Abstract
The literature on the drivers of innovation is tainted with overgeneralization due to the paucity of firm-level data in developing countries (Zanello et al., 2016), while agglomeration has ambiguities (Beaudry & Schiffauerova, 2009) about the most effective externality, localization or urbanization. Besides, knowledge about the agglomeration mechanisms and firm-level processes underlying these differences is limited. Hence, the thesis explores microdata of 5,400 manufacturing firms and population of 638,000 firms to examine the role of the market, location, and capabilities. We postulate that sales by domestic firms to Multinational Companies as an indirect internationalization mode facilitate process innovation significantly but not product innovation. Export as a direct internationalization mode has a null effect. Also, urbanization externalities significantly drive innovation for collocated firms within 25 to 60 kilometers, but localization has adverse effects, although the firms are not equally affected (Knoben et al., 2016). We argued that openness, market, and absorptive capabilities will leverage the externalities by moderating their effectiveness on innovation. Astonishingly, the data does not support the hypotheses, with size, resource, and institutional constraints likely to culminate in mistrust and unattractiveness of firms as knowledge partners. Examining the barriers to the moderating prowess of capabilities can provide in-depth insight.
