Comparing the Productivity Impacts of Knowledge Spillovers from Network and Arm’s Length Industries:Findings from Business Groups in Korea

Given the increasing significance of knowledge spillovers in innovation, this study investigates and compares knowledge spillovers from arm’s length firms in the industries (market) with those from other sister firms in the same business group (network). By dividing the knowledge pool into pools within and outside a sector to which a firm belongs, we re-examine the ongoing debate on the relative size of the intra- versus inter-sector spillovers, and address a new question on the relative size of spillovers from networks compared with those from markets. We find that although both intra- and inter-sector spillovers are significant, no evidence proves the dominance of either type of spillover, whether the spillover is from industries or from networks. More importantly, we find that spillovers from networks are greater than those from industries regardless of whether the comparison was made between intra- and intra-, inter- and inter-, intra- and inter, or interand intra-sector spillovers. Results imply that knowledge spillover is not automatic but subject to limitations related to the tacitness of knowledge, and that certain types of knowledge can be transferred only through direct interaction, which is more prevalent within a network organization such as a business group.