Research Policy 32 (2003) 751–770

Sectoral patterns of small firm innovation,

networking and proximity
Mark S. Freel∗
Department of Management Studies, Centre for Entrepreneurship, University of Aberdeen,
Edward Wright Building, Old Aberdeen AB24 3QY, UK
Received 28 September 2001; received in revised form 4 April 2002; accepted 5 June 2002

Abstract
Drawing upon a sample of 597 small and medium-sized manufacturing firms, this article investigates the extent to which
cooperation for innovation is associated with firm-level product and process ‘innovativeness’ and, where collaborative rela-
tionships are reported, the factors which influence their spatial distribution. With respect to the former issue, the data suggests
considerable variety of association across Pavitt’s [Research Policy 13 (1994) 343] sectoral taxonomy and innovation type.
However, the data also indicates the need for caution when developing network strategies or policies: the evidence presented
here is unequivocal in noting that innovation is neither a necessary nor less a sufficient condition for innovation. Moreover,
internal resources often act as complements to, or indeed appears to negate the need for, external resources. With regards to the
spatial distribution of firm linkages, it appears that increasing firms size and export propensity are positively associated with
external linkages at a higher spatial level. Moreover, the spatial reach of innovation-related linkages is also likely to be greater
for firms reporting the introduction of relatively novel innovations (i.e. products or processes which are new to the industry).
In contrast, smaller firms and firms engaged in incremental product innovations appear more likely to be locally embedded.
© 2002 Elsevier Science B.V. All rights reserved.
Keywords: Innovation; Small firms; External linkages; Embeddedness

1. Introduction innovation may no longer be understood as the out-

Following the work of Lundvall (1995), a consen-
sus has emerged which holds that ‘. . . interactive
learning and collective entrepreneurship are funda-
mental to the process of innovation’ (Lundvall, 1995,
p. 9). This view marks a significant shift from the
traditional view of innovation as a linear process
spanning technology development activities and new
product introduction (initiated by either scientific dis-
covery (‘science-push innovation’) or market demand
(‘demand-pull innovation’)). In this new conception,
∗ Tel.: +44-1224-274357; fax: +44-1224-273843.
E-mail address: m.s.freel@abdn.ac.uk (M.S. Freel).
come of independent decision-making at the level
of the firm, but rather must be viewed as an itera-
tive, cumulative and cooperative phenomenon, which
incorporates more than simple phased dyadic or bi-
lateral interactions between users, industry and the
science base (such as those in envisaged by the classic
Kline and Rosenberg (1986) chain-link model) (de la
Mothe and Paquet, 1998). That is, since innovation
involves the cumulative or path dependent creation
of new knowledge, or novel recombination of exist-
ing knowledge, innovation is essentially concerned
with learning. Learning, in its turn, is largely a social
process—most especially in the context of the transfer
and accumulation of tacit knowledge (Polanyi, 1966;

0048-7333/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.
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752 M.S. Freel / Research Policy 32 (2003) 751–770
Howells, 1995)—and is likely to involve considerably
more than two actors. Accordingly, any innovation
system is liable to be socially embedded in such a way
that the innovativeness of individual firms will be in-
fluenced by socially specific, and extra-organisational,
factors such as the infrastructure of financial in-
stitutions, labour markets, policy and provision of
workforce training, mechanisms governing the sup-
port of business start-ups and development, attitudes
and policy concerned with science and technology
and the potency and pervasiveness of inter-firm and
firm–institutional interaction (Dosi, 1999). It is this
final issue, the role of external innovation-related co-
operation, which this current paper seeks to address.
Drawing upon data from a new survey of ‘Northern
British’ SMEs, the paper is able to investigate the
nature of associations between a variety of poten-
tial collaboration partners, the geographic location of
these partners and the innovativeness of individual
firms.
2. Innovation and networking
Academics and policy makers rarely understate
the importance of industrial innovation. In a world
where such consensuses are rare, the common view
holds that, ‘[i]n all highly-industrialised nations the
long-term growth of business and (thus) of regions
[and, one may safely assume, nations] stems from
their ability to continually develop and produce in-
novative products’ (Sternberg, 2000, p. 391). Indeed,
Chris Freeman, the doyen of innovation theorists,
goes further; suggesting that ‘. . . not to innovate is to
die’ (Freeman and Soete, 1997, p. 266). Whilst one
may quibble about the appropriateness of such im-
peratives, it is nonetheless clear that innovations, of
varying scale and scope, positively impact upon the
performance of firms in aggregate and, by implication,
economies (Geroski and Machin, 1992, 1993). Yet, the
dominant network theory of innovation, in its many
incarnations (cf. Håkansson, 1987; Maillat, 1995;
Florida, 1995; Baptista and Swann, 1998; Cooke and
Morgan, 1998; Oughton and Whittam, 1997), holds
that individual firms are seldom capable of innovating
independently, and never innovate in a vacuum.
Frequently, advocates of network approaches to in-
novation induced economic development highlight an
increasing division of labour among organisations as
a first principle compelling collaboration or interac-
tion (Sternberg, 2000). That is, increasing uncertainty,
associated with changing technology and global com-
petition, has encouraged many firms (and, indeed,
many nations) to concentrate on fewer and fewer core
competencies, relying upon trade, or cooperation, for
others (Archibugi et al., 1999). This effective disin-
tegration of the vertical value chain has been taken
as evidence of a move from hierarchical governance
structures (based upon threat and coercion) to network
governance structures (based up reciprocity and trust)
(Nelson, 2000). In contrast to the pre-eminence of
Fordist and Taylorist practices during the immediate
post-war period, the efficient organisation of produc-
tion is increasingly associated with vertical disinte-
gration and flexibility (Hansen, 1990; Lawson, 1999).
Fundamentally, however, the conclusion one is asked
to reach, is that ‘. . . a high level of cooperation and
communication typically affects innovation activities
positively’ (Arndt and Sternberg, 2000, p. 467).
In this regard, the instrumental benefits of inter-firm
or inter-organisational collaboration are thought to re-
volve around the amelioration of internal resource con-
straints or competency gaps. In other words, a firm’s
capacity for innovation will inevitably be enhanced
by the extended knowledge base, and cost and risk
sharing, offered through extensive linkages with ex-
ternal agency (e.g. suppliers, customers, competitors,
universities, public agencies and so on) (see Rothwell
(1991) and Freel (2000) for a more detailed discus-
sion). This view, that no firm may function efficiently
as an island entire of itself, has become somewhat ax-
iomatic and has, in its turn, considerably influenced
European industrial policy. For instance, amongst its
principal conclusions, the most recent UK Competi-
tiveness White Paper noted that:
Firms may have to collaborate and network more,
particularly on new technologies, and strengthen
their links to the science and engineering base, shar-
ing equipment and often people. (DTI, 1998, p. 29)
Indeed, casual observation would suggest that UK
competitiveness policy, throughout the 1990s, has
been premised, to a greater extent, upon the belief
that there exist inadequate linkages between firms,
and between industry and the science base (Oughton,
1997).
 M.S. Freel / Research Policy 32 (2003) 751–770
Regardless of the sway held, recent empirical
work by Oerlemans et al. (1998, p. 300) sug-
gests an important caveat to the foregoing; that the
network view of innovation ‘. . . overemphasises
an inter-organisational approach to organisational
processes’. In our haste to embrace the importance of
external linkages in facilitating firm-level innovation,
there may be a tendency to neglect the contribution
made by internal resources. Yet, in most industries,
the greater part of innovation effort is made by firms
themselves (Nelson, 2000) and occurs within firms
themselves. As Dosi notes, quite emphatically, firms
require ‘. . . substantial in-house capacity in order
to recognize, evaluate, negotiate, and finally adapt
the technology potentially available from others’
(Dosi, 1988, p. 1132; see also, Cohen and Levinthal,
1989, 1990). In other words, the interactivity of the
innovation process refers to collaborations and iter-
ations involving individuals and departments within
the firms as well as to, more occasionally, external
co-operations with other organisations and institutions
(Freel, 2002). This former point is often neglected.
Though this is not to suggest the Håkanssonian
(1987) view that ‘. . . the company is interlocked
with others—it is not a free and independent unit’,
is in any sense erroneous. Merely, that the notion of
‘interlocking’ does not necessarily imply cooperation,
in any robust sense, between companies.
3. Proximity and networking
In terms of the role of spatial proximity in facil-
itating inter-firm (and firm–institution) collaboration
and information exchange, much of the impetus
has been provided by the conceptual developments
stemming from the ‘new industrial districts’ litera-
ture and the success enjoyed by empirical exemplars
such as the ‘Third Italy’ (see for example, Brusco,
1982; Becattini, 1978, 1990; Bianchi, 1990). This
literature defines innovation networks, to a greater
extent, spatially—viz. ‘. . . a territorial agglomeration
of small firms, normally specialised by product type,
product components or process phases, held together
by inter-personal links, by common “social culture”
amongst the workers, entrepreneurs and politicians
and enveloped by an “industrial atmosphere” . . . ’
(Bianchi, 1998, p. 96). Whilst not explicitly precluding
753
extra-regional links, one is, nonetheless, given to
understand that the ‘district’ has geographic bound-
aries. The models of regional economic development,
which have arisen subsequently:
. . . emphasise the spatial organisation of the mar-
ket by different players (firms essentially), the
inter-relation between these players and, eventu-
ally, the diffusion of economic growth from a given
set of players to the rest of the geographic area.
(Andréosso-O’Callaghan, 2000, pp. 70–71)
Even in their larger conception (i.e. incorporat-
ing interactions between cultural, social, political
and economic actors), these conventional models of
organisational and economic development require
implicit spatial/geographic boundaries and are, in this
sense, closed systems. The central issue, as Howells
(1999) records, is that: ‘Studies indicate to a lesser
or greater extent a typical distance decay function in
communication’ (p. 83).
Yet, proximity is not simply a spatial phenomenon.
Whilst, historically, physical barriers (such as oceans,
mountains or deserts) made it difficult for individu-
als to learn about opportunities or share in first mover
advantages, one may reasonably anticipate that recent
developments in ICT will have significantly reduced
this ‘tyranny of distance’. Indeed, in the modern global
economy, politically inspired borders between coun-
tries and regions may create regulatory hurdles that
serve to constrain the flow of goods, services and,
crucially, information (Brown and Butler, 1993). As
Staber (1997, p. 59) notes, whilst ‘[g]eographic prox-
imity is important to the extent that it facilitates infor-
mation exchange and mutual adjustment’, information
is not the only commodity and proximity may also be
defined socially—and, indeed, in terms of technology,
organisation or institutional framework (see Kirat and
Lung, 1999). Thus, the relevant organisational popu-
lation may, more appropriately be defined as ‘. . . a
set of organisations similar in their structures and pro-
cesses and in their relations with actors in their envi-
ronment, but with no theoretical limit placed on the
territorial location of populations’ (Staber, 1997, p. 59;
tense changed).
This is not to suggest that spatial proximity is of
no importance in influencing the level of interaction
between economic actors. Indeed, with respect to uni-
versity linkages, Freel (2000) notes the importance
754 M.S. Freel / Research Policy 32 (2003) 751–770
of personal contacts, with adjacent firms, in the dif-
fusion of knowledge (see also Acs et al., 1994).
However, it is likely that there is an inverse relation-
ship between cognitive proximity (and, relatedly, the
extent to which the knowledge involved is tacit or
codifiable) and the importance of spatial proximity.
Nooteboom’s (1999) notion of ‘cognitive proximity’
draws on both Granovetter’s (1982) ‘strength of weak
ties’ and Cohen and Levinthal’s (1990) ‘absorptive
capacity’. In this way ‘cognitively distant’ knowl-
edge has ‘the advantage of yielding more novelty or
‘non-redundance’, but understanding may be compli-
cated by a lack of shared experience. In particular,
when knowledge is tacit, strong ties, based on en-
during and intensive interaction, may be needed’
(Nooteboom, 1999, p. 140). Simplistically, following
Cohen and Levinthal (1990), knowledge is considered
cumulative and more difficult in novel domains. In
this sense we are viewing the transfer of knowledge
between organisations as a process of ‘learning by
interacting’ (Lundvall, 1995)—as distinct from the
‘learning by doing’ (Arrow, 1962) and ‘learning by
using’ (Rosenberg, 1982). Accordingly, ‘. . . the more
complex the learning process, the more interactions
it probably requires’ (Johnson and Lundvall, 1993,
p. 75) and, presumably, the more necessary spatial
proximity becomes—in facilitating frequency of di-
rect interaction. To restate, if the requisite knowledge
is cognitively distant from the firm’s internal knowl-
edge base (which, in turn, determines its ‘absorptive
capacity’) then spatial proximity becomes important
in assisting effective knowledge transfer. The reverse
is also likely to hold and, while the potential impact
of spatial proximity is unlikely to tend to zero, in the
presence of cognitively proximate (in the sense of
shared frames of reference, experiences and mental
models), highly-targeted (to the needs and concerns
of the firm) and codifiable information, its impact
upon the innovation process diminishes.
However, it is likely that, for the majority or firms,
the knowledge that is required for innovation will be
relatively cognitively proximate. Such firms invari-
ably occupy mature industries and are, at best, char-
acterised by a flow of incremental, rather than radical,
innovations (Karlsson and Olsson, 1998)—which
build immediately upon their current state-of-the-art.
As Lundvall insists, ‘[t]he first step in recognizing
innovation as a ubiquitous phenomenon is to focus
upon its gradual and cumulative aspects . . . Almost
all innovations reflect already existing knowledge,
combined in new ways’ (Lundvall, 1995, p. 8). Ac-
cordingly, much of this knowledge is likely to be
available, and much of the learning will take place,
internally. Where internal knowledge deficiencies are
identified and external know-how is required, one
may reasonable propose that, more often than not, or-
ganisational and institutional proximities will play a
more significant role, than spatial proximity, in defin-
ing the nature of external articulation. Organisational
proximity, for instance, relies upon commonalities in
‘. . . the representations and structures which agents
use as a benchmark in order to define both their
routines and strategic practices’ (Kirat and Lung,
1999, p. 30). To the extent that organisational prox-
imity arises ‘. . . between organisations connected
by a relationship of either economic or finan-
cial dependence/interdependence’ (Kirat and Lung,
1999, p. 30), intra-industry links are liable to dom-
inate inter-industry links. Institutional proximity, by
contrast, implies a degree of congruence between, and
acceptance of the legitimacy of, the institutional in-
frastructure in which agents operate. And, in turn, the
impact the institutional framework has upon the devel-
opment of cognitive models. If the innovation process
requires ‘. . . the development of cognitive models
which are both coherent and shared’ (Kirat and Lung,
1999, p. 28) (in terms of structure rather than content)
we might anticipate firms embedded within similar in-
stitutional frameworks (political, financial, economic,
cultural) to be more readily disposed to collaboration.
In addition to the influence of various proximities,
recent evidence has pointed to the influence of firm
size and product market on the spatial distribution
of innovation-related external linkages (Arndt and
Sternberg, 2000; Kaufmann and Todtling, 2000).
Specifically, these studies suggest a positive relation-
ship between firm size and export intensity and the
geographic reach of search and collaboration activ-
ities. In other words, it appears that, in aggregate,
smaller firms are more spatially embedded than larger
firms and non-exporters are more embedded than ex-
porters. Thus, integration within local networks may
not be the outcome of conscious decision-making, on
the part of the firm (or, relatedly, any attempt at some
form of optimisation), but rather may indicate either
resource limitations, which constrain the reach of firm
 M.S. Freel / Research Policy 32 (2003) 751–770
search processes, or development stage, which sees
the firm serve a largely, and initially, localised market.
In either instance, the features of a firm’s innovation
process or the pervasiveness of some ‘local’ institu-
tional innovation system may have limited influence
on the spatial composition of its external linkages.
In light of these emerging tensions in the literature,
the object here is to address a number of related em-
pirical questions:
Question 1a: To what extent is the innovation per-
formance of firms associated with articulation (be-
yond simple transaction relationships) with external
agency? The following question, offering a variety
of potential collaboration partners, was used to de-
termine the presence of ‘linkages’: ‘Did your firm
co-operate with other firms or organisations for
innovation related activity (including marketing,
training, etc.) and/or technology transfer during
the last 3 years?’
Question 1b: What is the relative importance of
various potential collaboration partners?
Question 1c: What is the relative importance of
external linkages and internal resources?
Question 1d: How do these issues differ across
sectoral groupings?
Question 2: Where innovation-related external link-
ages are reported, to what extent are they clustered
locally and what factors determine their spatial
distribution?
4. Data
4.1. Sample
The data presented here was collected as part of
a ‘Survey of Enterprise in Scotland and Northern
England’. This original survey, administered during
April and May of 2001, sought to gain a better un-
derstanding of the state of (small and medium-sized)
enterprise within the UK, sufficiently removed from
the thrall of the dominant, core economy of London
and the Southeast. To this end, the original sample
frame included both manufacturing and service firms.
However, that the nature of innovation (at the heart
of the current paper) varies substantially and sys-
tematically between manufacturing and service firms
is fairly well established (see for example, Hoffman
755
et al., 1998).1 Accordingly, the current analysis sets
aside service firms and focuses upon manufacturing
firms in isolation.
Specifically, 5200 small and medium-sized (FTEs
<500) manufacturing firms were surveyed, gener-
ating 597 usable responses (i.e. a 11.5% response
rate). As Fig. 1 illustrates, the sample is stratified in
such a way as to under-represent the smallest firms
(one to nine employees) and over-represent larger
SMEs. Surveys of micro-firms tend to report lower
response rates and, in the case of innovation related
surveys, poorer data quality (see Cosh et al., 1998).
Undoubtedly, this deliberate skew impacts upon the
‘representativeness’ of the current sample. The chief
consequence is likely to be an over-estimate of the
level of innovation within the population. However,
it is not anticipated that this ‘bias’ will greatly impact
upon the analysis presented below.
With regards to the relative sectoral distribution of
sample firms, Fig. 2 indicates an over-surveying of
textile and clothing firms and firms involved in the
manufacture of wood and paper products (SIC (92)
Divisions 17–19 and 20–21, respectively)—relative to
the pertinent population. By contrast, printing and pub-
lishing firms and manufacturing firms not elsewhere
specified (NES) are significantly under-represented
in the sample (SIC (92) Divisions 22 and 36–37, re-
spectively). In all other SIC (92) divisions, the sample
reasonably represents the population—though, in the
case of food and beverages, not the UK. The decision
to over-survey firms in the identified sectors was made
with reference to recognised regional industrial clus-
ters (DTI, 2001a). Over-representation of some sectors
necessarily leads to under-representation of others.
Accordingly, the decision was made to under-survey
printing and publishing firms—since many of these
are de facto business service providers—and manu-
facturing firms ‘not elsewhere specified’—as a result
of the ambiguity inherent at the two-digit level. Whilst
stratification of the sample, in this manner, will in-
evitably distort aggregate observations, one does not
anticipate that the legitimacy of the analysis presented
in Section 5 will be greatly compromised.
1 Although this is not to imply that service firms merely play
a passive role [as users] in the process of technological develop-
ment. Simply, that to lump service firms and manufacturing firms
together, for the purposes of analysis, is to ignore the various
dynamics in play.
756 M.S. Freel / Research Policy 32 (2003) 751–770
Fig. 1. Relative size distribution of sample firms.
5. Empirical analysis
5.1. Modelling innovation
In investigating the extent to which external link-
ages (as defined earlier) are positively associated with
firm-level innovative performance, the current paper
follows the established practice (see Geroski, 1990;
Feldman, 1994; Love and Roper, 1999, 2001;
Oerlemans et al., 2001) of modelling innovation out-
put using a modified knowledge production function
approach. In this way ‘. . . innovation output depends
on the presence and volume of innovation resources
and the utilisation of these internal and external re-
sources in the innovation process’ (Oerlemans et al.,
2001, p. 9):
INNi = β1 RDi + β2 TECHi + β3 QSEi
+β4 CUSTi + β5 SUPPi + β6 COMPi
+β7 UNIi + β8 PUBi + ε
In addition, the analysis reported later on incor-
porates two moderating variables: age (measured in
years) and firm size (full-time equivalent employ-
ees). On the whole, one may reasonably suggest that
younger firms are less likely to have established rou-
tines, technology or products and are less likely to oc-
cupy mature or traditional industries. Moreover, with
regards firm size, whilst the evidence is decidedly
equivocal, recent academic opinion runs counter to
the established Schumpeterian or Galbraithian view
(that increased market concentration and, relatedly,
increased firm size act as necessary stimuli to in-
novation) and holds instead that, subject to sectoral
variations, small firms may, in fact, be more innova-
tion intensive than large firms (Acs and Audretsch,
1987, 1988). Therefore, adopting a very general view
of innovation, one might anticipate that younger and
smaller firms report proportionately higher levels
of innovation than their older and larger peers. As
Table 1 indicates, innovation has been defined using
an absolute and output-based measure. In the esti-
mations firms are classed as innovators only if they
record the introduction of, at least one, new product
or process, which is new, not only to the firm but also,
to the industry. In this way, minor product or process
improvements or mere competitor imitation are ex-
cluded. However, the degree of novelty implied by this
measure is relative. One would anticipate that, in the
bulk of mature industries, such product and process
innovations would, nevertheless, build closely upon
the firm’s current technological state-of-the-art. This
position is also in line with the view of innovation as a
commercial endeavour rather than a purely technolog-
ical endeavour and accords with the observation that
bulk of commercially significant innovations in man-
ufacturing are technologically incremental rather than
radical (Audretsch, 1995; Love and Roper, 1999).
 M.S. Freel / Research Policy 32 (2003) 751–770
Fig. 2. Relative sectoral distribution of sample firms.

757
758 M.S. Freel / Research Policy 32 (2003) 751–770

Table 1
Variables used in logit equations
Definition of Variables

INN Binary dummies of product and process innovation; firm introduced at least one product or process
new to the industry ‘during the last 3 years’ coded 1, otherwise, coded 0
RD A series of binary dummies of research and development expenditure as a proportion of sales turnover;
categories are 1–5%, 6–10%, 11–20% and >20%; no R&D spend is treated as the reference group
TECH Proportion of workforce (FTEs) classed a technicians
QSE Proportion of workforce (FTEs) classed as technologists or scientists
CUST Binary dummy of customer focused innovation networking; if firm cooperated with a customer for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
SUPP Binary dummy of supplier focused innovation networking; if firm cooperated with a supplier for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
COMP Binary dummy of competitor focused innovation networking; if firm cooperated with a competitor
for innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
UNI Binary dummy of university focused innovation networking; if firm cooperated with a university for
innovation-related activities ‘during the last 3 years’ coded 1, otherwise, coded 0
PUB Binary dummy of public sector focused innovation networking; if firm cooperated with a public
agency (e.g. UK government offices, EU, enterprise companies/agencies, etc.) for innovation-related
activities ‘during the last 3 years’ coded 1, otherwise, coded 0

Finally, sectoral variations relating to innovation 5.2. Anticipated sectoral variations

are fairly well established. For instance, it is known
that industrial sectors vary in terms of the sources,
paces and rates of technological change (Pavitt, 1984).
Moreover, ‘[b]ecause sectoral patterns of technologi-
cal innovation are different, one may expect that firms
in specific sectors use specific internal and external re-
sources in order to innovate successfully’ (Oerlemans
et al., 1998, p. 302). That is, sectoral variations are
likely, in their turn, to modulate the requirement for
firms to be engaged in innovation networks and, re-
latedly, the extent and character of such networking.
In attempting to control for ‘sectoral noise’, the cur-
rent paper adopts Pavitt’s (1984) classic taxonomy,
‘supplier-dominated’ firms, ‘production-intensive’
firms, and ‘science-based’ firms. In his paper, Pavitt
further disaggregates production-intensive firms into
‘scale-intensive’ and ‘specialist suppliers’. However,
since the current study is exclusively concerned
with SMEs (less than 250 full-time employees), it
is likely that the majority of firms classed (at the
two-digit SIC (92) level) as scale-intensive will be
de facto suppliers of components, sub-assemblies
and equipment to genuinely scale-intensive firms.
Consequently, the models estimated in Section 5.2,
recombine these sub-categories for the purposes
of analysis.
Prior to detailing the results of the analysis, it seems
prudent to outline a priori anticipations of sectoral
variations in external and internal resources usage.
5.2.1. Supplier-dominated firms
The innovation focus of such firms is thought,
largely, to be concentrated on cost reducing pro-
cess technologies to meet the demands of highly
price-sensitive customers. However, given the gener-
ally weak in-house R&D and engineering capabilities,
suppliers are the likely source of new or improved
process technologies. Notwithstanding the relative
emphasis on process innovation, Pavitt (1984) sug-
gests that general sources of technology (including
those which lead to product innovations) are liable to
include, in addition to suppliers, government financed
research extension services and, less frequently, large
users. On the whole, however, given the greater
propensity to sell to myriad end users, or through
distribution agents, one would not anticipate a sig-
nificant role for customers. Competitor collaboration,
of the ‘Third Italy’ type, may be present; though
this is hope more than anticipation. Finally, since
supplier-dominated firms are believed to ‘make only
a minor contribution to their process and product
 M.S. Freel / Research Policy 32 (2003) 751–770 759

technology’ (Pavitt, 1984, p. 356) one would antici-
pate a limited association between internal resources
and innovation.
5.2.2. Production-intensive firms
Given the earlier contention that, in the current
sample, these firms are largely de facto suppliers to
genuinely scale-intensive firms, and the relative focus
on product innovation, one would anticipate a posi-
tive association between innovativeness and customer
collaboration—at least in the case of product innova-
tion. In contrast, suppliers and the public knowledge
infrastructure are liable to play a limited role. Some
competitor collaboration may be present as a result
of supply chain dicta or management. Finally, in line
with Pavitt’s observations, one might expect in-house
capabilities to make a significant contribution to both
product and process innovations.
5.2.3. Science-based firms
The innovation focus of many science-based firms
is a balance between products and processes. Process
technology is largely developed in-house or sourced
from suppliers, whilst product technology is extended
internally ‘. . . based upon the rapid development
of the underlying sciences in the universities and
elsewhere’ (Pavitt, 1984, p. 362). This suggests a role
for universities in product innovation and suppliers
in process innovation, which complement extensive
in-house capabilities. Innovation-related collaboration
with customers, competitors and (quasi-) government
agencies is likely to be limited.
5.3. Analysis
Estimation of the models, suggested in Section 5.2,
takes the form of eight logit equations, employing
‘new [to the industry] product introduction’ (Table 2)
and ‘new [to the industry] process introduction’
(Table 3) as binary dependent variables. On the whole,
the models seem to have a number of satisfactory prop-
erties. For instance, various tests for multi-collinearity
(using correlation matrices, and multiway frequency
analysis (Tabachnik and Fidell, 2001)) suggest

Table 2
Logit models of the probability of introducing new (to industry) products
Independent variables Pavitt (1984) sectors

Total sample Supplier-dominated Production-intensive Science-based

Age 0.00 (0.011) 0.00 (0.004) −0.001 (0.042) −0.002 (0.070)

Size (FTEs) 0.008 (19.913)a 0.014 (5.362)b 0.009 (14.335)a 0.008 (2.658)c
R&D expenditure
1–5% of turnover 0.707 (10.618)a 1.705 (6.357)b 0.638 (5.618)b 0.017 (0.001)
6–10% of turnover 0.622 (2.867)c 1.954 (3.984)b 0.199 (0.137) 1.009 (1.621)
11–20% of turnover 1.272 (6.317)b 2.918 (4.552)b 0.578 (0.770) 1.597 (1.377)
>20% of turnover 0.683 (1.707) 2.107 (2.824)c 0.298 (0.149) 0.745 (0.293)
Percentage of technicians 1.701 (4.292)b 2.490 (2.103) 1.300 (1.233) 1.612 (0.542)
Percentage of QSEs 1.565 (2.122) −6.015 (0.107) 7.099 (3.261)c 2.097 (1.585)
Customer links 0.565 (5.735)b −0.075 (0.013) 0.869 (8.590)a 0.177 (0.027)
Supplier links −0.046 (0.036) 1.322 (3.990)b −0.252 (0.674) −0.217 (0.092)
Competitor links −0.053 (0.031) 1.088 (1.616) −0.147 (0.153) −0.357 (0.195)
University links 0.230 (0.416) −9.808 (0.071) 0.010 (0.001) 2.065 (3.202)c
Public sector links 0.534 (3.846)b −0.455 (0.368) 0.910 (7.362)a −1.185 (1.401)
Nagelkerke R2 0.192 0.400 0.230 0.227
−2 log-likelihood 629.874 98.064 390.275 107.921
(χ2 )d 80.664a 34.468a 62.679a 17.095
N 528 98 337 93
a Significant at 1% level.
b Significant at 5% level.
c Significant at 10% level.
d Full model vs. constant only model. Figures in parentheses are Wald χ2 -test statistics.
760 M.S. Freel / Research Policy 32 (2003) 751–770

Table 3
Logit models of the probability of introducing new (to industry) processes
Independent variables Pavitt (1984) sectors

Total sample Supplier-dominated Production-intensive Science-based

Age 0.001 (0.023) −0.002 (0.018) −0.001 (0.047) 0.008 (0.724)

Size (FTEs) 0.004 (4.852)b 0.009 (2.585)c 0.003 (1.720) 0.009 (3.162)c
R&D expenditure
1–5% of turnover 1.031 (11.337)a 0.922 (0.974) 1.501 (13.754)a −0.201 (0.065)
6–10% of turnover 0.042 (0.006) −1.206 (0.203) 0.158 (0.034) −0.746 (0.374)
11–20% of turnover 1.359 (5.912)b 1.773 (1.352) 1.489 (3.895)b 0.995 (0.485)
>20% of turnover 0.952 (2.183) 11.837 (0.028) 1.266 (1.824) −6.214 (0.033)
Percentage of technicians 2.275 (6.134)b 0.133 (0.002) 3.791 (8.862)a −1.421 (0.139)
Percentage of QSEs −1.430 (0.474) −111.890 (0.267) −0.072 (0.000) −2.897 (0.638)
Customer links −0.087 (0.079) −22.020 (0.052) 0.502 (1.804) −1.336 (1.361)
Supplier links 0.689 (5.220)b 1.968 (3.084)c 0.559 (2.255) 0.730 (0.666)
Competitor links −0.320 (0.758) 0.864 (0.262) −0.437 (0.955) −0.730 (0.406)
University links 0.929 (5.606)b 21.309 (0.002) 0.540 (1.458) 2.500 (2.919)c
Public sector links 0.051 (0.022) −10.942 (0.016) 0.287 (0.496) −0.897 (0.466)
Nagelkerke R2 0.142 0.498 0.210 0.263
−2 log-likelihood 418.321 43.050 260.713 68.585
(χ2 )d 45.571a 29.555a 44.889a 15.656
N 522 97 335 90
a Significant at 1% level.
b Significant at 5% level.
c Significant at 10% level.
d Full model vs. constant only model. Figures in parentheses are Wald χ2 -test statistics.

little problem in this respect. Moreover, as the data in
Tables 2 and 3 indicates, the models appear reasonable
predictors of ‘innovativeness’ for all but science-based
firms (see later). With reference to the moderating
variables identified before; innovators seem, on the
whole, to be larger than non-innovators, which runs
counter to the stated expectations. However, given
the definition of innovation employed and the sectors
that dominate the sample, this is perhaps less remark-
able than if one were investigating innovation inten-
sity in less mature, embryonic industries (Acs and
Audretsch, 1987). In contrast, firm age appears to
have no impact upon the ‘innovativeness’ of firms.
Addressing product innovation, in the first instance,
and turning to specifics, the all-sample model indi-
cates significant positive associations between the
firm’s innovation-related cooperation with customers
and public (and quasi-public) sector agencies and in-
novative performance. Collaboration with customers
for product innovation underpins von Hippel’s (1978)
‘Customer-Active’ innovation paradigm (CAP),
wherein ‘continuous user–manufacturer interaction
. . . identifies re-innovation opportunities, new uses
and new users’ (Shaw, 1991, p. 127; tense changed).
Moreover, it is commonly accepted that there is scope
for considerable gain through involving the user in
the product design and development processes. In
the context of the current study, such gains are be-
lieved to be principally three-fold (see Gardiner and
Rothwell, 1985): firstly, firms may be able to supple-
ment their internal design and development activities
by accessing the technical and managerial skills res-
ident within their customers; secondly, user involve-
ment is likely to be the ideal way to establish the
optimum price/performance combination and, conse-
quently, the optimum specification; finally, involving
the user in the product design and development stages
is likely to reduce the post-delivery learning required
on their part (and accordingly, this may result in strong
demonstration effects, attracting other customers and
accelerating the innovation acceptance process). With
regards to public sector linkages, the data may pro-
vide some legitimating evidence with regards to the
role of public agencies as network facilitators: in
 M.S. Freel / Research Policy 32 (2003) 751–770
the ‘. . . encouragement of networking relationships
between firms to establish collective economies of
scale’ (Oughton and Whittam, 1997). Regardless,
the all-sample observations paint a superficially en-
couraging picture of the potential contribution that
collaboration with public agency may play in facili-
tating innovation. However, it is important to note the
significant role played by internal resources: product
innovation appears to be positively associated with
the employment of technicians and with research and
development expenditure—up to a point. This issue
of ‘up to a point’ is interesting, perhaps suggesting
some form of decreasing returns to R&D investment
at the firm level. However, this would be to endorse
the conventional economics view of R&D: namely,
that it generates only one output—new information or
knowledge (frequently embodied in physical artefacts,
such as new or improved products). Following Cohen
and Levinthal (1989, 1990) this is generally believed
to be an erroneous position, though the finding is, in
itself, intriguing.
Finally, indeed crucially, notwithstanding the pos-
itive observations noted for customers and the public
sector, innovation-related cooperation with suppli-
ers, competitors or universities does not appear to be
linked to the product innovativeness of sample firms
in aggregate.
With regards to expected sectoral variations: the
positive relationship with external cooperation (in-
volving customers and public sector agencies) does
not appear to hold across Pavitt’s taxonomy. For
instance, in the case of ‘supplier-dominated’ firms,
and largely in line with expectations, only supplier
collaboration is positively associated with product in-
novation. Moreover, this appears to be complemented
by in-house R&D expenditure (of any magnitude).
Conversely, there is no statistical relationship between
the product innovativeness of supplier-dominated
firms and collaboration with customers, universities,
competitors or the public sector.
Perhaps unsurprisingly, given their predominance
in the current sample, the pattern of observations for
production-intensive firms is similar to that noted for
the all-sample estimations. In particular, with respect
to innovation-related cooperation, one notes positive
associations between product innovativeness and col-
laborative linkages with customers and with the public
sector. The former observation is in line with stated
761
expectations: accepting the presumed focus upon per-
formance improving product innovation, rather than
cost reducing process innovation, there is likely to be
scope for customers to play a key role in product de-
sign and specification activities. The latter observation
(i.e. a strong positive association between product in-
novativeness and cooperation with the public sector)
is less anticipated. However, it may reflect a deter-
mination, on the part of government, to develop the
innovativeness of lower tier suppliers as a means to
strengthening supply chains and improving compet-
itiveness (DTI, 2001b). Significantly, these external
linkages appear to be complemented by internal re-
sources, in the form of (limited) R&D expenditure and
employment of QSEs. Finally, as with the all-sample
model, there are no statistical relationships between
firm-level innovativeness and cooperative ventures
involving competitors, universities or suppliers.
With respect to the final sectoral grouping,
science-based firms, the data in Table 2 indicate only
a weak significant association between product inno-
vation and university collaboration: firm size apart,
no other significant relationships are observed. That
product innovation in science-based firms is positively
associated with university cooperative ventures is as
anticipated. Indeed, the absence of observed statistical
associations between innovativeness and customers,
competitor, supplier or public sector collaboration
may also be in line with expectations. However, lack
of observed statistical relationships with R&D expen-
diture or the employment of QSEs is more remark-
able and runs counter to both intuition and empirical
precedent. Moreover, in this instance, the model itself
does not appear to be an effective predictor of product
innovativeness (in the absence of statistical signifi-
cance). This observation may suggest some source of
firm heterogeneity beyond that captured by the regres-
sors. It may be that the manner in which resources
are developed, extended or combined (i.e. transfor-
mation activities, see Håkansson (1987)) is of greater
import than simply the volume and type of resource
input. Unfortunately, measurement of such transfor-
mation activities is beyond the scope of the current
study.
Turning, next, to process innovation (Table 3):
Perhaps unsurprisingly, the observed statistical asso-
ciations between the introduction of a (new to the in-
dustry) process innovation and external collaboration
762 M.S. Freel / Research Policy 32 (2003) 751–770
varies markedly from those recorded for product inno-
vation. For instance, and with regards to the all-sample
model in the first instance, innovation-related cooper-
ation with customers or public sector agencies is no
longer significantly associated with innovativeness.
Conversely, one observes statistically significant rela-
tionships relating to supplier and university collabora-
tion. Undoubtedly, there is a comfortable logic in this
reversal. To suggest that suppliers and customers have
greater roles to play in process and product innovation
respectively is likely to be uncontroversial and, in this
sense, is reassuring. The association involving univer-
sity collaboration and firm-level process innovation
is also encouraging and may indicate the greater
role that universities play in addressing the imme-
diate concerns of industry than is often thought. As
Nelson (2000) asserts, ‘[t]o a much greater extent than
commonly realized, university research programmes
are not undifferentiated parts of a national innova-
tion system broadly defined, but rather are keyed
into particular technologies and particular industries’
(p. 13). Crucially, one also notes the complemen-
tary correlations between process innovativeness and
internal resources; proxied by firm size, R&D expen-
diture (to a point) and the employment of technically
qualified staff.
Notwithstanding this general picture, the data also
indicate considerable sectoral variations. In line with
expectations, successful new process introduction by
supplier-dominated firms is strongly associated with
supplier cooperation. Given presumptions of poorer
in-house R &D and engineering facility, in such firms,
the absence of significant observations linking inter-
nal resources and process innovation is also as an-
ticipated. Speculating from the discussion of product
innovation given earlier, it may be that where R&D is
present within supplier-dominated firms, it is directed
towards product innovation, with significant process
innovation largely driven by equipment suppliers.
For the bulk of the current sample, the production-
intensive firms, Table 3 indicates no statistical
relationships between successful new process intro-
duction and external innovation-related collaboration.
Again, this is largely in line with expectations. Whilst
the analogous model for product innovation suggested
a positive statistical association involving customer
(and public sector) collaboration, these firms are
thought to ‘. . . produce a relatively high proportion of
their own process technology’ (Pavitt, 1984, p. 359).
Accordingly, the significant positive observations in-
volving R&D expenditure and technical employment
are as anticipated: in this instance, in-house resources
appear to play a greater role.
Finally, with respect to science-based firms, similar
observations are noted for both product and process
innovation. That is, significant correlations between
innovativeness and university collaboration and in-
novativeness and firm size only (both significant at
the margin). Furthermore, the model is, again, a poor
predictor of new process introduction. Consequently,
one is, once again, tempted to suggest the existence
of some form of firm heterogeneity not captured by
the regressors: perhaps signalling the importance of
varied transformation activities, rather than the mere
presence of heterogeneous resources.
On the whole, the empirical data indicates a
number of relevant considerations. In the first in-
stance, one might be tempted to suggest that, in
general, the data denotes a positive association be-
tween innovation-related cooperation and firm-level
innovativeness—i.e. networks matter. However, this
is misleading and any statement must, more appropri-
ately, be couched in conditional terms. That is, certain
types of cooperation are associated with specific types
of innovation, involving certain firms, in certain sec-
tors. Conversely, many sources of innovation-related
collaboration are not correlated with specific types of
firm-level innovativeness, in certain sectors—indeed,
competitor cooperation is not associated with either
product or process innovativeness in any sectoral
category. Clearly, blanket collaboration imperatives
overstate the case and misunderstand the various
dynamics at work. Moreover, the models presented
indicate the frequent importance of internal resources,
as either a complement to, or a substitute for, exter-
nal collaboration. As noted earlier, in most industries
the greater part of innovation effort is made by firms
themselves (Nelson, 2000) and occurs within firms
themselves. Indeed, even in circumstances where the
requirement for collaborative effort is identified, it is
thought essential that firms have developed internal
competencies which facilitate the effective recogni-
tion, appraisal, negotiation and assimilation of ex-
ternal expertise (Dosi, 1988). Only rarely will firms
be mere passive receptors of exogenous technology
(broadly defined).
 M.S. Freel / Research Policy 32 (2003) 751–770
Finally, there is some indication (at least in the case
of science-based firms) that the standard knowledge
production function approach may not accurately rep-
resent firm-level innovation—or proxy firm-level in-
novation processes. In other words, innovation outputs
are not merely the sum of innovation inputs but, rather,
are likely to also be a function of the activities through
which the resource inputs are transformed. Standard
approaches, such as that reported here, may not ade-
quately capture these underlying dynamics.
In addition to the conditions noted earlier, a fur-
ther, central, caveat must be added. As Fig. 3 clearly
demonstrates, a great many firms were engaged in
no innovation-related external collaboration dur-
ing the period investigated by the survey. And yet
many of them appear to have successfully innovated
nonetheless (e.g. 31.3% of firms with no external
links recorded the introduction of a product new to
the industry; though this is compared with 50.4%
of firms with at least one innovation-related link).
To rephrase, networking (in the sense of cooperation
adopted here) cannot be considered either a neces-
sary, nor less a sufficient condition for innovation
and it may be that, within both the academy and
the polity, the tendency to overstate the impact of
networks persists. Furthermore, the vast majority of
Fig. 3. Proportion of firms with innovation-related external linkages.
763
all cooperative ventures reported occurred along the
value chain. This accords with our earlier discussion
regarding the nature of technological, organisational
and institutional proximities. That is, for most firms,
occupying relatively mature industries and engaged
in technologically incremental innovations, the infor-
mation shared, or exchanged, in relationships with
customers and suppliers is likely to be relatively cog-
nitively proximate and be facilitated by organisational
(in the sense of similarities in routines, strategies
and governance) and, within the UK (and perhaps
Europe), institutional (in the sense of similarities in
institutional infrastructure) proximities. This appears
to hold equally for science-based firms. In other
words, irrespective of sectoral classification, and the
implications for innovation this implies, relatively
few horizontal, competitor links, or extra-industry
links were reported. This is in contrast with the si-
multaneous competition–collaboration expectations
of much of the ‘new industrial districts’ literature
(see for example, Oughton and Whittam, 1997) and
the science-industry interactivity aspirations of public
policy (Etzkowitz and Leydesdorff, 2000) and may
suggest that the frequency of contact implied by mar-
ket relations may prove a more robust basis for the de-
velopment of trust and cooperation under uncertainty.
764 M.S. Freel / Research Policy 32 (2003) 751–770
5.4. Innovation and embeddedness
The second question identified in the early
parts of the paper concerned the spatial
distribution of external, innovation-related linkages.
Specifically, where linkages were reported, to what
extent were these clustered spatially? To this end,
Table 4 reports the results of a multiple-discriminant
analysis2 with groupings based on the highest spa-
tial level of innovation-related links (i.e. ‘local’,
‘regional’, ‘UK’ and ‘overseas’). Interpretation of the
functions relies largely upon consideration of the cor-
relations between individual predictors variables and
the respective functions (in effect, factor loadings)—
supported by the results of univariate ANOVAs for
each variable. Whilst consensus is lacking with re-
gards to the interpretation of loadings, a common
‘rule of thumb’ suggests that correlations in excess
of 0.33 (i.e. 10% of variance) may be considered
eligible for interpretation whilst lower ones may
not (Tabachnik and Fidell, 2001). Accordingly, the
following discussion adopts this convention.
As the data indicates, the three functions gener-
ated are effective predictors of group membership
(P = 0.002; see also Fig. 4). In particular, larger
firms and firms with a higher export intensity are sig-
nificantly more likely to have overseas links, whilst
smaller firms are more likely to be locally embedded
(see Table 4). As noted earlier, this is in accordance
with other recent studies demonstrating the impor-
tance of firm resources, development stage and market
orientation in determining the spatial distribution of
innovation-related collaboration. The importance of
internal resources is further underscored by the sig-
nificant negative impact noted for the proportionate
employment of managers and professionals. That is,
a relatively higher proportion of staff designated as
either managers or professionals appears to be associ-
ated with a higher degree of local embeddedness. This
finding is somewhat counter-intuitive—one would ex-
pect the presence of significant managerial resource
to positively impact upon the firm’s ability to interact
with geographically distant organisations. However,
treating higher levels of management as a proxy for
2 Initial estimations incorporated sector dummy variables relating
to Pavitt’s taxonomy. However, these did not prove significant,
and, indeed reduced the discriminating power of the functions.
increasing bureaucracy, one may propose that rela-
tively managerialist firms are likely to suffer from
less flexibility and be less attractive, as innovation
partners, to firms operating in national or international
markets. Alternatively, greater managerial resource
may suggest a concomitant ability to more fully ex-
ploit local knowledge. However, in the absence of
richer, ‘firm-specific’ data, one may merely conjec-
ture upon the nature of causality—though, again, the
finding is intriguing. In contrast to the negative effects
of managerialism, though not supported by the uni-
variate ANOVA, the multivariate data from function
1 indicates a significant positive association between
the proportion of technicians in the workforce and the
presence of extended spatial linkages. In other words,
firms that recorded, at least one, innovation-related
overseas cooperative venture, are also likely to record
a higher proportion of technicians in the workforce
than are firms with national or regional linkages only
who, in turn, record higher proportions of technicians
than locally embedded firms). This finding may sim-
ply reflect the converse of the negative impact (on the
spatial reach of cooperation) observed in the presence
of high levels of management. However, a high pro-
portion of technically qualified staff may also hint at
a more developed absorptive capacity, which extends
the reach (both in distance and scope) of the firm’s
cooperative potential. However, again in the absence
of richer firm-specific data, this remains conjecture.
With regards to the effect that type and scope of
innovation have on the spatial distribution of external
articulation, the data from the current study suggests
a significant positive relationship between novelty
and reach. That is, the proportion of firms engaged in
relatively novel innovation (introducing products or
processes which are new to the industry)3 increases as
one progresses through the spatial groupings. By con-
trast, the proportion of firms engaged in incremental
product innovation only (introducing products new to
the firm but not to the industry) appears inversely re-
lated to the spatial categories contrived. Incremental
process innovation appears to have no impact upon
the spatial distribution of innovation-related linkages.
To rephrase, novel innovators (product and process)
3 Type of innovation is coded using four binary dummy variables;
firms cannot be classified as both novel and incremental innovators
for either products or processes—in both instances ‘no innovation’
is the excluded category.
 M.S. Freel / Research Policy 32 (2003) 751–770 765

Table 4
Discriminant functions of the spatial distribution of cooperative ventures
Predictor variables Correlations of predictor variables with discriminant functions

1 2 3 Univariate F(3, 248)

Firm age 0.010 0.406 0.275 1.426

Size (FTEs) 0.437 0.023 −0.052 2.256a
R&D expenditure 0.282 0.118 0.125 1.084
Percentage of technicians 0.330 0.003 0.116 1.326
Percentage of QSEs 0.232 −0.158 −0.213 0.959
Percentage of professionals/managers −0.445 0.352 −0.233 3.390b
Export (as % of T/O) 0.573 0.568 0.113 6.217c
Novel products 0.488 −0.032 0.288 3.080b
Incremental products −0.368 0.396 −0.272 2.957b
Novel processes 0.070 0.005 0.834 2.313a
Incremental processes 0.083 0.028 −0.192 0.205
Canonical R 0.355 0.284 0.196
Eigen value 0.145 0.088 0.040
Function Wilk’s lambda χ2 d.f. Significance

1–3 0.772 61.866 33 0.002c

2–3 0.884 29.522 20 0.078a
3 0.962 9.348 9 0.406
Predictor variables Group means and proportions

Local Regional UK Overseas

Firm Age 42.07 26.95 36.73 41.07

Size (FTEs) 42.40 62.44 52.60 80.20
R&D expenditure (%) 11.9 14.0 15.0 23.2
Percentage of technicians 0.0271 0.0485 0.0443 0.0664
Percentage of QSEs 0.0076 0.0281 0.0142 0.0253
Percentage of professionals/managers 0.3226 0.1918 0.2071 0.1738
Export (as % of T/O) 0.070 0.046 0.054 0.174
Novel products (%) 33.3 47.4 48.8 62.3
Incremental products (%) 42.9 21.1 22.5 20.3
Novel processes (%) 14.3 12.3 28.8 23.2
Incremental processes (%) 38.1 40.4 35.0 40.6
N 42 57 80 69
NB: 300 firms had no innovation links.
a Significant at 10% level.
b Significant at 5% level.
c Significant at 1% level.

appear more likely to have collaborative partners lo-
cated at a higher (i.e. more geographically distant)
spatial level than do incremental innovators (product
only). Whilst there is some empirical precedent for
this result (Kaufmann and Todtling, 2000; Koschatzky,
2000), it is, in general, somewhat counter-intuitive
and, indeed, runs counter to accepted wisdom. The
‘milieux innovators’ approach (see for example,
Maillat, 1991, 1995; Maillat and Lecoq, 1992) for
example, suggests that the local environment is of
little importance for firms developing incremental
innovations, since resources required for this kind of
innovation are easily found within the firm. By con-
trast, the local environment is key to the successful
development of novel innovations. The more novel
the innovation the more important spatial proximity
becomes. The data presented here fails to support this
thesis. Moreover, R&D expenditure, as an alternative
766 M.S. Freel / Research Policy 32 (2003) 751–770
Fig. 4. Function at group centroids.
proxy for novelty of innovation, does not appear to
effect the spatial distribution of innovation-related
linkages.
6. Concluding remarks
Employing a sample of 597 small manufacturing
firms, this paper sought to explore two central issues:
the degree of association between external linkages
and firm-level innovation performance, on the one
hand, and the extent to which such linkages were
clustered spatially, on the other. To this end, the em-
pirical analysis presented here indicates a number of
interesting results.
In the first instance, with regards to the former
issue, one notes a highly-varied pattern of associ-
ation across Pavitt’s sectoral taxonomy and across
innovation type. The corollary, which may be drawn
from this, is that ‘networks’ (in the sense used here)
are not homogeneous or homogeneously good. The
influence of various types of innovation-related coop-
erative networking is likely to differ depending, inter
alia, upon the availability of internal competencies,
the type of user, the balance between product and
process innovation and, relatedly, the underlying tech-
nology trajectory (including issues of appropriability
and cumulativeness). Thus, pointing to considerably
more complexity than one might infer from policy
pronouncements, such as that noted in the recent UK
Competitiveness White Paper (DTI, 1998) (quoted
earlier), which may reasonably be paraphrased as:
‘Networks are good, more networks are better’. More-
over, it is imperative that one does not neglect the
relationship between innovativeness (in both products
and processes) and the presence of extensive internal
resources. Here again, the data from the current study
indicate considerable sectoral variation and variation
by innovation type—largely in line with expectations.
However, looking simplistically at the all-sample
models, R&D expenditure and technical employment
were strongly positively associated with successful
novel product and process introduction at the firm
level. There can be little doubt that internal resources
frequently act as complement to, and more occasion-
ally a substitute for, extramurally sourced technology.
For science-based firms, where no statistical associa-
tions relating to internal resources were observed, the
models, themselves, were found to be poor predictors
of ‘innovativeness’—suggesting some source of firm
heterogeneity not captured by the regressors, perhaps
in the form of internal transformation activities.
Moreover, and placing these specific remarks to
one side, the sample data suggests a further, more fun-
damental issue, which should give pause for thought.
Though, clearly, the network approach to innovation—
 M.S. Freel / Research Policy 32 (2003) 751–770
‘. . . that innovating firms are not islands of planned
co-ordination in a sea of market relations’ (Oerlemans
et al., 1998, p. 307)—is not without substance, one
must include an important codicil; a great many of
the current sample firms appear to have successfully
innovated without requiring ad hoc collaboration or
articulation with any other organisations. Accord-
ingly, indeed crucially, it is likely ‘. . . that internal
strategies relying on the firms’ own capacities are
significantly more important than strategies involv-
ing external partners’ (Kaufmann and Todtling, 2000,
p. 33).4 Remarkably, 53% of science-based firms (i.e.
those for whom external knowledge and external in-
teractive learning is considered particularly relevant),
within the current sample, record no external collabo-
ration during the survey period. It seems external col-
laboration is, unequivocally, neither a necessary nor
less a sufficient condition for successful innovation.
To reiterate, inferences from the current research co-
incides with the observations of, inter alia, Arndt and
Sternberg (2000) and Oerlemans et al. (1998); namely,
that the economic network approach overstates the
role of external factors in the innovation process. ‘[I]n
most industries the lions share of innovation effort is
made by firms themselves’ (Nelson, 2000, p. 13) and
occurs within firms themselves. One is tempted to ac-
cept Oerlemans et al.’s (1998) contention that, in most
instances, ‘. . . innovation is primarily a process built
on internal capabilities’ (p. 308), which may, more
occasionally, be complemented by external agency.
Acceptance of this postulate has, at least, one sig-
nificant implication. That is, since we know innovative
activity to be largely incremental, building upon cur-
rent capabilities and prior experiences and involving
some tacit dimension (in the sense that it is facilitated
by ‘learning by doing’ or ‘learning by using’), and
that tacit knowledge, in its turn, is essentially person
embodied, then ‘. . . any firm level strategy for the
development of knowledge must therefore be an em-
ployment strategy’ (Smith, 2000, p. 89). As Nelson
(2000) noted from a series of case studies, the pres-
ence of education and training systems which ensured
a flow of individuals with the requisite knowledge and
skills, was a distinguishing feature of those countries
that were able to beget and sustain competitive and
4 The absence of more specific internal resources may also
account for the low ‘explanatory’ power of the models presented.
767
innovative firms. However, an important caveat would
be to note that ‘. . . while strength in “high-tech”
depends upon the availability of university trained
people, industry more generally requires a supply
of literate, numerically competent, people in a wide
range of functions outside R&D’ (Nelson, 2000,
p. 19). Following this, one of the persistent criti-
cisms of UK competition policy, and competitiveness,
relates to the paucity of technically skilled individ-
uals at intermediate levels (see Oughton, 1997). In
the current study, and with the exception of product
innovation in production-intensive firms, it is the em-
ployment of technicians, rather than QSEs, which is
generally positively associated with ‘innovativeness’.
Finally, with respect to the spatial distribution of
linkages, there is little evidence that these are clustered
geographically (see also Fig. 5). This, however, does
not imply that the nature of the innovation process
does not impact upon the spatial distribution of inno-
vation partners. Rather, whilst the data provides fur-
ther supporting evidence regarding the role played by
firm size and product markets (Arndt and Sternberg,
2000; Kaufmann and Todtling, 2000), it also indicates
a significant relationship between scope of innovation
and the reach of linkages. Again, this, in itself, is
not remarkable. The general view holds that the local
environment, and the relative propinquity of innova-
tion partners, is likely to be more important for novel
innovators than for incremental innovators (Baptista
and Swann, 1998; Nooteboom, 1999). Yet, the current
sample points to the opposite relationship. Novel in-
novators (i.e. those introducing products or processes
new to the industry) are marked by the greater geo-
graphical reach of their innovation networks, whilst
incremental product innovators appear to be more
locally embedded. This may suggest that ‘. . . the
probability that local ties can offer all complementary
resources is low’ (Oerlemans et al., 2001, p. 4). How-
ever, it also raises concerns over the appropriateness
of cluster-driven network formation policies. The
UK’s experience of such policies, most clearly mani-
fest in the science-park phenomenon (cf. Garnsey and
Cannon-Brookes, 1993; Westhead and Storey, 1995;
Westhead, 1997) has met with limited success.
Finally, it is worth noting that, while Cooke and
Morgan (1994) lament the conventional economics
view of firms ‘. . . contextualised in terms of in-
dustries, sectors and markets’ (p. 25)—considered
768 M.S. Freel / Research Policy 32 (2003) 751–770
Fig. 5. Spatial distribution of innovation-related linkages.
‘spatially insensitive’—and suggest that the adoption
of a regional perspective would be more appropri-
ate (at least in the context of industrial innovation),
the data from the current study serves, largely, to le-
gitimise the former in preference to the latter. That
is, vertical industry, sector and market links clearly
dominate (recall Fig. 2). Even in the great exemplars
of agglomeration-based regional development (such
as Silicon Valley and the ‘Third Italy’), clusters are
largely defined sectorally or, indeed, by product mar-
kets and not by some abstruse notion of ‘high-tech’,
‘bio-tech’ or some such thing. It is essential that, in
developing strategies to facilitate the creation of net-
works or strengthen a given innovation system, policy
pays sufficient heed to this premise.
In closing it is important to note a limitation: the
data employed here is cross-sectional (incorporating
some limited retrospective reporting on the part of re-
spondents). Accordingly, any causal inferences drawn
must be treated with care.
Acknowledgements
The data presented here was collected as a part of
a survey of ‘Enterprise in Northern Britain’. Accord-
ingly, I am grateful to the individuals and institutions
involved in this project. In addition, I am grateful to the
participants at the Fifth EUNIP conference in Vienna
at which an earlier draft of this paper was presented.
Finally, I am grateful for the constructive comments
of two anonymous reviewers. Nonetheless, any errors
in analysis and interpretation remain my own.
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