The Locational Dynamics of the U.S. Biotech Industry: Knowledge Externalities and the Anchor Hypothesis

Biotechnology, rather than defined as a distinct industry like automobiles or steel, is instead a scientific knowledge base -- a rapidly evolving technology -- that has economically valuable applications in such diverse industries as pharmaceuticals, medical diagnostics, agriculture, bio-environmental remediation and chemical processing. Biotechnology has captured the imagination of ambitious scientific investigators, investors seeking high rates of return, as well as economic development officials who hope to anchor the industry within their district and reap the economic and employment rewards. Biotech is still at an early stage and there are many competing hypotheses about its future development. This paper adapts the concept of the anchor tenant from real estate economics to explore the locational concentration and specialization of the emerging biotech industry. Established Anchor firms who use a new technology may create knowledge externalities that benefit smaller dedicated biotech firms and increase overall innovative output in the region. In the situation of a shopping mall, the market failure is addressed through rents. In the absence of such a transfer mechanism among firms, we may except that smaller firms would benefit from a location premium and this would result in a greater number of new start-ups and better performance.