citation data to locate innovations across states. The study concludes that innovative activity tends to cluster more in industries where knowledge spillovers play a decisive role, thus confirming the hypothesis that the ability to receive knowledge externalities is influenced by the distance from the knowledge source, which in turn generates geographic concentration of production.

Branstetter (2001) provided new estimates of the relative impact of domestic and international knowledge spillovers on innovation and productivity at the firm level. His study uses micro data on publicly traded high-technology manufacturing firms in the United States and Japan during the period 1977-1989. The results provide strong evidence on intra-national knowledge spillovers. There is limited evidence that Japanese companies, for example, benefit positively from research undertaken by American firms, and there is no evidence that American companies benefit positively from research conducted by Japanese companies. In fact, when the last effect is statistically distinguishable from zero, it is negative. This seems to be an important result within the literature on spillovers. We will discuss more extensively the mechanisms for negative knowledge spillovers in our results section.

Similarly, Griffith et al. (2006) investigates how much firms in the United Kingdom benefit from U.S. R&D with panel data. The authors found that U.K. firms benefit significantly from U.S. R&D. In contrast, the opposite flow of knowledge seems not to generate such benefits for U.S. firms. The evidence supports the hypothesis of international spillovers with strong idiosyncratic components. They also find that industries in the UK whose productivity lags behind with respect to the U.S. benefit the most; however surprising this result might be, it highlights the importance of controlling for technological distance between firms.

Botazzi and Peri (2003) discuss plausible impacts of existing knowledge on the generation of new ideas. They argue that they can be positive, negative or zero due to two opposing effects. First, existing ideas can broaden the base of useful knowledge available to generate new innovations in the future. Alternatively, if the best ideas are the first to be discovered, then a larger stock of knowledge implies that it is going to be harder to find new ideas. While the first effect suggests a positive relationship between the knowledge stock and production of new knowledge, the second acts in the opposite direction, decreasing the production of knowledge as more knowledge is available. Finally, the separation of the stock of knowledge accumulated in the country as the rest of the world is done to allow the possibility that these effects can differ or even have opposing effects.

From a broader perspective we can argue that new knowledge can be a complement or a substitute for existing knowledge. While in some cases knowledge itself can be useful to create new inventions behaving as complements, the instruments in which knowledge is embedded can be exclusive, or might have market consequences that can undermine the generation of new knowledge. Patents, for example, are exclusive in the sense that once it has been granted nobody else can patent the same innovation (for the same stated commercial purpose). This is a well known effect studied 5