Engineers on the Production Floor? State-Level Evidence that Patenting and Production Locate Together

The new trade theory literature suggests that R&D activities and production may be geographically separated. However, concurrent studies show a strong correlation between R&D and production (or exporting). This correlation is often attributed to border-induced disruptions in the flow of knowledge. Yet it is unclear whether the correlation between R&D and production (or exporting) is due to borders per se or to other factors. Surprisingly, researchers have yet to use subnational level data to investigate this point. This paper fills the gap by employing U.S. state-level data for 11 sectors over 1986-96 to examine this question. The results suggest that innovative activities are co-located with production and exporting at the subnational level. While this evidence cannot reject the Markusen model, it does indicate that innovation and production are not easily separated. Further, it suggests that the existing literature may overstate the importance of international borders and understate the role of subnational distance as impediments to spillovers