Firm Value, Spatial knowledge Flow, and Innovation: Evidence from Patent Citations

We show that geographic location of research-intensive firms plays a vital role in the ability to generate new research and products, which consequently affects firm value. In empirical tests using pharmaceutical firms and their patents, we first show that firms more often cite patents of other firms that are geographically closer to them than those firms that are farther away. We then show that a patent’s quality is a function of the firm’s near proximity to other knowledge-intensive institutions and activities. Finally, we show that because patent quality is a function of a firm’s geographic location, location consequently affects firm value.