Dynamic recombinant relatedness and its role for regional innovation

Previous research has argued that related variety enhances regional innovation as inter-industry knowledge spillovers occur more easily between cognitively similar industries. In this study, we engage with empirical operationalization of what is ‘related’ in related variety. We argue, based on theoretical grounds, that estimating regional knowledge production functions requires related variety measures that capture the recombination of knowledge explicitly. To test this proposition, we develop a set of related variety indicators that account for indirect linkages between industries and allow these linkages to vary over time. Empirically, we estimate the relationship between regional innovation output and regional industry mix in Swedish regions between 1991 and 2010. Our results suggest that related variety measures based on dynamic recombinant relatedness are superior in predicting regional innovation output.