in a geographic cluster, “entrepreneurs may accrue particular benefits to agglomeration during the early phases of a firm,” McCann writes with co-author Timothy B. Folta of Purdue University’s Krannert School of Management. The paper was published recently in the Journal of Business Venturing.

While scholars such as Paul Krugman and Michael Porter have long written about the positive business effects of geographic clusters, this research is among the first to investigate which firms benefit the most from agglomeration.

McCann and Folta examined 806 biotechnology firms founded in the United States between 1973 and 1998. Although the firms were spread across 85 Metropolitan Statistical Areas, the co-authors found that the top 10 clusters in 1994 (the peak of the industry in terms of the number of companies operating during the study’s time frame) provided locations for nearly 75 percent of the firms in the industry.

McCann and Folta also measured the “knowledge richness” of each cluster by totaling the number of patents held by all the biotech firms in each cluster. Statistical analysis of these data sets yielded several findings of note:

• Locating in a cluster is beneficial for firms: Firms in larger and more knowledge-rich clusters have a higher probability of patenting in any given year.

• For each firm that’s added to a cluster, companies within that location have a 1 percent higher increase in the odds of patenting. While that figure may seem small, the effects add up quickly. Increasing a cluster size by 10 firms raises a firm’s patenting probability by nearly 10 percent.

• Within clusters, the increased patenting probability is even higher for firms that already have a richer knowledge base—that is, a higher number of patents. “Our conjecture is that such firms are better able to benefit from knowledge spillovers,” McCann and Folta write.

• Younger firms enjoy a similarly higher patenting probability within clusters, according to the analysis. “This result is consistent with prior scholars who have speculated that young firms might more effectively draw benefits from their clustered regions,” the co-authors write. This is because younger firms tend to have more flexible organizations and a greater need to rely on outside knowledge sources because of their limited resources.

McCann and Folta write that these findings hold relevance for researchers, business practitioners and policymakers.

The evidence regarding what types of firms benefit most from clustering “should be of principal importance to scholars of entrepreneurship or strategic management wondering about the relationship between location and competitive advantage,” they write. “For those deciding whether to locate in an agglomeration or for those attempting to recruit firms to an agglomeration, it provides advice on those firms that are most likely to benefit.”

A version of this article originally appeared in VB Intelligence on July 25, 2012.