Firm value, spatial knowledge flow, and innovation: evidence from patent citations

Abstract

Purpose – The purpose of this paper is to examine the role of geographic location of research-intensive firms in the ability to generate new research and products, which consequently affects firm value. Design/methodology/approach – The authors conduct the empirical study following a three-step process. First, if pharmaceutical firms are more likely to cite the patents of other firms and other innovators that are nearby, as opposed to firms and other innovators that are far away, then location (i.e. close proximity) is likely important when it comes to the ability to learn and to use the knowledge being generated by other innovators. The authors employ a “geographic information systems” (GIS) and geo-code each pair of citing and cited patents. In addition, the authors utilize spatial statistics such as Moran’s I to analyze the spatial clustering pattern of patent citations and knowledge flows. Next, the authors measure the pharmaceutical companies’ ability to generate useful patents as a function of the amount of innovation and industrial activity that is occurring close to them. Finally, the authors test whether a firm’s location relates to its firm value. Specifically, the authors model firm value as a function of its patents quality, but the authors also allow the firm’s patents quality to be a function of its location and locational attributes. In this way, the authors establish a link between location and firm value. Using a simultaneous system of equations, the authors find that location explains patent quality, which, in turn, explains firm value. In other words, there is a positive relationship between firm value, innovation and location. Findings – In empirical tests using pharmaceutical firms and their patents, the authors first find that firms more often cite patents of other firms that are geographically closer to them than those firms that are farther away. The authors then find that a patent’s quality is a function of the firm’s near proximity to other knowledge-intensive institutions and activities. Finally, the authors find that because patent quality is a function of a firm’s geographic location, location consequently affects firm value. Research limitations/implications – For knowledge-intensive firms, geographic location matters. More specifically, the authors contend that research-intensive firms are better able to use and to expand on existing knowledge when they are closer to other research-intensive enterprises. The implication is that firm value maximization involves a location factor. Practical implications – The practical implication for investors is that investors should invest in those firms that are situated in a location that is rich in geographic innovation resources because those firms are more likely to generate more and higher quality patents or innovations. Originality/value – The study is the first to establish the linkage among spatial knowledge diffusion, geographic drivers of innovation, and market valuation of the firm. The study is unique in that the authors not only present evidence on spatial knowledge flows by geo-coding the exact longitude and latitude location coordinates of citing and cited patens, but more importantly, the authors also identify geographic drivers of innovation, and examine their impacts on citation-weighted patent counts and knowledge stock. Finally, using a series of simultaneous equations, the authors show how geographic innovation resources positively affect citation-weighted patent stock and knowledge stock and consequently affect market value of the firm. Thus, the novel approach contributes not only to the literature that measures geographic localization of knowledge flow using patent citations, but also to the literature that examines the impact of geographic sources of innovations on patent outputs and patent quality and, thus on firm value for research-intensive firms.