Journal of Small Business Management 2010 48(2), pp.

258–279

Social Networks: Effects of Social Capital on

Firm Innovation* jsbm_294 258..279

by Francesc Xavier Molina-Morales and María Teresa

Martínez-Fernández

This paper aims to introduce some specific insights regarding social networks and
the geographical proximity of firms in order to investigate factors involved in the
innovation of firms. In particular, this study reviews ideas from the industrial district
literature by analyzing the role played by the dimensions of social capital, that is,
social interactions, trust, shared vision and involvement of local institutions, in the
process and product innovation of firms inside the district. This paper draws on an
analysis comparing district members and nonmembers based on a sample of 220
manufacturing firms in the Valencia Region (Spain). Findings suggest a positive
association between district affiliation, social capital and involvement of local insti-
tutions and innovation that can offer relevant prescriptions for policy makers and
individual entrepreneurs.

firms. Concepts such as the Industrial

Introduction
Territorial agglomerations of firms
have received a significant amount of
attention from researchers from diverse
disciplines. Externalities from physical
proximity have been described as a jus-
tification of the potential benefits for
District have analyzed the content and
nature of these externalities. The indus-
trial district is a concept that defines the
territorial agglomeration of firms. For the
purposes of this research, we have used
the definition by Becattini (1990, p. 39),
who defined it as a “socioeconomic entity

*This research was supported financially by Spanish Ministry of Education and Science research
project number ECO2008-04708/ECON. Thanks to Editor and anonymous JSBM referees for
their helpful suggestions.
Francesc Xavier Molina-Morales is an associate professor at the Universitat Jaume I in
Castellon, Spain.
María Teresa Martínez-Fernández is an associate professor at the Universitat Jaume I in
Castellon, Spain.
Address correspondence to: F. Xavier Molina-Morales, Department of Business Administra-
tion & Marketing, AERT Research Group (CSIC-Associate Unit), Campus Riu Sec, 12080
Castellón, Spain; Tel: +34 964387117; Fax: +34 964728629; E-mail: molina@emp.uji.es.

258 JOURNAL OF SMALL BUSINESS MANAGEMENT

characterized by the active presence of a
community of people and a population of
firms within a natural and historically
bounded area.”
Broadly speaking, firms in territorial-
based networks develop a set of relation-
ships in the form of “untraded
interdependencies” (Storper and Scott
1989), which benefit their innovation
and competitive capabilities in different
ways (Meeus, Oerlemans, and Hage
2001). Territorial networks, consisting of
a number of nodes and their respective
direct or indirect relations, are used as a
metaphor to represent the actors
involved in the innovation process in a
territory. The use of this metaphor
emphasizes an integrated approach and
the systemic vision of the process.
In this context, previous research has
sought to apply and describe the territo-
rial agglomeration of firms with a social
component, using developments from
the social capital and embeddedness
concept (Lam 1997). However, attempts
to determine the real potential of this
approach in the field of territorial net-
works are scarce. As social capital theo-
rists argue, social networks are an
important part of the learning process in
which firms discover new opportunities
and obtain new knowledge. They also
have the opportunity to improve the
knowledge they already possess by inter-
acting with one another (e.g., Tsai 2000;
Kogut and Zander 1992).
According to Cooke, Clifton, and
Oleaga (2005) social capital affects firms’
performance. In particular, the analysis
looks at SMEs but it is also extended to
the individual firm and regional levels.
Findings supported the positive effect of
social capital at the individual level but it
was not so conclusive at a regional level.
Our research aims to introduce and
operationalize a model based on the
social capital perspective by including a
set of factors such as social interactions,
trust, shared vision, and the involvement
of local institutions. This model provides
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
an explanation for the level of innovation
capacity of district firms and it may be
useful to explain differences both among
firms within the internal district and
between districts or different territorial
contexts.
We have structured the paper as
follows: first, we explain the bases of the
notion of social capital, and then we
describe its characteristics and potential
benefits and apply it to the analysis of
the industrial district. Our research
hypotheses are then formulated and
finally we use a sample of 220 Spanish
firms to analyze the causal relation
between social capital factors and inno-
vation outcomes.
Theoretical Framework
Our aim is to analyze the impact of
particular factors on innovation at both
the individual firm and district levels.
Determinants of Innovation
A primary perspective was constituted
by authors who emphasized organiza-
tional variables as being relevant if firms
are to be innovative (Whitley 1999). For
instance, Sternberg and Arndt (2001)
found evidence that firm-specific deter-
mining factors for innovation were more
important than either region-specific or
external factors.
However, other authors (Geroski
1995) argue that the reduction to purely
individualistic competition fails to take
into account organizational variables,
such as cooperation between firms,
research institutes, and clients. Some
particular externalities have been pro-
posed by the literature. For instance,
public research is often considered to be
essential in the technological change
process. Moreover, these externalities
are not widespread and are in fact geo-
graphically localized (Autant-Bernard
2001). Moreover, Anselin, Varga, and Acs
(1997) evidenced the confirmation of
earlier findings that academic externali-
ties are not only uniform across sectors
259
but also indicate important differences
across sectors in terms of agglomeration
effects (Varga 2000).
Previous research has explained how
industrial districts and clusters represent
local configurations that are high in
social capital and are characterized by
mutual trust, cooperation, and an entre-
preneurial spirit, as well as by a multi-
tude of small local firms (as opposed to
large firms) with complementary special-
ized competencies (Trigilia 2001;
McEvily and Zaheer 1999).
The literature on the National System
of Innovation (Edquist 1997; Lundvall
1992) was focused on the national
(regional) institutional environment. This
literature offers a more complex and
interactive framework with which to
understand the dynamics of the innova-
tion process in a particular environment.
A further step may be the introduction of
the territory in the discussion. Geo-
graphic concentration should be taken
account in the analysis particularly in the
case of knowledge-based industries
(Audretsch and Feldman 1996). Regions
are becoming focal points for knowledge
creation and learning in the knowledge
society as they actually become learning
regions. Learning regions function as col-
lectors and repositories of knowledge
and ideas, and as an infrastructure which
facilitates the flow of knowledge, ideas,
and learning.
Finally, we propose a social network
approach based on geographic proxim-
ity. Hakansson (1987) spelled out the
advantages that technical development
could benefit from when generated
within a network of actors. Nevertheless,
networks can have a geographical
dimension when they refer to a geo-
graphically bounded locality (De Propris
2002). Amin and Cohendet (2004) ana-
lyzed the role of spatial proximity and
territorial embeddedness in the process
of knowledge formation. These authors
also consider learning based on relations
at a distance. Whereas tacit knowledge
260 JOURNAL OF SMALL BUSINESS MANAGEMENT
requires spatial proximity, codified
knowledge is ubiquitous. The authors
have introduced the idea that even in
long-distance relations actors can feel
they are in the same space.
A recent approach analyzes the com-
munities of practice as mechanisms to
support individual and organizational
learning processes (Benner 2003). The
need to access and exploit knowledge in
order to innovate is also affected by
social structures. The so-called commu-
nities of practice are cross-firm associa-
tions included in the territory that
connect people beyond business rela-
tions. These associations enforce the cre-
ation of social capital values such as
trust, shared vision, or social interac-
tions. At the core of this concept is the
argument that the fundamental process
by which people learn is through their
engagement in social practices (Brueck-
ner 2006).
It is critical for an area or region to
build its own intellectual and knowledge
resources and to avoid being dependent
on imported resources (Saxenian 1994).
This author presented evidence that a
more open and decentralized industrial
system provided Silicon Valley’s entre-
preneurs with advantages in emerging
sectors, despite comparable technologi-
cal capabilities (in comparison with
Route 128). It is also important to con-
sider the knowledge structure in the
context of the district. For instance,
variety and coherence enforce the capac-
ity of the firm the exploit new ideas and
opportunities (Rantisi 2002).
In short, we have mentioned
firm-specific determinants and we have
also described external determinants.
We have introduced some examples
(public research) and then we have
used the National System of Innovation
framework. We have emphasized the
role played by the territory and
finally we have proposed a social
network approach based on geographic
proximity.
Social Capital and Innovation
Innovation refers to the conversion of
knowledge into new products, services,
or processes to be introduced on the
market (or the introduction of significant
changes into existing ones). More spe-
cifically, innovation and firms’ capacity
to innovate can be associated with the
capacity to combine and exchange
knowledge resources (Kogut and Zander
1992). Resources in networks include
information, products, and personnel, as
well as support for these resources.
Moran and Ghoshal (1996) have argued
that new sources of value are generated
by means of new exploitations of
resources and, more particularly,
through new ways of exchanging and
combining resources. Either way, since
the pieces of knowledge to be combined
may reside in different parties, the
exchange of information becomes a req-
uisite for combination and thus for
knowledge creation (Cabrera and
Cabrera 2002).
Undoubtedly, knowledge and innova-
tion come from both internal and exter-
nal sources, yet in the recent strategy and
innovation literature, a great deal of
emphasis has been placed on determi-
nants that are external to the firm. These
factors refer to the positive externalities
firms receive in terms of knowledge from
the environment in which they operate
(Van Waarden 2001). More specifically,
interorganizational relationships create
opportunities for knowledge acquisition
and exploitation (Lane and Lubatkin
1998).
As the embeddedness perspective
argued, access to external innovation
sources is associated with the character-
istics of the interactions of the firm with
other actors in the social networks. This
perspective views economic action as
embedded networks of ties, which firms
maintain even with nonmarket actors
(Oliver 1996). As an extension of this
view, a firm embedded in social struc-
tures is endowed with social capital.
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
The function of social networks is to
enable the circulation of information and
trust both in terms of credit and relations
between firms, which in turn leads to
economic consequences for develop-
ment due to the exchanges that are fos-
tered (Gambetta 1988). Information and
trust are referred to in terms of qualities
that would restrict opportunism as a
resource that prevents cheating or fraud
in business (Trigilia 2001). As Yli-renko,
Autio, and Sapienza (2001) argue that the
degree to which firms use their external
networks to acquire and exploit knowl-
edge is regulated by the amount of social
capital they possess. Through social
interaction, firms may increase the
depth, breadth, and efficiency of the
mutual exchange of knowledge (Lane
and Lubatkin 1998). Thus, the social
network, as a strategic resource, exerts
an influence on the future capabilities of
firms, and hence, it is an explanatory
factor of their performance (Andersson,
Forsgren, and Holm 2002).
Dimensions of Social Capital
For the purposes of this paper, social
capital is defined as the norms and social
relations embedded in the social struc-
tures of society that enable people to
coordinate action and to achieve desired
goals. People in firms form part of the
different societal groups that determine
attitudes, beliefs, identities, and values,
as well as access to resources and
opportunities—and ultimately to power.
Since most of the organizations are not
homogeneous, they differ in the access
they have to resources and power. There
may be high social capital within a group
(“bonding” social capital) which helps
members, but they may be excluded
from other groups (they lack “bridging”
social capital). The two types of social
networks we distinguish correspond to
Putnam’s (2000) concepts. He defines
“bridging social capital” as bonds of con-
nectedness that are formed across
diverse social groups, whereas “bonding
261
social capital” cements only homogenous
groups. Bridging social capital has a
positive effect on growth, whereas
bonding social capital has a negative
effect on the degree of sociability outside
the closed social circle. We find evidence
for Fukuyama’s claim that the strength of
the family bond implies a certain weak-
ness in ties between individuals not
related to one another (Fukuyama 1995).
Coleman (1990) stressed the positive
effect exerted by the cohesive or dense
structure of the networks on the produc-
tion of social norms and sanctions
that facilitate trust and cooperative
exchanges. In the same vein, the strong
tie argument suggests that it provides
organizations with two primary advan-
tages, namely, exchanges of high-quality
information and tacit knowledge, and it
serves as a mechanism of social control
that governs the interdependencies in
partnerships (Uzzi 1996). In contrast, the
disperse characterization proposes the
structural holes approach (Burt 1992) as
an alternative perspective that defines
social capital in terms of the information
and control advantages of being the
broker in relations between otherwise
disconnected people within social struc-
tures. Moreover, Granovetter (1973)
argued in favor of the strength of the
weak tie, emphasizing how weak ties
enable an actor to access new, exclusive
information.
Social Capital and Industrial
District
Industrial District. We have deliber-
ately avoided the discussion on the defi-
nition of a cluster or district (see among
others: Maskell and Kebir 2005; Martin
and Sunley 2003; Maskell 2001). Our aim
is to gain a better understanding of how
individual firms can explore and exploit
the external resources that the agglom-
eration produces. The cluster cannot
provide a universal model of how
agglomeration is related to regional and
local economic growth and it cannot
262 JOURNAL OF SMALL BUSINESS MANAGEMENT
explain how concentration is the main
cause of success (Martin and Sunley
2003). For the purposes of this research,
the district concept is far more precise
and adequate to define the social
network. The district provides a number
of characteristics that condition the
dense and strong tie network.
The Effect of the Territory (District) on
Social Capital. Proximity can be
expected to shape social networks by
producing a dense structure and strong
ties. Therefore, firms benefit from effi-
ciency by exploiting existing opportuni-
ties through sharing high-quality
information and tacit knowledge as well
as through cooperative exchange. If geo-
graphical dispersion prevents or hinders
the generation of routines and redundan-
cies of the interactions, face-to-face inter-
actions between actors induce the
frequency and redundancy of the ties
(McEvily and Zaheer 1999). In short,
proximity provides frequent, repeated,
nonmarked, informal contacts, all of
which facilitate strong ties and the
density of the network of ties. There may
be high-bonding social capital which
helps members, but they may be
excluded from other groups because
they lack bridging social capital.
In the context of territorial networks
we suggest that rather than creating this
portfolio of ties internally, firms can use
external parties (but which are still
within the district network) to connect
themselves to disperse and weakly tied
networks. Among possible third parties,
we focus on local institutions. The exist-
ence of local institutions in industrial dis-
tricts has been widely discussed in the
literature. In general, beyond providing
firms with specific support services and
other resource benefits (Baum and
Oliver 1992), local institutions act as
repositories for knowledge and opportu-
nities involving competitive capabilities.
Although a great variety of arrangements
exists, in general, there is a set of both
private and public institutions within the
industrial district that carry out support-
ing activities. For the purposes of this
research, we define local institutions as
locally oriented organizations that
provide firms in the local area with a
host of collective support services.
Examples of local institutions include
universities, research institutes, voca-
tional training centers, technical assis-
tance centers, and trade and professional
associations.
In a very different context, other
authors have provided evidence of the
impact of local institutions on firm per-
formance. An inventory of experiences
can be found in Cooke and Morgan
(1998), and Cooke (2002), where the
authors reported different cases involv-
ing experiences that point to the exist-
ence of an unwritten social constitution
which encourages firms, their associa-
tions, and local public bodies to support
their interests through joint solutions to
common problems.
Hypotheses
Tsai and Ghoshal (1998), among
others, have examined how social capital
contributes to the ability of the organiza-
tion to create value in the form of inno-
vations. A good way to gain a better
understanding of the potential benefits
of social capital is to use its different
dimensions (Nahapiet and Ghoshal
1998). To conceptualize these dimen-
sions of social capital, we used the social
interactions, trust, and shared vision
hypotheses.
In general, we have used the Moran
and Ghoshal (1996) argument that new
sources of value are generated through
new exploitations of resources and, more
particularly, through new ways of com-
bining and exchanging resources. To
create new and better products, firms
need to reallocate resources, combine
new resources, or produce new combi-
nations of already existing resources.
Similar propositions appear in the orga-
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
nizational literature. Hence, the pro-
cesses of combination and exchange of
resources may be associated with inno-
vation and may serve as an indicator of
the creation of value. We have added the
role of the local institutions as a specific-
ity of territorial clusters. Local institu-
tions can act as intermediary agents
between firms and external disperse net-
works, in the way suggested by Burt
(1992) and investigated by McEvily and
Zaheer (1999).
Social Interactions and Innovation.
The intensity of the social interactions of
one organization can be used as an indi-
cator of social capital (Nahapiet and
Ghoshal 1998). Social interactions are
channels through which information and
resources flow and enable an actor to
gain access to other actors’ resources.
Social interactions dissolve the bound-
aries between organizations and stimu-
late the formation of a common interest.
Social interactions connect managers,
technicians, and employees from differ-
ent firms. These interactions occur at
social events held for reasons to do with
the family or friendships and include
activities performed by the so-called
“communities of practice.” In this
context, information and ideas, which
are knowledge resources, can be
accessed, interpreted, and transmitted
through these networks. In conse-
quence, the absence of these interactions
reduces the sources of knowledge firms
can access and, in particular, they run
into difficulties when it comes to access-
ing tacit knowledge or finding high-value
information.
Several studies (of both intra and
interorganizational relationships) have
stated the importance of social interac-
tions for the creation and diffusion of
innovation (Ibarra 1993). Consequently,
if an organizational firm develops a
greater number of social interactions
with other firms, it will have more oppor-
tunities to exchange and combine
263
resources in the network and, as a result,
this will have a positive effect on inno-
vation. These advantages include obtain-
ing information and access to specific
resources (Powell, Koput, and Smith-
Doer 1996). Consequently, a firm with an
abundance of social interactions is likely
to have a greater capability to combine
and exchange resources with other
actors, and so enhance its innovation
capacity (Tsai and Ghoshal 1998). We
can hypothesize this as follows:
H1: Social interactions of the firm
will be positively associated with
innovation.
Trust and Innovation. Trust acts as
mechanism of control over the
exchanges between actors in the
network; it is a subtle dimension of
social capital. Trust acts as a mechanism
governing embedded relationships (Uzzi
1996), thus facilitating innovation and
learning (Meeus, Oerlemans, and Hage
2001). Actors that trust and are trusted by
others give and receive information and
knowledge resources freely without fear
of being cheated or misled. Absence of
these mechanisms gives rise to difficul-
ties in understanding each other, or to
costly monitoring of the exchanges,
which can even include legal contracts or
the legal resolution of conflicts.
Previous researchers have argued that
trust in interorganizational settings may
foster innovation (Dakhli and De Clercq
2004). A high level of trust among orga-
nizations facilitates the exchange of con-
fidential information by diminishing the
risk that one party will opportunistically
exploit this information to the other’s
disadvantage (Knack and Keefer 1997).
Trust also facilitates social exchange by
reducing the need for time consuming
and costly monitoring, and therefore
makes it possible for people and organi-
zations to devote additional time to ben-
eficial actions and endeavors (Blau
1964). Since trust induces joint efforts,
264 JOURNAL OF SMALL BUSINESS MANAGEMENT
one actor can probably obtain the help
needed to attain goals from other actors
to a degree that is not possible in a
situation where trust does not exist.
Relational trust appears when two
parties begin to trust each other and they
become more willing to share their
resources without worrying about being
taken advantage of by the other party.
Thus, cooperative behavior may emerge
which involves the exchange or combi-
nation of resources. Following Nahapiet
and Ghoshal (1998), where relationships
are high in trust, people are more willing
to engage in social exchange in general
and cooperative interaction in particular.
Moreover, trust promotes the exchange
of a range of resources that are difficult
to put a price on, but which enrich an
organization’s ability to compete and
solve problems. Trust is fundamentally a
social process, as these mechanisms and
expectations are emerging features of a
social structure that creates and repro-
duces them over time.
When an actor creates a reputation for
trustworthiness, this is important infor-
mation for other actors in the network. It
is reasonable therefore to expect that a
unit with greater trustworthiness is more
likely to be a frequent exchange partner
for other actors in the network. The
firm’s trustworthiness may act as a signal
to other parties. Several recent studies
have emphasized the role of trustworthi-
ness in governing social and economic
exchange (Tsai 2000). Trustworthiness
not only constrains opportunistic behav-
ior but also reduces the costs of finding
an exchange partner (Deroïan 2002).
Hence, it can be argued that different
levels of perceived trust and trustworthi-
ness may result in different levels of both
exchange and combination of resources
between firms in the same network, thus
enhancing innovation in the organiza-
tions. Accordingly, we propose:
H2: The level of trust of a firm is posi-
tively associated with innovation.
Shared Vision and Innovation. Shared
vision is a final mechanism to make it
possible for knowledge resources to flow
through the network. Sharing vision
allows for more fluent transmission;
since the actors share vision they use
“the same language,” which is a subtle
dimension of social capital. Shared vision
is identified as a shared code or para-
digm, which facilitates a common under-
standing of the collective objectives and
the proper ways to act within a social
system (Nahapiet and Ghoshal 1998).
This common understanding can be
appropriated by the collective as a
resource (Portes and Sensenbrenner
1993).
Shared vision includes collective goals
and aspirations of the members of the
network. When the members of the
network have the same perceptions
about how to act with the others, they
can avoid possible misunderstandings in
their communications and have more
opportunities to freely exchange their
ideas and resources; this in turn helps
them to see the potential value of com-
bining and exchanging resources (Tsai
and Ghoshal 1998). It can be shown that
shared vision allows organization bound-
aries to be crossed and access to
resources from other units.
According to the specific literature, to
some extent firms in districts share some
of the characteristics described in the
notion of shared vision in a similar way
to what happens in the individual corpo-
ration (Piore 1990). The district is char-
acterized as a group of firms working
together and there is an interfirm rather
than an intrafirm division of labor
(Becattini 1990). This notion was based
on two aspects, one referring to a
common perception about how to inter-
act with one another, and the other
involving common goals or interests. The
first aspect is related to previous experi-
ence or repeated interactions and the
latter has to do with common interests
beyond the individual firm’s interests.
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
Both aspects are present in district firms
and may be a feature that differentiates
them from external or isolated firms. We
can therefore view shared vision as being
a mechanism that helps different organi-
zations to integrate or to combine
resources, thus enhancing firms’ level of
innovation. We formulate the hypothesis
as follows:
H3: Sharing the firm’s vision with the
rest of the firms will be positively asso-
ciated with innovation.
Local Institutions and Innovation. Lo-
cal institutions are significant actors in
networks that provide specific knowl-
edge as a consequence of their position
as intermediaries. Institutions are in
contact with many diverse, external
circles and at the same time are close to
the internal district firms; as a result they
can explore and transfer new, exclusive
information, knowledge, and opportuni-
ties. Institutions use two mechanisms to
provide firms with knowledge and inno-
vation. As intermediaries, local institu-
tions facilitate the acquisition of
competitive capabilities by compiling
and disseminating knowledge and by
reducing search costs. We have backed
our argument with previous research
such as Baum and Oliver (1992) or
McEvily and Zaheer (1999).
Local institutions that have links with
external networks may supply the indus-
trial district with new ideas and concepts
that are continually refined because of
internal redundancy, proximity, and
transactional intensity. Consequently,
firms can take advantage of having net-
works of ties with local institutions that
provide a feasible source of information
on the options to enhance the firms’
capabilities. Beyond providing local
firms with specific support services and
other resource benefits, local institutions
also act as repositories for knowledge
and opportunities involving innovations.
Because these institutions interact with a
265
large number of firms in the geographi-
cal district, they are exposed to a wide
variety of solutions to organizational
challenges.
There are several ways in which local
institutions may facilitate the creation of
value for firms. (1) Local institutions offer
specific support services, such as techno-
logical services (standardization, control
of products or control of quality systems).
These services enable firms’ quality man-
agement to be improved (McEvily and
Zaheer 1999). (2) Local institutions orga-
nize training activities for district firm
employees. These activities enhance the
human capital in firms. In general, their
training programs are about specific or
applied knowledge or skills that would
otherwise be difficult to obtain. (3) Local
institutions interact with many internal
and external firms and institutions. This
variety provides institutions with a spe-
cific capacity to compare and evaluate
different solutions to problems since they
are members of broader scale associa-
tions, participate in congresses, or carry
out joint projects with external partners,
and so on. In this way, district firms not
only save search costs but also receive a
feasible source of information on the
options they have available to enhance
their capabilities. (4) They frequently
undertake research projects with local
firms and joint research projects are often
carried out between researchers from
both institutions and firms. Internal spill-
overs occur through formal and informal
channels of communication, thus allow-
ing district firms to increase their capacity
to innovate. (5) These organizations also
promote products and firms in national
and international markets, and in this
way local institutions enable district firms
to explore new markets while minimizing
the risks they take. Moreover, by moni-
toring international trade fairs, local insti-
tutions generate economies of scale for
firms. Part of the common promotion is
conducted through the development of a
district/country brand that benefits all
266 JOURNAL OF SMALL BUSINESS MANAGEMENT
firms. Hence, it can be argued that the
involvement of local institutions has a
direct effect on the capacity of district
firms to innovate. Accordingly, we
propose:
H4: Firm involvement in local institu-
tions will be positively associated with
innovation.
District Affiliation and Innovation.
Proximity facilitates the redundancy of
relationships and face-to-face contacts,
and also facilitates the building of
common norms and values. It can be said
that district membership is associated to
sharing attitudes, beliefs, identities, and
values, and in consequence, bond capital
arises. However, how to gain bridging
social capital in order to connect with
external and diverse networks is a much
greater challenge. Social interactions,
trust, and shared vision (as indicators of
bonding social capital) are expected to be
higher inside the district than outside it.
We agree that district membership
probably affects firms in a systemic or
global manner rather than acting on just
one individual factor. Frost (2001) estab-
lished the link between exploitation/
exploration, on the one hand, and the
location of firms’ external knowledge
sources, on the other. This idea fits into
what may be described as the strategic
perspective on external sources of inno-
vation (Powell, Koput, and Smith-Doer
1996). A rather different line of thinking
emphasizes the emergent properties of
such networks and their embeddedness
(Granovetter 1985) in the social relations
of technological innovation. Saxenian
(1994), for example, noted that school,
career, and friendship ties are important
mechanisms through which external
technical knowledge is located, accessed
and assimilated. Bianchi and Bellini
(1991, p. 488) argued that innovation
networks are underpinned to an impor-
tant extent by “social solidarity” and best
sustained through constant interaction
and geographical proximity. An impor-
tant question refers to the fact that
although membership gives firms access
to knowledge resources endowment, this
does not mean that all members benefit
to the same extent. On the contrary, each
of the actors has a particular and unique
network of relationships, and specific
characteristics such as knowledge struc-
ture, degree of complementary, or simi-
larity of knowledge endowment, and so
on. In consequence, although all
members of the district may enjoy advan-
tages, the extent to which they are used
may vary. Consequently, the industrial
district may combine both strategic
requirements to reach higher levels of
innovation in comparison to external and
isolated firms. From the foregoing, we
formulate the following hypothesis:
H5: District affiliation will be positively
associated with a firm’s innovation.
Research Methodology
The Empirical Setting
Valencia Region. The empirical
research drew upon a sample of Spanish
industrial firms located in the Valencia
Region. Valencia has a population of
about 4.5 million inhabitants, represent-
ing about 10 percent of both the Spanish
population and GDP. The industrial struc-
ture of the region is based on a number of
industrial districts, such as ceramic tiles,
shoes, furniture, toys, textiles, etc.
Mention must be made of a Ford car-
manufacturing plant in the region that has
fostered an important network of supplier
firms in its vicinity. A significant tourism
industry is also well established, which is
a consequence of the region’s natural
resources, extensive Mediterranean coast
including significant tourist resorts.
Finally, the traditional agricultural sector,
which was important in the past, has
declined dramatically in recent years.
Manufacturing firms are basically
SMEs; in fact, according to official statis-
tics, 48 percent of the firms had less than
six employees, and only 1 percent of the
firms employed more than 100 workers.
The basic tool for promoting innovation
in the Valencia region is the Instituto de
la Pequeña y Mediana Industria Valenci-
ana (IMPIVA), which depends on the
regional government and is responsible
for developing the innovation policy in
the region by focusing on SMEs. The
IMPIVA offers a variety of services and
organizes action programs addressed to
support industrial SMEs, and at the same
time foster a network of technological
infrastructures to lend support to inno-
vations. This activity is manifested in two
networks, namely, Technological Insti-
tutes and a network of European Busi-
ness and Innovation Centres.
Collecting Data. The identification
drew on previous research. For instance,
Ybarra (1991) has identified as many as
eleven different industrial districts in the
Valencia region. Moreover, the Spanish
Ministry of Industry has recently pub-
lished a map of districts using a quanti-
tative criterion (Trullen and Boix 2005).
Both sources have been used for us to
distinguish between district members
and nonmembers. The firms selected for
our empirical research were intended to
be representative examples of the manu-
facturing firms in the Valencia region. By
using a public database (ARDAN 2000),1

1
The ARDAN is a public database published by IMPIVA, a regional industrial policy agency, and
it provides productive and financial information about all manufacturing firms except those that
have an annual revenue below Euros 240,000. We used firms from up to 18 different industrial
segments or SIC epigraphs and, in order to define the sample, we used a random stratified
selection process to choose firms, with assignation in proportion to their size and product
segments.

MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ 267

we were able to identify the address and
four-digit Standard Industry Classifica-
tion (SIC) of the companies involved in
the study.
Data were collected using a question-
naire distributed among firms. These
were administered in face-to-face inter-
views addressed to the general manager
of each firm. We contacted 400 firms and
obtained 220 complete and correct
responses, of which 129 were district
member respondents and the remaining
91 were nondistrict member firms. Since
few precedents were available to guide
the development of indicators, fieldwork
helped to refine the choice of constructs
and identify the most relevant items.
Item selection was also based on the
feedback obtained from a pilot question-
naire. For the sake of simplicity, we
employed a five-point Likert scale.
Two sample controls were run. With
regard to the bias due to nonrespondent
firms, we checked for possible differ-
ences between sample and nonrespon-
dent firms, and no significant differences
in terms of size and technological
attributes were observed. Once firms had
been classified as belonging to one of
two clusters according to their industrial
district affiliation, they were checked for
the presence of significant differences
with respect to size and product seg-
ments. However, none were found. A full
description of the items used to define
variables can be seen in Appendix I.
Research Design
Independent Variables
Social Interactions. A social interac-
tion is any contact or relation that an
actor or employee from one firm keeps
with other actors or employees from
other firms in the community which can
affect their access to and use of knowl-
edge resources of the firm. The variable
“social interactions” refers to intensity in
terms of the number of times actors
share time in any kind of event including
those of a social, familiar, or other
268 JOURNAL OF SMALL BUSINESS MANAGEMENT
nature. It is said that the existence of
more interactions between actors facili-
tates access to the information and
knowledge of others. An actor (a firm)
that maintains a larger number of inter-
actions with other firms in the district is
more likely to be able to manage more
flows of knowledge resources. We used
as reference Tsai and Ghoshal (1998).
Trust. The variable trust refers to the
degree to which an actor or a firm is
considered to be fair and honest in the
exchange of any kind of resources
degree an actor or a firm is considered as
to be fair and honest in the interchange
of whatever resource. Firms build a repu-
tation of trust (or on the contrary, mal-
feasance), probably on the basis of
previous experience. This perception can
affect the intensity and the quality of
flows of resources firms allow to be
shared and exchanged with another firm.
Moreover, as it is well known in the
literature, trust as interexchange control
mechanism can substitute more formal
or contractual controls as a mechanism
to control exchange. We based ourselves
on Tsai and Ghoshal (1998) and Blum-
berg (2001).
Shared Vision. Shared vision refers
to an attribute that people and firms may
have that can facilitate and offer them
certain benefits. Shared vision is about
the cognitive perception of others; it is
about beliefs or common fate. It
involves, for instance, a common lan-
guage, common cultural-based values of
the business success and risk aversion,
and so on. Although organizations
pursue individual goals, they may under-
stand that they share their fate with other
organizations in the same ambit (or dis-
trict). This is to be expected since at the
same time organizations pursue their
own individual strategies, they are also
part of a collective strategy. However,
this attribute or ability is not developed
to the same extent by all organizations.
We used Tsai and Ghoshal (1998) as a
reference.
Involvement of Local Institutions.
Not all organizations in the district (or
outside it) have the same ability or will-
ingness to interact with local institutions.
For instance, this may depend on how
complementarity or similarity of the
structure of the internal endowment of
knowledge resources of the organization
is with respect to what local institutions
are offering, In consequence, involve-
ment may vary from one organization to
another. We based ourselves on McEvily
and Zaheer (1999).
Industrial District Affiliation. Al-
though there are different methods to
identify a district and district members,
in our opinion the one that best reflects
what they really mean is the “perceptual”
identification. This involves collecting
the actors’ opinions about whether they
belong to a district or not. This is also the
most faithful to Becatinni’s original defi-
nition. When we collected data from
managers, we provided them with a list
of industrial districts. Based on Becattini
(2002), we asked managers directly
whether their firms belonged to one of
the listed industrial districts or not;
responses were controlled using firms’
addresses. Dummy variables have been
used to identify affiliation in similar
studies, such as those by Hundley and
Jacobson (1998), and Geringer, Tallman,
and Olsen (2000), among others.
Dependent Variables
Innovation. Innovation in the
context of research is understood as any
idea, practice, or object that is perceived
as new by an organization and that is
implemented and used successfully in
the market. To measure this variable, we
asked for the number of product and
process innovations that had been pro-
duced in their firm. This measurement of
innovation is based on Tsai and Ghoshal
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
(1998), and Meeus, Oerlemans, and Hage
(2001).
Control Variables. In order to isolate
the effect of the variables included in our
model, we selected two control variables,
the size of the firm (Hitt, Hoskisson, and
Kim 1997) and R&D efforts (Hagedoorn
and Duysters 2002). The size variable
allows us to control for economies and
diseconomies of scale at firm level. Addi-
tionally, R&D investments have tradition-
ally been used to control innovation in
individual firms (Cohen and Levinthal
1990).
Analysis Techniques
First, we classified firms in two clus-
ters according to their industrial district
affiliation. We then calculated separate
descriptive statistics (mean and standard
deviation) for all multiple-item variables
and, in order to find the validity of the
aggregation, we calculated the value of
Cronbach’s alpha for the same variables.
In order to test hypotheses 1, 2, 3, and 4
we used the estimated model of multiple
linear regression analysis (similar to
Hagedoorn and Duysters 2002). To see
how much additional variance was
explained by the district affiliation vari-
able (hypothesis 5), we tested our
hypotheses with a hierarchical regres-
sion analysis, entering independent vari-
ables in the first step, the district variable
in step 2, and tracing changes in the
multiple-squared correlation coefficient
(R2) from step to step (in a similar
manner to the methods used in previous
research, for instance).
Results
Since it was not possible to use cen-
trality measures in our sample, we were
faced with reliability concerns. In
general, construct data depend on
respondents’ ability to assess the ties
accurately (Marsden 1993). On reviewing
some material, we found similar con-
cerns in previous research and adopted
269
similar solutions to control for them. For
this reason, we evaluated the validity of
answers using data gathered from a
second knowledgeable respondent who
was able to provide an accurate report.
This study surveyed the contacts of 25
randomly selected second respondents.
Drawing on these analyses, it is reason-
able to conclude that the validity of the
measures is acceptable since no signifi-
cant mean differences were found.
Table 1 shows descriptive statistics
and Cronbach’s alpha for the multiple-
item variables, and Pearson’s correlation
for all combinations of variables. The
least favorable Cronbach’s alpha value
corresponded to the multiple-item scale
measuring process innovation, with a
score of 0.61. Bearing in mind that the
scale had not been used before, the
values of the alpha were within the limits
of tolerance suggested in the literature
(Malhotra 1997).
As can be seen in Table 1, social
capital indicators were significantly
higher for district firms. As also
expected, our dependent variables (both
product and process innovation) showed
significantly higher values for district
members. This is to be expected from
our theoretical reasoning. Finally, with
regard to control variables, neither size
nor R&D investments showed any signifi-
cant differences between member and
nonmember firms. This can be explained
by the fact that belonging to a district
cannot determine any of the dimensions.
These results, however, may contradict
certain district literature assumptions,
such as the lower the size of the district
firms, the less internal R&D effort they
make.
Tolerance and variance inflation
factor (VIF) statistics were run to deal
with concerns about multicollinearity.
However, the least favorable values for
the Tolerance (0.857) and VIF (1.116)
statistics for the Local Institutions vari-
able are considered to be satisfactory in
order to avoid multicollinearity.
270 JOURNAL OF SMALL BUSINESS MANAGEMENT
Table 2 shows the results of the hier-
archical regression analysis conducted in
order to estimate the effects of district
affiliation on innovation. Hypotheses 1,
2, 3, and 4 predicted that social interac-
tions, trust, shared vision, and involve-
ment of local institutions are likely to
make firms more innovative, both in
product and process innovation. The
coefficients for all these relationships are
positive and significant, indicating that
they do indeed contribute to innovation.
Hence, hypotheses are supported.
Hypothesis 5 predicts a direct effect of
district affiliation on firm innovation. The
coefficient for district affiliation is posi-
tive and significant (p < .05; p < .01),
which indicates that firms belonging to
the district are likely to be more innova-
tive. Hypothesis 5 is therefore confirmed.
Moreover, the introduction of the district
affiliation variable in the second step of
the regression analysis enables us to
determine the improvement of the
explanatory capacity of the model (D
Adjusted R2), which is reflected in a
change in the Adjusted R2 value from
0.314 to 0.325 for product innovation,
and from 0.231 to 0.323 for process inno-
vation. Differences exist between the
social capital variables of district and
nondistrict firms. Among independent
variables, the local institution involve-
ment variable was the most significant
when the district affiliation variable is
introduced. This means that for district
members, the role played by local insti-
tutions is much more relevant than for an
external nondistrict member. Thus, dis-
trict firms are heavily dependent upon
their institutions.
Control variable results can be
explained. Size, for example, is not asso-
ciated with innovation as can be
expected since internal division of labor
in the district allows economies of scale
throughout the territory. R&D, also as
expected, is associated with innovation
since it is an indication of the absorptive
capacity of the firms.
 Table 1
Descriptive Statistics, Means, Standard Deviation, Cronbach’s Alpha, and Comparison
of Means
Variables Mean (District Members) S.D. a Mean (No District S.D. a F
N = 129 Members) N = 91

(1) Product Innovation 1.72 1.28 0.63 1.55 1.25 0.63 2.572*
(2) Process Innovation 1.74 0.97 0.61 1.21 0.82 0.61 3.216*
(3) Social Interactions 3.84 0.69 0.75 3.21 0.79 0.78 12.684**
(4) Trust 3.43 0.93 0.79 2.86 0.93 0.78 15.259**
(5) Shared Vision 3.67 0.77 0.68 2.98 0.97 0.69 14.604**
(6) Local Institutions 3.45 0.75 0.85 2.87 0.94 0.85 15.259**
(7) Size 1.26 0.47 — 1.25 0.51 — 0.002 (a)
(8) R&D 5.02 5.75 — 5.23 9.69 — 0.037 (a)

Accompanied by (a) indicates nonsignificance.

a = Cronbach’s alpha for all multiple-item variables.

MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ

*Difference between district members and nonmembers significant at p < .05.
**Difference between district members and nonmembers significant at p < .001.

271
272
Table 2
Results of Hierarchical Regression Analysis: Effects of District Affiliation on
Firm Innovation
Firm Innovation

Product Innovation Process Innovation

Variable
Constant 1.949† (0.113) 1.879† (0.163) 3.004† (0.181) 2.990† (0.165)
Size 0.006 (0.031) 0.017 (0.064) 0.064 (0.051) 0.115 (0.064)
R&D 0.025* (0.006) 0.121† (0.033) 0.077* (0.022) 0.119** (0.059)
Social Interactions 0.157† (0.030) 0.153*** (0.047) 0.240* (0.059) 0.278*** (0.024)
Trust 0.117** (0.058) 0.110** (0.048) 0.218** (0.060) 0.217** (0.032)
Shared Vision 0.115* (0.120) 0.147† (0.035) 0.113* (0.066) 0.159** (0.065)
Local Institutions 0.114** (0.052) 0.160* (0.038) 0.180* (0.109) 0.364† (0.039)
District Affiliation 0.131** (0.079) 0.217*** (0.030)
R2 Adjusted 0.314 0.325 0.231 0.323
F 13.419† 17.279† 7.833† 14.257†
D R2 Adjusted 0.011 0.092
DF 3.86 6.424

JOURNAL OF SMALL BUSINESS MANAGEMENT

N = 220.
Nonstandardized regression coefficients (errors within brackets).
*p < .10.
**p < .05.
***p < .01.
†
p < .001.

Discussion
Findings of the research are useful to
discern some issues to be discussed in
greater detail. One the most relevant
refers to the mechanisms that a firm can
use to be connected to external firms and
the role that intermediary agents can
play in this process.
We assume that linkages with firms
outside the district were produced
mostly using “bridging” actions by an
intermediary actor. Several explanations
for the barriers that prevent firms from
gaining direct access to external net-
works can be suggested. First, one
primary reason refers to the small size of
the firms in districts. Indeed, in most
cases, these firms do not have significant
R&D and marketing departments. Thus,
for instance, they cannot afford to make
the large financial investments required
for research projects. The second reason
concerns the need for an intensive
exchange and combination of resources
in the innovation process, and conse-
quently, an important interfirm coordina-
tion effort is also required. In the
industrial district, there is a high degree
of specialization, and hence, knowledge
and innovation involve efforts by other
groups of firms. Finally, the high trans-
action cost of knowledge transfer in the
open external markets is also observed.
The barriers can be justified since search-
ing for new opportunities to improve the
innovation capabilities of firms implies
high levels of uncertainty and risk. Firms
can avoid risks by using intermediaries
to provide a feasible source of informa-
tion about the existing options. Regard-
ing the transmission of tacit knowledge
between two organizations, difficulties in
the formalization of these resources
make transmission through market rela-
tionships more complicated.
Recently, some industrial district theo-
rists have reviewed the presence and
role of the large firm within the district.
This has involved reconsidering internal
MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ
heterogeneity and questioning the tradi-
tional industrial district model (Rabellotti
and Schmitz 1999). According to Lazer-
son and Lorenzoni (1999), larger firms
frequently organize production among
groups of smaller firms, introduce tech-
nological innovations, and expand exist-
ing markets. Moreover, Bellandi (2001)
proposed that involvement in knowledge
exchange and institutional building and
therefore the identification of develop-
mental embeddedness, are more prob-
able where and when local factors are
neither too weak nor too strong, and in
the presence of contextual policies fos-
tering the developmental role of large
units. In fact, some authors try to
combine leadership, institutions, and
large firms (Cooke 2002). Finally, Malipi-
ero et al. (2005) analyze the role of focal
firms in industrial clusters as “gatekeep-
ers” that introduce external technological
novelties in the cluster and enact useful
new knowledge production locally, thus
enhancing the capabilities to be competi-
tive on the international scene of all the
firms in the cluster.
Conclusions
Findings support the idea that social
capital variables affect the innovation of
firms. This means that knowledge
exchanges required for innovation were
favored under certain relational condi-
tions. However, study findings went
even further since they offered a more
precise view of the extent to which these
social capital indicators can explain inno-
vation. In consequence, they provide
useful information for firms in order to
know how their particular relational net-
works must be designed.
By using the social capital theory to
explain innovation, we can give a com-
prehensive and complete explanation
that enables us to understand the rela-
tions between firm-specific and regional
factors explaining innovation. In the lit-
erature, many works have attempted to
prove the so-called district or territory
273
effect. Rather than simply justifying the
competitive superiority of the district
firms, our model can also be used to
analyze differences among firms within
the district and external differences
among districts.
Firms inside in industrial district may
combine diverse types of ties and links in
order to establish connections and thus
enhance their innovative capacity. We
argue that firms’ embeddedness in net-
works of social, economic, and profes-
sional ties is an important, if somewhat
neglected, perspective in strategy
research.
In the industrial district tradition,
most authors have considered the district
as a whole, analyzing only aggregate
data and results. According to the litera-
ture, the geographically “bounded”
agglomerations may yield a number of
beneficial nontraded interdependencies.
These interdependencies are significant
factors in explaining why some geo-
graphically bounded entities may
prosper or lag behind other entities. This
perspective does not take into account
the fact that firms may present significant
internal (that is, within the district) dif-
ferences in terms of characteristic fea-
tures and performance.
The main contribution made by our
work is to the existing body of research
linking industrial districts with innova-
tion. This established stream of research
contains a number of works worth men-
tioning, such as McEvily and Zaheer
(1999) or Capello (1999a, 1999b). In both
these studies, social or relational capital
is analyzed as a factor for creating inno-
vative capacity in firms. However,
according to our findings, it can be
shown how there are significant differ-
ences between the effects of these factors
on internal and external firms.
Our proposition supported a number
of prescriptions for firms’ strategies. We
argue that firms should interact with
local institutions and other participants
in order to improve environmental con-
274 JOURNAL OF SMALL BUSINESS MANAGEMENT
ditions (Molina-Morales and Martínez-
Fernández 2004). Dynamics between the
formation of tacit and codified knowl-
edge and other elements of innovation
processes call for a reassessment of insti-
tutional arrangements. A full explanation
of the benefits of the systemic effects
probably comes from the perspective of
individual firm capabilities. The distinct
capabilities of the firm may be based on
specific resources for exploiting the local
environment or on fitting characteristic
organizational features to the district
environment. These capabilities allow
synergies to be obtained from the use of
different shared resources (Lam 1997).
Limitations of the paper
and future research
Finally, mention must be made of
some of the limitations of our research.
Because of the use of district affiliation
as a control variable, we are cautious
about inferring any degree of causality
among the key constructs. Although we
have presented hypotheses in a manner
that implies certain independence among
variables, it is possible that district affili-
ation explains other variables, such as
the dimensions of social capital and
involvement of local institutions. Conse-
quently, further research is needed to
elaborate the relationship between the
different elements of the model. More-
over, in order to capture social capital
elements in the interactions between
actors within the district, future research
should also take additional cultural
issues into account.
As a matter for further discussion, we
suggest that in order to access external
sources of new and exclusive knowl-
edge, firms in districts should use indi-
rect rather than direct ties by means of
intermediary agents (Molina-Morales and
Martínez-Fernández 2004). In particular,
local institutions are relevant actors in
territorial networks that provide specific
knowledge as a consequence of their
position as intermediaries.
 Another question may be raised as to
the diversity of the local institutions.
Since local institutions may be predomi-
nately from the same industry, the infor-
mation accessed by local firms may be
less diverse. Thus, a deeper analysis is
needed of how local institutions vary in
terms of the scope of the activities they
carry out. Finally, it could be interesting
to investigate on the limits of the positive
effect of the social capital. Decreasing
returns could occur when all firms in a
network are connected through embed-
ded ties. In fact, the decreasing impact of
social capital beyond a certain level of
social interactions and trust results in
parochialism and inertia.
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Appendix I
Operationalization of Variables
Social interaction: (1) People from your company spend a considerable amount
of time on social occasions with people from other firms; (2) People from your
company spend a considerable amount of time on social events organised by the
local community; (3) A local origin and common academic background of the
employees at local firms allow social interactions to take place; and (4) There is an
informal network among customers, suppliers and competitors. Responses were
scored on a 5-point Likert scale, where 1 = fully disagree and 5 = fully agree. To
measure the variable, we obtained an average of all the items for each firm and
Cronbach’s alpha was run to validate the aggregation of items.

278 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Trust: (1) Other firms can rely on your company without any fear that you will
take advantage of them, even if the opportunity arises to do so; (2) In general your
company will always keep the promises it makes to others; (3) Suppose your
company is seeking to be a business partner in a joint project. You are confident that
you will do what is required in the agreement (i.e., what partners believe you should
do) even without a written contract that clearly specifies your obligations; and (4)
You consider that other firms feel a special duty to stand behind you in times of
trouble, so you consider it only fair that your company should also give support to
other firms. Responses were scored on a 5-point Likert scale where 1 = fully disagree
and 5 = fully agree. To measure the variable we obtained an average of all the items
for each firm and Cronbach’s alpha was run to validate the aggregation of items.
Shared vision: (1) You and the people in your company share the same ambitions
and vision as other companies in your local area; (2) People in your company are
encouraged and motivated to pursue the collective goals and mission of the whole
local area; (3) You consider that your company’s future is related to other firms in the
area; and (4) There is some kind of collective strategy or plan for firms in the whole
area. Responses were scored on a 5-point Likert scale where 1 = fully disagree and
5 = fully agree. To measure the variable we obtained an average of all the items for
each firm and Cronbach’s alpha was run to validate the aggregation of items.
Involvement of local institutions: (1) Your company has received significant
support for R&D activities from local institutions; (2) You or your employees have
received specific training by local academic institutions; (3) Your company has
received considerable information about products and markets from local institu-
tions; and (4) You consider that you cannot receive support from external firms
directly, instead of through local institutions. Responses were scored on a 5-point
Likert scale where 1 = fully disagree and 5 = fully agree. To measure the variable we
obtained an average of all the items for each firm and Cronbach’s alpha was run to
validate the aggregation of items.
Industrial district affiliation: We used a dummy variable to represent affiliation
to Valencian districts or the absence of such affiliation.
Product innovation: (1) Number of developments or introductions of new mate-
rials; (2) Number of developments or introductions of new intermediate products; (3)
Number of developments or introductions of new components; and (4) Number of
developments or introductions of new attributes of the products. To measure the
variable, we added up the number of innovations reported for each item over the
period of time under consideration and Cronbach’s alpha was run to validate the
aggregation of items.
Process innovation: (1) New developments or introductions of new equipment;
(2) Improvements in the level of automation; (3) Number of new organizational
methods of the productive activities; and (4) Use of new energy sources. To measure
the variable, we added up the number of innovations reported for each item over the
period of time under consideration and Cronbach’s alpha was run to validate the
aggregation of items.
R&D expenditure: It is frequently argued that the absorptive capacity of firms can
be operationalised through their investment in R&D (Cohen and Levinthal 1990). The
percentage of investment in R&D over the total sales of the firms was used as an
indicator.
Size: Size was operationalised as the number of employees (1 = 11–50 employees;
2 = 51–250 employees; 3 = +250 employees).

MOLINA-MORALES AND MARTÍNEZ-FERNÁNDEZ 279