Beyond Borders: The Influence of Social Networks and Labor Flows on Innovation Spillovers

This paper demonstrates that knowledge spillovers are not as geographically constrained as previously suggested. We show that social ties and labor flows significantly enhance knowledge diffusion, independently of geographic distance. Specifically, a one-decile-rank increase in social ties and job flow probability leads to a 20.14% and 14.33%increase in pairwise citations, respectively. These mechanisms are particularly critical in facilitating the diffusion of disruptive technologies, but their positive effects are entirely nullified by stricter enforcement of non-compete clauses (NCCs). To address causality and mitigate concerns about endogeneity, we leverage state-level variation in tax credits as an instrumental variable for peers’ innovation activities. We find that a one-standard-deviation increase in patent activities by distant social peers and labor flow-based peers increases a focal firm’s patenting by 8.4% and 15.4%, respectively. Our focal county welfare analyses identify key factors that enable regions to better harness distant knowledge spillovers and suggest that policies fostering cross-class interactions and broader social inclusion can help narrow the regional disparities and promote more equitable development.