Localized Technological Change in Italy
Chapter 6: The Emergence and Decline of Innovation Systems
The analysis developed so far makes clear that externalities are endogenous. It should be evident by now that externalities are external to each individual firm, but by no means are they external to the system of firms under analysis. Externalities are internal to the system and change as a consequence of the actions and interactions of the firms. As is well known, Alfred Marshall elaborated the notion of externalities to account for increasing returns at the firm level. The notion of externalities enabled Alfred Marshall to justify increasing returns as the product of conditions external to each firm, rather than internal. In his original analysis, however, the factors that accounted for increasing returns were external to each firm, but internal to the system into which firms were embedded. They do not fall from heaven and they are not given and static. Quite the opposite, they are the result of a recursive process of emergence that takes place when the conduct and the performances of the firms and their interactions affect the structural characters of the system and these, in turn, affect the context of action of each individual firm. Externalities and, specifically, knowledge externalities are a specific and yet dynamic and changing attribute of the system that is produced by the interaction of the individual agents that belong to the system. The levels of knowledge externalities are, in fact, influenced by the density of firms and by the structure of their relations. The effects can be both positive and negative...
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