New insights on the role of location advantages in international innovation

Understanding the reasons why economic activity prefers to locate in certain physical spaces (and not in others) forms the basis of much enquiry since at least the Enlightenment, and continues to do so. Although the jargon in such enquiry has evolved through the centuries, the concern with national competitiveness has driven many of these efforts and, connected to this, the propensity to trade, and the ensuing issues of balance of payments and national debt. Nonetheless, location and agglomeration of economic activity - until about 50 years ago - worked on the assumption that both capital and labour were location-bound, because firms and individuals showed little propensity to mobility. Thus competitiveness was primarily shaped by the attributes of the location, and as locations evolved in the nature of their inherent strengths and weaknesses, the kind of economic activity based there also fluctuated. This had obvious ramifications for the nature and extent of trade, and the conditions that permitted one region or country to be more successful than others. The evolution of the modern multinational enterprise (MNE)1 changed this with the growing level and intensity of foreign direct investment (FDI), intrafirm trade and complex sets of linkages among and between spatially dispersed economic actors. Mostly, this has gradually decoupled - but only to an extent - the severely linear relationship between the competitiveness of firms in a given location and the competitiveness of the location itself.