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The authors describe how managers can understand the role of location in innovation and evaluate the innovative capacity
of both countries and regions. Using data from the Organization for Economic Cooperation and Development and emerging nations
over the past quarter century, their findings show the striking degree to which location matters for successful innovation at
the global technology frontier. Their analysis sheds light on why individual nations have registered sharp differences in
innovative performance.
The strong effect of location on innovation holds important implications for companies and creates a new broader agenda
for innovation management. Choosing R&D location and managing relationships with outside organizations should not be
driven by input costs, taxes, subsidies or even the wage rates for scientists and engineers, as they often are. Instead,
R&D investments should flow preferentially to the locations with the greatest innovative capacity. Taking active steps to
harness and extend locational advantages takes on equal weight with R&D process management. Locational advantages -
rooted in proprietary information flows, special relationships with local companies, and preferential access to local
institutions - are competitive advantages that are difficult for outsiders to overcome. They can help explain an apparent
paradox of globalization: Ideas and technologies that can be accessed at a distance cannot serve as a foundation for
competitive advantage. Effective management of locational advantages may ultimately prove more sustainable than simply
implementing corporate best practices.
Motivated by differences in innovation intensity across advanced economies, this paper presents an empirical
examination of the determinants of country-level production of international patents. We introduce a novel framework
based on the concept of national innovative capacity. National innovative capacity is the ability of a country to produce
and commercialize a flow of innovative technology over the long term.
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