Innovation: Does Location Matter?

Connected Globe - CopyUndeniably, innovation has become the defining challenge for international competitiveness in an increasingly globalised world. However, traditional attitudes about the administration of innovation focus almost entirely on internal dynamics – the proficiencies and procedures within companies for generating and commercializing technology. While the significance of these elements is irrefutable, the external environment for innovation is also important too.  Thus, producing standard products using standard methods will not sustain competitive advantage in advanced nations. Rather, companies must be able to innovative at the global frontier.

Take Israeli firms for example, the prominent innovative output of these businesses is due not only to more effective technology management, but also to Israel’s favorable environment for innovation. In specific, Israel boasts strong university-industry linkages, tax incentives for R&D and a large pool of highly trained professionals. However, it is important to note that the most productive location for innovation also fluctuates markedly across industries. For example, the United States has been an especially attractive environment for innovation in pharmaceuticals since the 1990s, while Sweden has advanced in wireless technology innovation.

Ultimately, building a foundation for competitive advantage entails a candid consideration of the role location plays in both innovation and competitiveness. However, despite popular belief, the choice of locations should not be driven purely by labour costs. Instead, companies should select the most fertile locations in terms of the innovation ecosystem. By locating facilities in countries with favorable innovation infrastructures and powerful clusters in their sector, companies have better opportunities to develop new products or processes. In fact, it is now broadly affirmed that strong clusters foster innovation through dense knowledge flows and spillovers, as well as positively influencing the regional economic performance.

Moreover, attractiveness for investment in innovation is high on the policy agenda in many countries as innovation has become a key factor of growth and competitiveness in OECD countries. Consequently, there is a growing interest among OECD member countries to formulate policies aimed at fostering territorial attractiveness for innovative activities, such as R&D.

For instance, the United States government offers a lucrative R&D Tax Credit that is accessible to a broad range and size of companies.  Actually, compared to other R&D tax credits offered around the globe, the United States’ model remains one of the most competitive.  The R&D tax credit fuels innovation which translates into new product development, job creation and increased productivity—three key factors necessary for growth in a global environment. As described above, the attractiveness of a country for innovation is somewhat determined by the advantageous character of its location factors, which typically differ between industries, functional activities and internationalisation motives. Hence, firms should proactively assess and harness the strengths of their local environment in order to enhance innovation capacity and commercialising new ideas.

Contact Swanson Reed for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

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