*Dr Gary A. S. Cook
Senior Lecturer in Applied Economics
University of Liverpool Management School
Chatham Street, Liverpool L69 7ZH
g.cook@liv.ac.uk
tel: 0151 795 3708
Professor Hans L"o"of
Professor of Economics
The Royal Institute of Technology, Division of Economics
Drottning Kristinasv 30, SE-100 44 Stockholm, Sweden
hans.loof@abe.kth.se
Professor Naresh R. Pandit
Chair in Management
Norwich Business School, University of East Anglia
Norwich, NR4 7TJ
n.pandit@uea.ac.uk
Professor B"orje Johansson
Professor of Economics
J"onk"oping International Business School, J"onk"oping University
Gjuterigatan 5, SE-551 11 J"onk"oping
borje.johansson@ihh.hj.se
Abstract
This paper addresses two questions: what, if anything, is the influence of geographic
concentration of economic activity on patterns of foreign direct investment; what is the
relationship, if any, between geographic concentration of economic activity, multinationality and
innovation. The paper identifies the consensus view which is emerging in the literature, based on
both theory and evidence, that strong clusters are likely to be attractive for inward direct
investment and that they promote innovation. The paper tests whether this relationship is evident
in Great Britain using data derived from the UK’s Annual Foreign Direct Investment survey and
the UK’s Community Innovation Survey 2007. It addresses a surprising gap in the emerging
literature by also examining the relationship between cluster strength and outward direct
investment, thereby testing Porter’s (1990) claim in The Competitive Advantage of Nations, that
advantages gained in strong clusters would be the foundations of international competitiveness.
The paper also distinguishes between two different types of agglomeration economy, localisation
economies based on collocation of firms in related lines of activity, and urbanisation economies
based on the overall concentration of economic activity in a particular region, a distinction most
of the emerging literature in International Business has not made clear. The first set of models
examine the propensity to engage in outward direct investment and the geographic pattern of
foreign ownership of firms active in Great Britain and find that both are positively related to
cluster strength, with localisation economies being more important than urbanisation economies.
Two models of innovation are estimated, the first examines what factors influence firms to be
innovative and the second what influences innovation effort as measured by R&D intensity. In
both cases there is evidence that regional agglomeration promotes innovation and that there are
stronger effects flowing from own industry agglomeration than from broader regional scale.
* corresponding author