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Strategic Management Journal
Strat. Mgmt. J.
,
26
: 287–295 (2005)Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.448
RESEARCH NOTES AND COMMENTARIESCLUSTERS, NETWORKS, AND FIRMINNOVATIVENESS
GEOFFREY G. BELL*
LabovitzSchoolofBusinessandEconomics,UniversityofMinnesotaDuluthCampus,Duluth, Minnesota, U.S.A
This paper extends current knowledge of industry clusters by disentanglingthe effects of networks from cluster (i.e., distinctly geographic) mechanisms on
fi
rm performance as well as by studyingthe in
 fl 
uence of these different mechanisms on
fi
rms located inside and outside the industrycluster. It also highlights the importance of simultaneously modeling multiple networks whichmay differentially in
 fl 
uence important 
fi
rm outcomes. In the paper, I model the innovativenessof Canadian mutual fund companies as a function of their geographic location—inside or outside the industry cluster of Toronto—and of their centrality in networks of managerial and institutional ties. I 
fi
nd that locating in the industry cluster as well as centrality in the managerialtie network enhances
fi
rm innovation, while centrality in the institutional tie network does not.
Copyright
2005 John Wiley & Sons, Ltd.
INTRODUCTION
Industry clusters—groups of geographically proxi-mate
fi
rms in the same industry—are a strik-ing feature of the geography of economic activity(Krugman, 1991) examined by industrial geog-raphers at least since Marshall (1920). Strategyscholars are now beginning to study how clustersin
fl
uence
fi
rm performance, and have yet to distin-guish between bene
fi
ts associated with enhancedsocial interaction effects (Harrison, 1992) and
Keywords: innovation; networks; multiple networks;industry clusters; mutual funds
∗
Correspondence to: Geoffrey G. Bell, Labovitz School of Busi-ness and Economics, University of Minnesota Duluth Campus,110 SBE, 412 Library Drive, Duluth, MN 55812, U.S.A.E-mail: ggbell@d.umn.edu
agglomeration economies (DeBresson and Amesse,1991; Harrison, 1992; Harrison, Kelley, and Gant,1996; Pascal and McCall, 1980; Shaver and Flyer,2000). Many existing studies model only
fi
rmsin the cluster, ignoring both ties between clus-ter members and other (‘remote’)
fi
rms (Harrison,1994, and Saxenian, 1994b, are notable excep-tions) and the overall industry network struc-ture (Storper and Harrison, 1991). This paperovercomes some of these shortcomings by ask-ing, ‘What is the relationship among industryclusters, network centrality, and
fi
rm innovative-ness?’ I examine these relationships by examin-ing the in
fl
uence of clusters and network struc-ture on the innovativeness of Canadian mutualfund companies. My study advances the strategyliterature by untangling cluster mechanisms from
Copyright
2005 John Wiley & Sons, Ltd.
Received 22 November 1999Final revision received 14 September 2004
 
288
G. G. Bell
network mechanisms and showing how they dif-ferentially in
fl
uence important
fi
rm outcomes. Itextends network theory by comparing partiallyoverlapping networks of managerial and institu-tional ties and showing that centrality in differ-ent networks distinctly in
fl
uences innovativeness.The paper proceeds as follows. The next sectionof the paper develops theory and hypotheses. Ithen outline my study setting and methodology,and present results. Finally, I present conclusions,limitations, and implications for scholars and man-agers.
THEORY AND HYPOTHESES
A cluster is a group of 
fi
rms from the same orrelated industries located geographically near toeach other (Becattini, 1990; Brusco, 1990; Har-rison
et al
., 1996; Storper and Harrison, 1991).Scholars such as Harrison (1994) and Porter (1990)predict that
fi
rms in the cluster should be moreinnovative than others for at least two reasons.First,
fi
rms in the cluster bene
fi
t from agglomer-ation economies such as nearby suppliers attain-ing ef 
fi
cient scale (Scott, 1992), direct observa-tion of competitors (Burt, 1987; Harrison
et al
.,1996), and ability to exploit collective knowledge(Dosi, 1988; Marshall, 1920). Second,
fi
rms inclusters bene
fi
t from network-based effects, espe-cially enhanced social interaction (Harrison, 1992).I begin my examination of these in
fl
uences bybrie
fl
y de
fi
ning key terms.
Key terms: Innovation and centrality
 Innovation
is the development and implementa-tion of new ideas to solve problems (Dosi, 1988;Van de Ven, 1986). According to Van de Ven,‘An innovation is a new idea, which may be arecombination of old ideas, a schema that chal-lenges the present order, a formula, or a uniqueapproach which is perceived as new by the indi-viduals involved’ (Van de Ven, 1986: 591). Inno-vation includes a pattern of informal cooperativeR&D (von Hippel, 1987), resulting from infor-mal information exchange among
fi
rms, so
fi
rmsbetter positioned to access information should bemore innovative (Rogers, 1995). Innovation alsocountenances the possibility that an actor may tryto imitate others, but in the process inadvertentlygenerate new ideas (March, 1994). It entails thedevelopment of new products or services as wellas new administrative systems (Damanpour, 1991;Nohria and Gulati, 1996).
Centrality
measures the involvement in the net-work (Knoke and Burt, 1983): the extent to whichan actor is deeply involved in network relations(Burt, 1980; Wasserman and Faust, 1994). It con-siders access to and control over resources (Knokeand Burt, 1983; Wasserman and Faust, 1994), andthus is likely to be highly associated with inno-vation, as access to and control over informa-tion and resources are associated with innovation(Becker, 1970; Powell, Koput, and Smith-Doerr,1996; Rogers, 1995; von Hippel, 1988).
Clusters and
fi
rm innovativeness
Firms in clusters have better access to informationthan do other
fi
rms (Bianchi and Bellini, 1991;Porter, 1990; Pouder and St. John, 1996), resultingfrom both direct cluster effects as well as networkprocesses underlying the cluster (Becattini, 1990;Brusco, 1990; Harrison, 1994). Thus, the totaleffect of clusters on innovation may be mostlyindirect, partially in
fl
uenced by network position.In this section, I focus on the direct effect of clusters on innovation that operate independentlyof network effects.Such cluster effects will arise partially becausethere is common knowledge available to membersof the cluster (Geroski, 1995) that is not con-sciously transmitted among them (Marshall, 1920),or is transmitted via chance meetings betweenexecutives that are fostered by geographic prox-imity (Saxenian, 1994b). Common knowledge isaugmented and reinforced by public informationsources, such as the local media or universi-ties (Porter, 1998; Saxenian, 1994b). Over time,the common knowledge forms a cluster level of absorptive capacity (Cohen and Levinthal, 1990).The ability to understand and exploit this cluster-level absorptive capacity is enhanced by the com-mon lineage and heritage of the
fi
rms in the clusterand their executives. Speci
fi
cally,
fi
rms in clustersoften share lineage to a common parent
fi
rm, suchas the many
fi
rms in Silicon Valley directly or indi-rectly related to Fairchild (Saxenian, 1994a). Morebroadly, executives in geographically proximate
fi
rms share a common background and understand-ing (Paniccia, 1998). This common lineage andheritage will enable executives to understand infor-mation they may share when they ‘run across each
Copyright
2005 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 287–295 (2005)
 
 Research Notes and Commentaries
289
other’ in chance settings (Saxenian, 1994b). Also,because information is sticky and place-speci
fi
cand the ability to transfer information decays withdistance (Ormrod, 1990; Saxenian, 1994a; vonHippel, 1994),
fi
rms in the cluster will have bet-ter access to common knowledge than geographi-cally remote
fi
rms (‘remotes’). Thus, they tend tosearch locally for information used in innovation(Almeida and Kogut, 1997; Jaffe, Trajtenberg, andHenderson, 1993).Additionally, the geographic proximity of 
fi
rmsin the cluster enhances direct observation of com-petitors (Burt, 1987; Pascal and McCall, 1980;Rogers, 1995). A
fi
rm that observes others may tryto mimic them and inadvertently generate innova-tion (March, 1994). Such inadvertent innovationmay operate even in the absence of direct net-work ties, when the imitator cannot simply contactthe other
fi
rm to learn more about an innovation,but must rely on cues from observing the other,increasing the likelihood of mutation and inno-vation. Firms outside the cluster (remotes) wouldhave access to neither the cluster common knowl-edge nor the ability to directly observe their rivals,so would not be able to use these conduits forinnovation (Powell
et al
., 1996). Thus:
 Hypothesis 1: In a given industry, after control-ling for network effects, cluster-member 
fi
rmswill be more innovative than remotes.
Modeling multiple networks
Scholars have long recognized that organizationsare embedded in multiple, only partially overlap-ping, networks (Powell, 1985; Powell and Smith-Doerr, 1994). Powell (1985) found no boundarybetween the work and personal life of his subjects,suggesting that modeling multiple networks isneeded to understand how different networks in
fl
u-ence outcomes. Consequently, I model a manage-rial network (the network of informal ties amongmanagers) and an institutional tie network (the net-work of formal ties between their
fi
rms) to captureboth informal and formal ties.
Centrality and
fi
rm innovativeness
Central actors are extensively involved in theirnetworks (Burt, 1980; Freeman, 1979; Wassermanand Faust, 1994), so have highlighted knowledgeof others’ innovative efforts (Becker, 1970). Theyare less likely than others to miss valuable infor-mation (Becker, 1970), and have quick access topromising new ventures (Powell
et al
., 1996) thatmay generate innovation.Central
fi
rms may be better positioned to accessthe veracity of the information they receive aswell as the information sources themselves (Burt,1987). An information source may limit the infor-mation it provides, either for strategic reasons (tomisrepresent the information) or to be ‘helpful’(limiting information to what it believes the otherparty needs). The more a
fi
rm is involved in its net-work, the more it can compare information acrosssources and assess its veracity. Moreover,
fi
rmswith multiple information sources are less likelyto miss vital information as multiple informationsources provide multiple channels to discover newinformation, and can combine information in novelways to generate innovation (Van de Ven, 1986).Firms and their executives are involved in twodistinct networks: a managerial network of infor-mal ties among
fi
rm executives and an institutionaltie network of formal ties between
fi
rms. The man-agerial network enhances information
fl
ow, espe-cially the
fl
ow of tacit information among
fi
rms(Uzzi, 1996). It provides relatively high-trust con-text in which to communicate (Argyle and Hen-derson, 1985). Being central in this network mayexpose managers and their
fi
rms to a rich
fl
ow of tacit knowledge useful for innovation. Conversely,the institutional network provides opportunities tohear industry news. For example, if a trade associ-ation approves members’ new products, then serv-ing on the association’s boards and committeesprovides early warning about competitor actions.Thus, centrality in each network should enhanceinnovativeness:
 Hypothesis 2: Centrality in the managerial net-work enhances
fi
rm performance. Hypothesis 3: Centrality in the institutional net-work enhances
fi
rm performance.
METHODS
Research setting
I collected the data on and from mutual fundcompanies listed in the January 1998
Member-ship Directory
of the Investment Funds Institute
Copyright
2005 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 287–295 (2005)
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