A good neighbor, a found treasure: Do local neighbors affect corporate innovation?

Abstract This study examines whether local neighbors operating in different industries affect corporate innovation engagement. Based on mimetic isomorphism theory, we find that innovative local neighbors can serve as a social reference group for corporations to build legitimacy and guide corporations' mimetic innovation behavior. Our results remain robust after controlling for endogeneity by employing various methods. More importantly, our mechanism analysis indicates that local government activism is crucial to promote mimetic innovation behavior in a region. Our study provides a valid mechanism to explain the emergence of highly innovative cities that agglomerate across industry boundaries. Our research makes two key contributions to the literature. First, our study contributes to the literature on corporate innovation clustering by adding new evidence of the mimetic effects in corporate innovation across industries. Different from the industrial peer effects in innovation, which address the industrial peer effects through the lenses of competitiveness and information dissemination, our results highlight that mimetic isomorphism explains the regional effects of mimicry on corporate innovation. We find strong evidence indicating that firms imitate the innovation behaviors of their local neighbors, and this tendency is most plausibly explained by the incentives associated with acquiring legitimacy. Second, our findings clarify the mimetic behaviors in corporate innovation by extending the theory of mimetic isomorphism. We link local government activism to mimetic isomorphism from the psychological and sociological perspectives. In particular, our results indicate that local governments can implement activism through the psychological and sociological mechanisms illustrated in this study. Those “soft” mechanisms initiated by government contribute to a better understanding of the regional effects of mimicry on corporate innovation.