Proximity and endogenous regional development

As outlined by Krugman (1991), a fundamental fact is the clustering of economic activities in space, providing evidence for the pervasive influence of some form of increasing returns. It thus stands to reason that the links between a firm and its suppliers are easier to establish if 'suppliers are located in the proximity' (Johansson, 2005, p. 138). It is common for many firms in a sector to geographically concentrate - or spatially cluster - together forming a cluster, within which several forms of direct and/or indirect interaction may take place generating 'positive externalities for firms belonging to a cluster' (Johansson et al., 2006a). Those networks formed between firms have spatial configurations with different distance sensitivities. As stated by (Karlsson et al., 2005, p. 8): 'in a world with increasing returns the character of the geographic transaction costs for various types of economic interaction has strong effects on the spatial extension of various types of inter-firm networks.' It is thus axiomatic that the development and the success of firms will be influenced by the conditions prevailing in their environment - what Maskell et al. (1998, p. 1) referred to as 'conditions in the immediate proximity'- or in the 'local or regional milieu'. Innovative and entrepreneurial activities tend to agglomerate at certain places leading to national, regional or local specializations, and there is a considerable literature on the role played by spatial proximity in promoting firm competitiveness