Regions Matter: How Localized Social Capital Affects Innovation and External Knowledge Acquisition

T introduce new products, firms often use knowledge from other organizations. Drawing on social capital theory and the relational view of the firm, we argue that geographically localized social capital affects a firm’s ability to innovate through various external channels. Combining data on social capital at the regional level, with a large-scale data set of the innovative activities of a representative sample of 2,413 Italian manufacturing firms from 21 regions, and controlling for a large set of firm and regional characteristics, we find that being located in a region characterized by a high level of social capital leads to a higher propensity to innovate. We find also that being located in an area characterized by a high degree of localized social capital is complementary to firms’ investments in internal research and development (R&D) and that such a location positively moderates the effectiveness of externally acquired R&D on the propensity to innovate.