External Entry and the Evolution of Clusters: A Study of the Biotechnology Industry in Canada

Building on recent work in economic geography, evolutionary economics, and international business, I examine how firms that enter from outside a region alter the knowledge and opportunity structure for potential entrepreneurial entrants and indigenous incumbents in that region. In particular, I examine the short and long run effects of both greenfield and acquisition entry on entrepreneurial entry, as well as on the exit and growth of indigenous incumbents in industry clusters. A comprehensive dataset of all firms in the Canadian biotech industry between 1976 and 2003 is used to study the dynamic effects within all regions that have experienced an external entry. The results show a complex set of processes at work. Newer greenfield and acquisition entrants have consistently opposing effects, with newer greenfields enhancing entrepreneurial entry, but dampening growth and survival of indigenous incumbents in the longer run. Older greenfields, those that have a long presence in a given region and are primarily traditional pharmaceutical firms, have a similar effect to that of acquisitions. Moreover, the level of agglomeration moderates the influence of ‘outsiders’ on the indigenous industry, especially in the case of acquisitions. The results suggest that legal constraints on labor mobility barriers have an important influence on the observed patterns. The overall patterns suggest that the search and site selection of outsiders is an important mechanism driving local industry evolution, complementary to other traditional mechanisms.