From the work of Porter 1985, we know that the basic rationale for innovation is to improve the long-run competitive position of a firm: Economics Assignment, UOL, Ireland

From the work of Porter 1985, we know that the basic rationale for innovation is to improve the long-run competitive position of a firm. In a competitive
the environment of uncertainty, innovation is undertaken in order to improve the relative quality of the products or services offered by a firm in comparison with its competitor firms.

In other words, innovation is undertaken in order to maximize the expected long-run profits per unit of capital invested by the firm. Although the process by which innovation takes place is very complex, recent research stresses the essential role played by face-to-face knowledge exchanges between agents in this process. The result of this is that in the last two decades the role played by face-to-face interaction in determining the nature and geographical patterns of economic growth and development has become a major focus of research across a range of different academic fields.

This research interest has arisen within economics primarily because of the
work of Krugman, within the business and management literature primarily because of the work of Porter, and within geography primarily because of the work of Scott. Following the original observations of Marshall, Krugman has reawakened interest in the ways in which localized knowledge spillovers can contribute to the growth of localized economies of agglomeration;

Porter focuses on the ways in which the mutual transparency and knowledge exchanges afforded by spatial proximity can foster an area’s competitiveness by encouraging localized innovation processes, and Scott discusses how the flexibility of inter-firm relations may be related to firm size and to the nature of their knowledge exchanges.

Within each of the three Krugman, Porter, and Scott theoretical approaches, knowledge flows are assumed to take place primarily between local individual firms, agents, and organizations. As such, common to all three approaches is the implicit assumption that knowledge flows take place more easily over shorter distances than over longer distances. Yet, following Porter and Scott, these various agglomeration and clustering literature are now also used to underpin research into the economic geography of innovation.

In order for this to be justified, however, the geography innovation literature also makes an additional second implicit assumption, namely that localized knowledge flows foster localized processes of innovation, which themselves are a source of further local economic growth. In essence, therefore, all of this literature is predicated on the basic assumption that the face-to-face interaction between agents plays a key role in determining the nature and spatial patterns of both knowledge flows and the geography of innovation.