In a survey of over 6,000 American manufacturing and service sector firms conducted in 2014, 49% responded that their most valuable product innovations originated from outside sources. Many reported customers and suppliers as the primary source of these external sources. 14% said startups were the origins of the innovations within their organizations. While many of these relationships are through formal market channels such as joint ventures and cooperative R&D, 37% reported innovation originating from informal communications channels. Another 20% stated service contracts or consulting as another source. The report estimated if these external sources were cut off from these companies, it would reduce the number of innovative firms by up to 43%.  

This suggests the importance of communication channels within a city is a critical component of most firm's innovation strategies. A single firm cannot store all knowledge.  As Bill Joy, co-founder of Sun Microsystems, famously said, "no matter who you are, most of the smart people work for someone else."  Cesar Hidalgo, a faculty member of MIT's Media Lab,  explains this as once the amount of knowledge exceeds a single person (personbyte) one must begin to form firms (firmbyte) comprised of multiple people working together to accomplish complex tasks. Once the cost of obtaining this knowledge and know-how is less expensive outside the firm, companies begin looking beyond the organization to assimilate new knowledge and capabilities. As we will examine in future posts, distance, quality of communication channels, the levels of trust, and advances in technology can significantly reduce these cost and encourage interfirm cooperation.