Industrial and Corporate Change, Volume 16, Number 1, pp. 89–130 doi:10.1093/icc/dtl034 Advance Access published May 18, 2007 Desperately seeking spillovers? Increasing returns, industrial organization and the location of new entrants in geographic and technological space* Barak S. Aharonson, Joel A. C. Baum and Maryann P. Feldman Using detailed data on Canadian biotechnology firms during the 1990s, we explore the geographic scope of knowledge spillovers and the balance spillover- seeking and expropriation-avoidance in entrants’ locations. Our findings indicate that knowledge spillovers are highly localized, with entrants attracted to incumbents’ R&D employees and spending within 500 m, but not further. We also find that two local contextual factors enhance the tendency toward spillover seeking. One is increasing returns to positive information externalities that accompany concentrations of technologically similar firms. The other is the entrepreneurial and open industrial organization that arises when incumbents with direct ties to universities concentrate geographically. Our findings provide empirical evidence of forces promoting geographically concentrated and technologically specialized industrial micro-clusters, as well as factors reinforcing the significance of co-location for the creation of new knowledge. 1. Introduction Although the benefits associated with industrial clustering, building on Marshall (1920), are well known, non-pecuniary externalities known as knowledge spillovers remain controversial, in part, because of the broad range of localized knowledge *This research was supported in part by the Merck Frosst Canada & Co. Research Award on Canadian Competitiveness. We are grateful to Lee Fleming for helpful conversations, and for feedback from participants at the Danish Research Unit for Industrial Dynamics (DRUID) conference, the Center for Economic Policy Research (CEPR) conference on Integration and Technological Change, seminar participants at the Harvard Business School and Kellogg Graduate School of Management at Northwestern University, and an anonymous ICC reviewer for their helpful comments on earlier versions of this article. Whitney Berta, Jack Crane, Igor Kotlyar, Danny Tzabbar and Haley Waxberg all provided expert help with data collection and coding. ß The Author 2007. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.