Hidden champions and knowledge spillovers: innovation-enhancing agglomeration effects and niche technology specificity

Abstract To achieve market and technology leadership, innovation is essential for niche market leaders. While research suggests that regions benefit economically from a high concentration of niche market leaders, it is still unclear which role locating close to one another plays for their innovation performance. Therefore, we contribute to existing literature that studies external factors of firm-level innovation. We analyze 1372 German niche market leaders and study whether (1) being located in a cluster improves their innovation performance and (2) if the impact of locating in a cluster varies depending on the diversity of industries within the cluster. We measured the spatial agglomeration using the location quotient. Our findings show that being located in a cluster increases the patenting rate by 1.49 times. This effect is more pronounced in clusters with more diverse industries, indicating a lower level of technology specificity. This suggests that technology specificity has an impact on a company’s ability to take advantage of positive knowledge from other companies in the same cluster. Finally, we conducted several tests to ensure the robustness of our analysis. The Modifiable Areal Unit Problem (MAUP) refers to the discretionary choice of the spatial unit, and we tested different spatial unit levels to account for this. Additionally, we used entropy balancing to confirm the positive effect of cluster location on innovation, comparing with a control set of mass-market firms. Our study concludes with implications for both corporate management and public policy.