Revisiting the Relationship between Institutions and Innovation : Trade Secrecy, Geographic Isolation, and Knowledge Recombination

The efficient exchange of information among inventors is a central driver of knowledge recombination and, ultimately, of innovation performance. Consistent with this notion, the literature has suggested that trade secrecy protection, by creating a barrier to such exchange, has a negative impact on innovation. However, this literature has not examined the role of transportation in this context. This paper seeks to address this gap by examining the joint role of trade secrecy and geographic isolation on the innovation performance of regions. We build a dataset of US CBSAs in the period 1971–2010, combining data on trade secrecy, travel time, and patenting activity. The analysis shows that trade secrecy and geographic isolation jointly have a substantial negative impact on innovation performance. This pattern is robust to a variety of robustness checks, addressing endogeneity and measurement concerns. Additional analysis suggests that this effect is at least partly explained by a lower degree of knowledge recombination as well as by a smaller number of firms engaging in innovation. This work has implications for managers making location choices and policy-makers shaping innovation policies