Geographic isolation, trade secrecy, and innovation

This paper studies the impact of geographic isolation on innovation. Geographically isolated regions have lower access to distant knowledge and, thus, may be less effective in producing innovation. In addition, this effect may be moderated by frictions in the labor market, such as trade secrecy protection, that hinder access to local knowledge. To explore this argument, we build a comprehensive dataset of US CBSAs for the period 1971–2014, combining data on travel time, trade secrecy protection, and patenting activity. We find that geographic isolation has a substantial negative impact on innovation quantity and quality. This relationship is at least partially explained by lower access to existing knowledge, as geographic isolation hinders collaboration and, to some extent, mobility. The negative effect is especially pronounced in regions characterized by strong trade secrecy protection. Overall, the evidence suggests that the combination of geographic isolation and trade secrecy protection is detrimental to the innovation performance of regions.