Do Capabilities Reside in Firms or in Regions? Analysis of Related Diversification in Chinese Knowledge Production

abstract Do capabilities reside in firms, in regions, or in both? Within economic geography, most contemporary research on diversification examines how local structures condition regional development possibilities. The underlying logic is that capabilities are generated within regions and sometimes shared between them. We challenge that logic, exploring whether capabilities are more likely to emerge within the firm and to flow across spatial boundaries than they are to be built within the region flowing across firm boundaries. Analysis focuses on technological diversification within the establishments of multilocational firms operating across Chinese cities. Overall, the results demonstrate that the knowledge structure of firms is more important than the knowledge structure of cities in shaping diversification within establishments. We show that rates of technological diversification vary according to plant status (headquarters or not), location (core or peripheral city), and on whether plants are introducing more or less complex knowledge. The influence of plant, firm, and regional characteristics on diversification vary markedly across the analytical samples examined.