The Geography of Innovative Firms

Craig A. Chikis, Benny Kleinman and Marta Prato

No 20408, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Most U.S. innovation output originates from firms that operate R&D facilities across multiple local markets. We study how this geographic structure influences aggregate innovation and growth, and whether it is socially optimal. First, we develop an endogenous growth model featuring multi-market innovative firms that generate knowledge spillovers to geographically proximate firms. In equilibrium, firms may operate in too few or too many local markets, depending on how sensitive the local spillovers they generate are to their local size. Second, to quantify these effects, we link the model to data on firms’ R&D locations, patents, and citation networks. Using an event-study design, we show that firms’ spatial expansion increases spillovers to other firms and estimate how these spillovers depend on a firm’s local footprint. Our estimates imply that U.S. innovative firms operate in too few markets relative to the social optimum. Third, using quantitative counterfactuals, we find that policies promoting broader spatial scope yield larger welfare gains than standard R&D subsidies. Moreover, unlike R&D subsidies, such policies can also reduce regional inequality.

Keywords: Innovation (search for similar items in EconPapers)
JEL-codes: L10 O30 O40 R10 (search for similar items in EconPapers)
Date: 2025-07
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