Conditional Proximity. Direction and Magnitude of Knowledge Spillover Effects

ABSTRACT Idiosyncratic geographical characteristics of regions play a critical role in determining how economic forces may display different directional and magnitude effects that are often neither symmetric nor reciprocal. This manuscript advances the understanding of the potential implications of the Knowledge Spillover Theory of Entrepreneurship, as the transmission of knowledge and related spillovers is conditional by geographic invisible barriers depicted in the conditional proximity hypothesis. The concept of Conditional Proximity is introduced to better understand the moderating potential magnitude and direction of knowledge spillover effects as a complementary perspective to the Marshallian channels. We validate this argumentation using a novel database of Italian innovative startups at the 2‐Dig NAICS level of classification. The evidence indicates the strong presence of conditional proximity between neighboring regions as observed in the persistent differences in new firm formation and resulting differences in firm intensity by economic sector in neighboring regions. The same level of cross‐interaction across border‐sharing regions creates idiosyncratic heterogeneous knowledge spillover effects across sectors and neighboring regions. Evidence shows that conditional proximity explains the different transferability across proxime regions and demonstrates why some sectors perform better than others. In addition, the asymmetric relationship between neighboring regions explains that distance is conditional to the presence and dynamics of the entrepreneurial ecosystems of the regions.