Innovation in High‐cost Developed Economies: People and Relationships

Abstract Knowledge collaboration and investment in people are two important mechanisms for transforming knowledge into innovation. Yet, little research has examined the differences in knowledge collaboration strategies and investment in people between innovative startups and incumbent firms in high‐cost developed economies. Drawing on the knowledge spillover of innovation theory and the geography of innovation literature, this study investigates (1) how the geographical locus of knowledge collaboration shapes innovation outcomes and (2) under conditions of investment in Research and Development and human capital, to what extent regional, national and international knowledge collaboration affect the propensity for product innovation in startups vis‐à‐vis incumbent firms. Using two data samples of innovative startups and incumbents in the UK from 2004 to 2020, we find that regional knowledge collaboration disproportionately benefits startups, while incumbents gain more from national partnerships, challenging existing assumptions about the geographical locus of knowledge spillovers in these two groups. We identify an ‘innovation paradox’ in which combining R&D investments with external collaborations reduces innovation propensity; however, combining investment in human capital with external collaborations serves as a key conduit for innovation in national and more diverse international contexts, with startups benefiting more. Implications for managers, regional development agencies and entrepreneurs are discussed.