Colocation and Knowledge Diffusion: Evidence from Million Dollar Plants

This paper uses the entry of large corporations into U.S. counties during the 1980s and 1990s to analyze the effect of plant opening on local innovation activity. We use a difference-indifferences identification strategy exploiting information on the revealed ranking of possible locations for large plants. Under the identifying assumption that locations not chosen (losers) are a counterfactual for the chosen location (winner), we have two main empirical findings. First, patents of these large corporations are 82% more likely to be cited in the winning counties relative to the losing counties after entry. The increase in citations is stronger for more recent patents whereas patent quality does not seem to play an important role. Second, patenting by incumbent inventors in the winning county increases after the entry announcement by 10% with respect to patenting by incumbents in losing counties. An additional effect on patent quality is present when these large entering corporations are have a history of intensive patenting activity. One can infer from these findings that geographical proximity increases knowledge diffusion and that local inventors benefit from the entry of top corporations into their county.