When the rain comes, don’t stay at home! Regional innovation and trans-local investment in the aftermath of the Great Recession

Global connectivity and knowledge circulation are necessary for innovation to thrive. However, in response to external shocks, economies tend to reduce their external exposure in order to minimize risk and focus their resources on internal markets. Uncoordinated and often competitive responses to economic shocks are in sharp contrast with the need for innovative solutions for recovery. This paper explores this paradox by looking at regional innovation in the USA in the aftermath of the Great Recession. The paper compares Foreign Direct Investment (FDI) with similar domestic, inter-state investment in order to assess whether a ‘local innovation premium’ is associated with global connectivity vis-à-vis purely domestic linkages. The results show that what matters for post-crisis innovation is active internationalization in the form of outward FDI. Truly global outward connectivity matters the most: investing abroad offers the highest short-term returns vis-à-vis domestic inter-regional investments. FDI connectivity with highly innovative frontier systems offers the highest returns when innovation is needed to respond to the crisis. However, low-innovation regions can still profit (in the short-run) from connectivity with other relatively less technologically advanced regions, benefitting from stronger congruence in terms of technological capabilities. These results send a warning message on the potentially adverse consequences of current policies in most advanced economies that seek to manage foreign activities of domestic companies in attempts to foster domestic security and recovery.