Economic theory emphasises that technological advances are key for long-term economic growth. For decades, policy-makers have taken different direct and indirect actions to spur technological development. Innovation and the factors that accelerate formation of new ideas stand at the centre of this long lasting policy discussion.

In the meantime, there is a debate on the potential role of innovation and technological advances for understanding territorial cohesion in developing countries. The background is the inclusiveness and sustainability of economic policies for the developing countries that mostly struggle with substantial spatial instabilities.

We have to keep in mind that lack of territorial cohesion can stem from local differences in innovation performance. In other words, policy that targets local differences in innovation can be a key for the success of territorial policies to combat regional differences.

Among potential explanations for the links between innovation and regional development, there is a consensus that those regions that are more innovative will perform better compared with the others. In terms of developed economies, Landabaso (1997) points out that innovation is an important element for understanding regional gaps within the European Union.

Rodríguez‐Pose and Villereal (2015) revisit Mexico as an example of a developing country and confirm that innovation can also play a key role in decreasing regional gaps in developing countries. These findings signal the need for policy action to stimulate local innovation.

Among various factors, the role of public policy in the form of infrastructure investment, incentives to accumulate human capital and research and development (R&D) and local sectoral effects via specialisation are heavily discussed in economic research (see Crescenzi and Jaax, 2017, among many other).

A relatively less examined factor is the market-based externalities that can stem from urbanisation and firm-level agglomeration. The impact of agglomeration-based externalities on innovation can contain valuable information about how agglomeration spurs innovation.

As an example, the Turkish economy is characterised by sizable regional disparities. Despite rapid economic growth, local economic conditions have been getting more polarised during the 2000s (Karahasan, 2020).

In recent research, we examine the innovation performance of Turkish regions and ask two specific questions (Karahasan, 2022). First, do local externalities created by the agglomeration of new firms spur innovation? Once we are able to answer this question, our follow-up is: does this mechanism work in the same way everywhere?

One key lesson from the Turkish experience is that innovation, which is measured by patent applications, is geographically clustered around the western developed regions. This pattern almost perfectly matches with the agglomeration of new firms and contains important hints about the potential role of externalities created by newcomers.

To capture other potential factors that can spur innovation, we also consider regional differences in R&D expenditures, human capital, openness, sectoral composition of production, urbanisation and welfare differences. After controlling for these factors our findings confirm our first hypothesis. Those regions that realise higher agglomeration of new firms are witnessing higher innovation accumulation.

These preliminary results show that in addition to the usual suspects of technological development (such as human capital accumulation, infrastructure and R&D expenditures), agglomeration of new firms in a specific region can create market-based externalities that will spur the formation of new ideas and thus innovation.

Our second important finding is about the changing importance of market-based externalities for the innovation performance of the Turkish regions. To investigate this, we use the same set of variables and apply a spatial decomposition for the effects of new firms’ agglomeration on the local innovation differences.

Our findings show that market-based incentives and externalities mostly work in the already developed regions that have historically hosted more innovation. In other words, even though the formation of new firms spurs innovation, this effect works only in the already developed regions.

In contrast, for the less developed and more isolated Turkish regions, the impact of market-based externalities seems limited. In our view, this does not imply that agglomeration is not central for less developed regions. Rather, this signals the importance and need for policy action to complement market-based incentives in less developed regions.

Further reading

Crescenzi, Riccardo, and Alexander Jaax (2017) ‘Innovation in Russia: the territorial dimension’, Economic Geography 93(1): 66-88.

Karahasan, BC (2020) ‘Winners and losers of rapid growth in Turkey: Analysis of the spatial variability of convergence’, Papers in Regional Science 99(3): 603-44.

Karahasan, BC (2022) ‘Impact of new firm formation on innovation performance of Turkish regions: Evidence from micro and regional data’, research project funded by the Scientific and Research Council of Turkey (Grant no: 121K666).

Landabaso, M (1997) ‘The promotion of innovation in regional policy: proposals for a regional innovation strategy’, Entrepreneurship and Regional Development 9(1): 1-24.

Rodríguez‐Pose, A, and EM Villarreal Peralta (2015) ‘Innovation and Regional Growth in Mexico: 2000-2010’, Growth and Change 46(2): 172-95.