Local milieu and innovations: Some empirical results

Industrial innovations constitute a major factor in fostering the expansion of industrial activities and, consequently, regional growth. Innovations an closely tied to variables both internal and external to the structure and operation of the firm. The latter variables have hardly ever been investigated empirically. The current study utilizes data collected by means of a thorough personal interview of a representative sample of firms belonging to the three fastest-growing industries in Israel: Electronics, Plastics and Metals. All the firms are located in the Northern region of Israel and cover three different sub-regions: metropolitan core, intermediate zone and periphery. The paper reports an attempt to identify and quantify external factors clustered under the term, "local innovation milieu," and to analyze their effect on the rate of industrial innovation. More specifically, the present study describes the construction of alternative measures of industrial agglomeration economies and their effect on the probability of a firm's belonging to different industrial branches when it comes to innovation. The results show that the size of the industry, as measured by the total number of employees, is the best explanatory measure of agglomeration economies in a particular sub-region. Agglomeration economies are significantly responsible for the increase in the rate of a firm's innovation potential in the Electronics industry. In the Plastics industry, however, no significant effect of agglomeration economies on the rate of innovation is detected; and in the Metals industry, only a marginal effect is felt.