The Influence of Proximity on the Networks of SME’s
The Case of the Mediacentrale
University of Groningen
Faculty of Management and Organization
Msc in Business Administration Strategy and Innovation
Date: 30/08/2009
Version: Final
Load: 25 credits
Author Arn Knol
Rembrandt van Rijnstraat 6 9718 PN Groningen 06-24710910 arnknol@gmail.com Student number: 1338951
Abstract
Young entrepreneurial firms depend on network ties to gain legitimacy, access to resources and access to knowledge in order to survive, grow and innovate. Research shows that proximity has a major influence on these networks. However, focus of research is generally on large scale clusters, cities or regions. The aim of this paper is to test the current relevant theory on networks and locational theory in a situation where young entrepreneurial firms are located in the same office building. A case study research of a proximity network in the Northern Netherlands was conducted and the results show that there are fewer strong ties than expected, and that the proximity network does not seem to give firms significant advantages.
Table of contents
Introduction 4
1. Relevant Theory: The Theoretical Framework 7
1.1 Importance of innovation for SME’s 7
1.2 Ties 8
1.3 Proximity 9
1.4 Knowledge Spillovers 10
1.5 Acquisition of Resources and Opportunities 10
1.6 Gaining Legitimacy 11
1.7 Location decision factors for SMEs 11
1.8 Anchor tenant theory 12
1.9 Conceptual Model 13
2. Case Study Research: Methodology 14
2.1 Case description: The Mediacentrale 14
2.1.1 Early development 14
2.1.2 RTV Noord 14
2.1.3 Firms in the Mediacentrale 14
2.2 Research Question 15
2.3 Research Methodology 15
2.4 Data collection method 15
2.5 Uncovering the network ties 16
2.6 Location Factors 16
2.7 Analysis 17
3. Results and Conclusions 18
3.1 Location and Proximity 18
3.2 Image 20
3.3 Strong and weak ties 20
4. Discussion and Implications 23
4.1 Proximity 23
4.2 Location factors 24
4.3 Strengths and weaknesses 25
4.4 Theoretical and practical implications 25
References 27
Appendix 1: Location decision literature summary 31
Appendix 2: Results per firm 32
Introduction
For policy makers, scholars and businesses alike, innovation is the topic that has generated much discussion in the past decades. The Lisbon agenda1 specifies that by 2010 the EU economy should be the most “dynamic and competitive knowledge based economy” in the world. The Dutch ministry of economic affairs declared that innovation is the most important factor in realizing this goal2. Krugman (1991) states that since first world economies have lost their comparative advantages for competition, first world economies are now dependent upon absolute competitive advantages. These competitive advantages are often based on innovative capabilities.
Since innovation has become increasingly important, the stimulation of innovation has been a major topic for policy makers, both on the local level and the national level. The coming years, the Dutch government will invest billions of euros in order to promote and stimulate innovation (IP 2008), stating that the Netherlands has to be “the leading knowledge country and the country where talent thrives” (IP 2008). The city of Groningen has announced to invest over 500 million in order to develop and strengthen their position as the “knowledge and innovation capital of the Northern Netherlands” (Wallage et al 2009).
In the Netherlands a new type of cluster has developed in the past ten years which has not received much attention in economical or geographical literature. In various cities large buildings, usually old abandoned factories, have been redeveloped into office buildings intended for small entrepreneurial firms. A number of features of these buildings makes them unique and a very interesting subject for research. These buildings are specially designed in order to house small to medium size entrepreneurial firms. By being so closely located together these firms share a number of facilities, such as the same entrance, shared cafeteria facilities and shared meeting rooms, so that contact between these firms is implicitly stimulated. Although no clear empirical proof exists, developers and the involved government bodies claim that these buildings stimulate innovation and synergy. In the development of these buildings government subsidies are generally provided in the light of their innovation policies.
Smits (2002) states that knowledge-intensive products take an increasingly significant role in first world economies. Therefore, the ability to create new knowledge, or innovation, is very important. Multiple studies have shown that small entrepreneurial firms are more innovative than large firms (Hoogstra and Van Dijk 2004) (Gordon and McCann 2005). Interestingly, small firms invest very little or nothing at all on R&D (De Propris 2002), meaning that small firms do not need to invest in R&D in order to innovate. In 2006 over 100.000 new firms were founded in the Netherlands3, and all SME’s accounted for 43% of the turnover of Dutch companies. The importance of SME’s for national innovation is therefor very significant. (IP 2008)
is easy to quantify in these industries. However, as Maskell (1998) states, knowledge creation, and thus innovation, is also essential in low and medium-tech firms.
Proximity to clients, suppliers, universities, competitors and/or complimentary firms all influence the effectiveness of a firm’s network (Littunen 2000, Simmie 2002, Koch and Strotmann 2006) . Classical location theory states that a firm chooses its location based on cost factors and regional infrastructure (Christensen and Drejer 2005). However, in the changing economy other factors have gained importance in location choice. The main factor is the access to knowledge. As firms become more and more knowledge based the access to knowledge is very important. This seems especially true for young entrepreneurial firms as they are usually knowledge driven (Koch and Strottman 2006). Hoogstra and van Dijk (2004) note that in the study of growth determinants for SME’s, location factors are usually neglected.
Locations where many firms are located together, such as industrial clusters and regions, have been extensively researched (Littunen 2000, Oerlemans et al 2005, Muscio 2006). Researchers agree that some regions, cities or clusters are more innovative and successful than others, which implies that a firm’s location choice has an influence on its success and innovativeness. However, in these researches the clusters in question are usually very large and have developed naturally over time. Also, in business parks there are still barriers of space and time between firms. Even though they are located closely together, spontaneous contact is unlikely to occur.
Another very interesting characteristic of these buildings is that it counteracts much of the critique on the location/innovation debate. As these buildings are designed to house young entrepreneurial firms it is logical that the innovation through proximity is a much more clear result from the location itself rather than in clusters that have developed naturally over time.
Since innovation is an important topic for policy makers, and SME’s make an important contribution to innovation, innovation stimulating activities are important for policy makers. This article researches what the influence of proximity is on the network of SME’s. It does so by conducting a case study on the Mediacentrale, an office location where a number of SME’s are located in the same building.
The core research question of this article is: What is the influence of proximity on the network effects of SME’s?
Box 1: TCN and the Mediacentrale
This article is a result of a research internship at TCN Groningen. TCN is a Dutch real estate company developing commercial properties, ranging from health care parks to office buildings. TCN’s differentiates itself from the competition by “developing innovative concepts, and being creative in
design, management and financing”. TCN is interested in the location decision factors of the firms located in the Mediacentrale, as this was one of the major selling points of the Mediacentrale as a potential firm location. TCN was also interested in the general satisfaction of these firms.
1. Relevant Theory: The Theoretical Framework
In this section an overview of relevant literature is presented. The main focus of this article is on networks, the ties existing in these networks, the effects of these networks and the influence of proximity on these networks. The importance of networks and their impact on the survival and success for SMEs is introduced. The difference between weak and strong ties is determined. Locational theory is also taken into account, in order to research whether network factors are an influence in firm’s locational decisions and to research how networks are locationally constrained. Lastly, a conclusion of the presented literature is given, and the conceptual model is introduced.
Existing literature on locational theory and its influence on networks, usually focuses on the ICT or biotechnology industry. In such studies, innovation is usually defined as the number of patent applications, and is therefore easy to measure and quantify (Wissema et al 1991, Hauser et al 2007). Therefore research on ind ustries and firms where innovative output is hard to quantify, such as firms in the service industry, is underrepresented. (Koch and Strotmann 2006). Literature focusing on soft innovative output is characterized by having very different research objects. From the New York fashion industry (Uzzi 1997), to only a handful of firms (Levin and Cross 2004, Capaldo 2007) to the top 500 NYSE companies (Jarillo 1989). Also, focus of research on clusters and networks is generally on naturally evolved clusters and networks.
Since almost all research on proximity focusses on clusters, cities or regions, there is always a physical barrier between firms, which could have an influence on the creation of ties between these firms. Since literature seems to neglect the proximity effect (Oerlemans et al 2005, Hoogstra and Van Dijk 2004). This article, which focuses on a location where these physical barriers are minimal, contributes to the existing literature on clusters and networks.
1.1 Importance of networks for SMEs
As stated in the introduction, innovation is very important for all businesses. Organizations can outperform competitors by differentiating their products through innovation (Tidd et al 1997). Being able to innovate is especially important for SME’s. In order for entrepreneurial SME’s to compete with established businesses, they need to differentiate themselves. The ability of entrepreneurial SME’s to successfully innovate is a main determinant in the survival and success of SME’s (Simmie 2001). In general, the more knowledge intensive SME’s are, the greater their contribution is to innovation in general (Koch and Strotmann 2006). Successful innovation of an entrepreneurial SME depends on several factors, the most important being an entrepreneurs’ experience, knowledge spillovers and networks. (Jarillo 1989, Bygrave and Minniti 2000, Koch and Strotmann 2006).
Hauser et al 2007, Capaldo 2007). Innovation is therefor important for the survival of a firm, and in order for a firm to overcome its liability of newness it needs to innovate. In order to innovate, access to resources, knowledge and legitimacy is needed.
As stated by Venkataraman and Van de Ven (1998), the survival and growth of an entrepreneurial firm depends on its ability to maintain and extend its network of inter-firm relationships. Freel and Harrison (2006) state that innovation no longer happens in individual firms, but is the product of networks. Networks seem especially important for small firms, as these are thought to be behaviorally advantaged, but materially constrained (Rothwell 1987). By maintaining, exploring and exploiting networks, small firms can maintain their behavioral advantage, but be less materially constrained (Freel and Harrison 2006).
In network building the entrepreneur plays a critical part (Lechner and Dowling 2003). Especially at the start up, the entrepreneur’s network determines the size of the firm’s network. Therefore, in this article the network of a firm is defined as the entrepreneur’s network, as his/her network is most important to the firm.
1.2 Ties
In 1973, Granovetter’s influential paper: The Strength of Weak Ties, was published. In this paper, Granovetter introduces a distinction between weak and strong ties. Weak ties are defined as relationships that are characterized by sporadic interactions with low emotional commitment. Strong ties are defined as relationships characterized by frequent contacts and deep emotional involvement. Although originally intended as framework to explain social behavior, the weak/strong tie theory was quickly adapted in economic theory.
Network ties, divided in strong and weak ties are both very important for a firm’s emergence, growth and performance (Hite 2005). Usually, emerging entrepreneurial firms have poor resources both due to liabilities of newness and smallness (Baum and Oliver 1996, Barber et al 1999, Lechner and Dowling 2003). One of the key challenges for emerging entrepreneurial firms is also the lack of legitimacy (Williamson 2000, Lechner and Dowling 2003). Network ties have proven to enhance the ability of entrepreneurs in key processes such as spotting opportunities (Ardichvilli et al 2003), acquiring resources and gaining legitimacy (Aldrich and Fiol 1994). The number of ties of firms increases over time. Firms in later stages of development have more ties than firms in earlier stages of development (Lechner and Dowling 2003, Hite 2005).
The key distinction between strong and weak ties is trust. Strong ties are governed through informal mechanisms such as trust and relational contracting, where weak ties are governed through formal mechanisms such as contracts (Hite 2005). In order to quantify the distinction between strong and weak ties Capaldo (2007) introduces three variables used to express the strength of an interorganizational relationship The duration of the relationship, the frequency and the intensity of the collaboration. Uzzi (1997) states that strong ties (also called relational embedded ties) are characterized by trust and personal ties.
influenced by the type of firm, the industry and location. However, the amount of studies focusing on ties and network structure for entrepreneurial firms (e.g. Ruef 2002, Elfring and Hulsink 2007, Hite 2005 Bygrave and Minniti 2000), without giving an indication of the amount of ties existing in these networks, does indicate a gap in research. Uzzi (1997) is one of the few studies where a specific network is uncovered and an indication is given about the amount of strong and weak ties existing in a network.
In his study, Uzzi analyzed the network ties of 23 fashion firms in New York City. These firms were all over fifteen years old, ranged from 2 to 182 employees. Though his focus was on the types of ties and their uses, he gives an indication of the amount of ties. Contractors had an average of 4.33 weak ties and 1.5 strong ties. Manufacturers had an average of 12 weak ties and 2 strong ties. Although Uzzi does not use this data in his research, it gives an indication on the number of strong and weak ties firms have.
1.3 Proximity
Firms do not innovate in isolation (De Propris 2002). As stated previously, young entrepreneurial firms depend on their networks in order to innovate successfully. Oerlemans et al (2005) conclude that there is a general agreement on the importance of spatial proximity for innovation. They also conclude that: “Literature tends to
theoretically under specify what is called the proximity effect”. Hoogstra and van Dijk (2004) also conclude that proximity effects are usually neglected. The two major influences a firm’s location has on its innovative capabilities are knowledge spillovers and social interaction, which can lead to the acquisition of resources. In this article, proximity is defined as the amount of barriers of space and time.
Proximity is important for firms as it leads to increased social interaction (Christensen and Drejer 2005). Social interaction is an important influence on innovation in two ways. First, social interaction can lead to trust between firms. Trust is an important factor to facilitate knowledge transfer between firms. Second, social interaction is also important as it plays a key role in mobilizing resources necessary for the process of creating firms and discovering new opportunities (Stuart and Sorensen 2003). Hauser et al (2007) state that physical proximity is a prerequisite for continuous and meaningful social interaction.
Particularly in knowledge intensive industries, large parts of knowledge and information are tied to personal capabilities and, thus, mainly exist in the form of tacit knowledge that has not been codified (Ruef 2002). The exchange and development of this type of knowledge requires trust, a common understanding, frequent communication, and face –to-face contacts. These factors are favored by short physical distances between the involved actors (e.g. Howells 2002, Morgan 2004). As innovation is a crucial element in the early development of firms in the knowledge intensive industries, spatial proximity can be assumed to affect positively the post-entry growth of these firms (Koch and Strotmann 2006).
spontanious interaction and the subsequent formation of weak ties. It can be expected that office locations with minimal barriers of time and distance have optimal proximity effects. However, research on office locations where these barriers of time and distance are minimal is lacking.
1.4 Knowledge spillovers
Knowledge spillovers are the direct or indirect transfer of knowledge from one party to another. Knowledge spillovers have a positive influence on a firm’s ability to innovate (Gilbert et al 2008). Innovation can rely on local knowledge spillovers to help overcome production uncertainties (Simmie 2002). Freel and Harrison (2006) conclude that especially in service industries networks play an important role in innovation. The is view that successful innovation relies upon accessing external knowledge, rather than information (Rothwell 1991), which implies that innovation led growth demands the creation and development of effective relationships between manufacturers, users, universities and other parties (Shaw 1991).
Knowledge spillovers, especially when received from multiple sources, can help firms reduce the uncertainty that is associated with engaging in innovation activities (Gilbert et al 2008) Especially the transfer of tacit knowledge, which is by nature hard to transfer, is important. When knowledge is more tacit in nature, face to face interaction and communication are important and geographic proximity may promote commercial activity (Bygrave et al 2000). Proximity between firms plays an important role in learning processes. Knowledge creation is supported by the institutional embodiment of tacit knowledge useful for particular classes of activity (Maskell and Malmberg 1999).
Knowledge spillovers require trust, and trust is higher when firms are located closely together. (De Propris 2002, Patrucco 2003, Christensen and Drejer 2004, Gilbert et al 2008). Tacit knowledge is hard to be transferred, and for it to produce positive externalities, it must be that firms are located close geographically (De Propris 2002). So proximity is important for knowledge spillovers, as proximity creates higher trust between actors, and enables tacit knowledge to transfer more easily. Because tacit knowledge is generally only transferred through strong ties (Uzzi 1997, Bönte and Keilbach 2005), trust besides geographical proximity, is an important factor in knowledge spillovers. Strong ties are a requirement the spillover of tacit knowledge.
Since proximity positively influences knowledge spillovers, it can be expected that the amount of proximity can be a determinant for the amount of succesful knowledge spillovers. Meaning that in a situation where proximity between firms is greater, knowledge spillovers occur more frequently and succesfully than in situations where proximity between firms is smaller.
1.5 Acquisition of resources and opportunities
the entrepreneur, such as social or family relationships, are primarily used to gain opportunities and resources (Jarillo 1989, Hite 2005).
When a firm ages, the need for resources and opportunities not available in the original strong tie network increases. Therefore, the firm will depend more on weak ties, which can, opposed to strong ties, act as bridges between independent actors. The strength of weak ties lies in the fact that weak ties can foster and speed up innovation by connecting a firm to otherwise difficult to reach knowledge, information and resources (Rogers et al 2003). Ruef (2002) argues that for firms to be innovative, they need access to information on disparate ideas and routines from which elements can be combined. As a firm gets past the start-up phase, weak ties become increasingly important as they can connect a firm to resources that are unavailable through the already existing strong ties.
Because small firms are usually unable to engage in formal marketing planning (Brush 1992) they favor informal and personal environmental scanning. Weak ties are important to successfully spot opportunities in order to develop new products, reach new markets or gain new clients (Lechner and Dowling 2003). Customers, suppliers, competitors etc. (Dollinger 1985) are all sources for marketing information.
1.6 Gaining legitimacy
Legitimacy is important for firms as it leads to continuity and credibility (Oerlemans et al 2005). Firms seek new and visible partners that can give a firm a reputation it did not have at the start-up (Lechner and Dowling 2003). Because economic exchange with young firms is perceived as risky (Bhide 2000), a firm needs to gain reputation in order to overcome this liability of newness (Larson 1992, Gulati and Higgins 2003). When a young firm builds a reputation through a reputation network suppliers and clients should be more willing to engage in a relationship with the firm because the perceived risk will be lower. Reputational networks influence firm growth and increases succesful and faster innovation (Lee et al 2001) (Lechner et al 2006). Firms have to organize institutional support and legitimacy in order to innovate succesfully (Aldrich and Fiol 1994).
1.7 Location decision factors for SMEs
In order to determine the importance of networks for the survival and innovation for SMEs, location decision factors can give an indication whether SMEs find possible network externalities an important location decision factor. Multiple studies have been performed on the location decision factors for SMEs. These studies and their results are summarized in Appendix 1.
innovative firms. The most important location decision factors for firms in the Westergasfabriek were accessibility and the promise of clustering and collaboration, with cultural profile scoring third.
Since most location decision factors in these studies fall in the categories accessibility, proximity or image the summarized results are shown in Table 1. Accessibility is mentioned in six studies as one of the most important location decision factors. Proximity to customers, suppliers, technology or the central business district is mentioned five times. Image and prestige of the location is mentioned four times. Since proximity is second most important location decision factor in the studies shown in Table 1, it can be concluded that proximity to customers, clients, competitors and central business districts is an important location decision factor for SMEs.
Table 1: Location decision factors for SME’s
Author Sample Most
important location factor 2nd most important location factor 3rd Most important location factor Gailbraith et al (2008) 44 High-tech SME
firms
Proximity Other Other
Nijkamp and Van Ommeren (2004)
66 Dutch SME firms
Accessibility Image Accessibility
Mazzarol and Choo (2003) 150 SME firms Proximity Accessibility Proximity
Kupke and Pearce (2000) 87 SME industrial firms
Proximity Accessibility Proximity
Sing et al (2006) 342 medium-high tech firms
Image Accessibility Image
Hitters and Richards (2002) 32 creative SME’s Accessibility Proximity Image
In the six studies summarized in Table 1, it is interesting to see the differences in outcomes. Where in two studies (Mazzerol and Choo 2003, Kupke and Pearce 2000) proximity accounts for four of the six most important location decision factors, in other studies (Nijkamp and van Ommeren 2003) proximity is not one of the most important location decision factors. The major differences in the outcomes of studies on location factors for SME’s can be accounted by the research context. The age of SME’s, the industry they are active in, and regional differences are possible explanations for the differences in research outcomes.
1.8 Anchor tenant theory
Although anchor tenants are originally found in shopping malls, the term is now also used in different contexts, such as in regional hi-tech industrial clusters (Agrawal and Cockburn 2003) and creative clusters (Bayliss 2007). In this context, anchor tenants are not only important for the customer base they attract, but also for the services and goods needed from other firms, and for potential knowledge spillovers.
In the context of office locational theory, it can be expected that the anchor tenant attracts other firms to locate at the same location, as these firms expect to do business with the anchor tenant, or to do business with customers or suppliers of the anchor tenant. It can also be expected that firms want to locate close to an anchor tenant because of perceived positive externalities, such as legitimacy, resources or knowledge spillovers. It is likely that an anchor tenant will take a central place in the proximity network. Highly central objects in a network are highly involved in the transfer of information (Dolfsma and Aalbers 2008).
1.9 Conceptual model
Networks, consisting of a mix of weak and strong ties, have a positive influence on the survival, growth and innovativeness of SME’s. The most important effects of networks are knowledge spillovers, legitimacy and the acquisition of resources and opportunities. However, these networks are constrained by barriers of space and time. These barriers, defined as proximity, influence the network of an SME, and therefor the network’s effects. The effect of proximity on the network effects of SME’s is graphically displayed in a conceptual model, as can be seen in Figure 1.
Figure 1: Research model: The influence of proximity on the network effects of SMEs
2. Case Study Research: Methodology
2.1 Case description: The Mediacentrale 2.1.1 Early developmentThe Mediacentrale was originally a power plant, generating electricity from coal, built in 1931. The power plant was shut down in 1982 after which the plant was dismantled. The building was then designated as “cultural industrial heritage”. After developments in the surroundings of the Mediacentrale, the city of Groningen decided to redevelop the Mediacentrale. In 1999 they contacted SIG Real Estate and asked them to develop a plan for the Mediacentrale. Even though the city wanted the Mediacentrale to be redeveloped, they imposed a number of restrictions. The Mediacentrale could not be developed into functions such as housing, sports, stores and standard offices and it could not compete with other locations in the vicinity.
In 1999 – 2000 the ICT bubble hadn’t burst yet, and the city of Groningen wanted to present itself as first choice for ICT firms. SIG Real Estate was active in the fiber optic cable industry and had finished building a high end fiber optic cable around the city of Groningen. Therefore it was decided to develop the Mediacentrale as an office location for small sized ICT and new media firms.
While redeveloping the Mediacentrale, TCN (formerly known as SIG Real Estate), tried to keep the industrial features of the building as intact as possible, while trying to keep the building as open as possible. The result is a building with a very large cathedral-like hall, while the surrounding offices look out on this hallway. The Mediacentrale is now a building that combines old industrial elements with new technology elements. Both TCN and the city of Groningen claim that the design of the Mediacentrale’s redevelopment has been made with innovation and the stimulation of contacts between tenants in mind.
2.1.2 RTV Noord
RTV Noord is a publicly owned regional radio and television station for the north of the Netherlands. RTV Noord had it’s offices in the centre of Groningen. Since these offices were too small for RTV Noord, the city counsil of Groningen and SIG Real Estate discussed relocating RTV Noord to the Mediacentrale. In 2002 the parties agreed that RTV Noord would let 4000m2 of space for a price of €75 per m2. In return for the low rent price per m2 the city council of Groningen granted SIG Real Estate a subsidy of €3.6 million for the development of the Mediacentrale. This deal between the city council and TCN was an important condition for TCN in order to go through with the development of the Mediacentrale.
2.1.3 Firms in the Mediacentrale
2.2 Research question
The core research question of this article is:
What is the influence of proximity on the network effects of SME’s?
In order to answer the research question, first the location decision factors of the SME’s located in the Mediacentrale were researched. The location decision factors of the firms give an indication whether an expected influence of proximity on SME network effects is a reason for firms to locate at a certain location. Then, the perceived image of the Mediacentrale by the firms located in the Mediacentrale is researched, to determine if, and to what extent, firms depend on the image of the Mediacentrale and its proximity network in order to gain legitimacy. Then, the amount of ties in the proximity network of the Mediacentrale is researched, and the the influence of firm age and total location time on the amount of ties is tested. Finally, the place of the anchor tenant in the proximity network is researched.
2.3 Research methodology
The research design one chooses depends on the research question, the matter of control over the behavioural events and the focus on contemporary as opposed to historical phenomena (Yin, 2003). In the case of the Mediacentrale, the population of firms is only 35, which is too small to use acquired data for statistical measurements.
For this research a case study approach has been selected. The main research question of this paper has a focus on answering a “how” or “why” question. Eisenhardt (1989) states that a case study is a research strategy which focuses on understanding the dynamics present within single settings.
2.4 Data collection method
Case studies typically combine data collection methods such as archives, interviews, questionnaires, and observations. The evidence may be qualitative (e.g., words), quantitative (e.g., numbers) or both (Eisenhardt 1989). The collection method applied in this article is classified as qualitative as it has been conducted through means of semi-structured interviews as this type of interview have been qualified as the best suitable for explanatory and exploratory studies by Saunders et al. (2000). The qualitative data are useful for
understanding the rationale or theory underlying relationship revealed in the quantitative data or may suggest directly theory which can then be strengthened by quantitative support (Jick 1979).
Table 2: Respondents
Respondents N
Founder and Owner 19
Owner 6
Other 4
2.5 Uncovering the network ties
In order to uncover the ties existing between firms in the Mediacentrale, a list was made of all firms located in the Mediacentrale. At the start of the interview, the respondent filled out this list (see appendix 2) answering the following questions:
“I have never had contact with an employee of this firm”
With this question the first selection is made. It is assumed that when there has been no contact between the respondent and a particular firm, there are no ties between the two firms.
“I have spoken to an employee of this firm in the last 6 months”
When the answer to this question is positive, but the following two questions are answered negative, then it is assumed that the relationship between the respondent and the employee of the specific firm is a weak tie
“I know at least one employee of this firm by his/her first name”
When this question is answered positively there is it possible that the relationship between the respondent and the employee/employees of the specific firm is a strong tie. For all firms that the respondent knows employees by their first names, additional questions are asked to investigate whether the relationship can be defined as a strong or as a weak tie.
“Our company has done business with this firm”.
When this question is answered positively it is another indication of that the relationship between the two firms could be classified as a strong tie.
After filling out this list, the respondents were asked about the exact nature of the relationships they had with other firms. Based on Capaldo’s (2006) variables, namely the duration of the relationship, the frequency and intensity of the collaboration it was determined which relationships could be classified as a strong tie. Of these relationships, the respondent was asked whether he thought the relationship was based on trust, making it a strong tie.
2.6 Location factors
In order to determine the locationon decision factors of firms in the Mediacentrale, the following questions were asked:
In order to find the main location decision factors the respondents were asked what the main location decision factors were before establishing the firm in the Mediacentrale. This question was semi-structured, and answers given by the respondents were grouped in one of the categories stated in Table 3. This question gives an indication whether the potential benefits of a proximity network is a location decision factor for SME’s.
What do you think the image of the Mediacentrale in Northern Netherlands is, and in how important is that to your firm?
In order to know whether the Mediacentrale has a positive influence on the reputation of a firm located in the Mediacentrale, this question was asked. The assumption is that when the respondent feels that the firm benefits from the image of the Mediacentrale, the Mediacentrale has a positive influence on the legitimacy or reputation of the firm.
What were your expectations before establishing your firm in the Mediacentrale, and have these expectations been met?
Although the first part of this question is already partially covered in location factors question, it is important to research whether or not expectations have been met to see if firms have actually benefited from a possible proximity network in terms of legitimacy.
2.7 Analysis
The data gathered on the amount of weak and strong ties is analyzed using SPSS. By determining whether the amount of ties of a firm has a significant correlation with the age of the firms, a conclusion can be drawn whether the age of a firm has a significant influence on its amount of ties. By determining whether the amount of ties of a firm has a significant correlation with the total location time of the firmst, a conclusion can be drawn whether the total location time has a significant influence on the amount of ties.
Due to the small population size, correlation tests such as the Chi-2 test can not be applied. Therefore, an independent T test is performed, which measures whether the means of two groups are significantly different from each other.
3. Results and Conclusions
3.1 Location and proximity
The respondents were asked their reasons for choosing the Mediacentrale as their office location. The answers were grouped and the results are stated in Table 3. The outcomes of location expectations of firms in the MC has also been researched. The results are stated in Table 4.
Table 3: Location decision factors
Location decision factor Times mentioned
Proximity to other SMEs 17
Atmosphere of the Mediacentrale 11
Physical location of the Mediacentrale 8
ICT facilities 3
Image of the Mediacentrale 3
Anchor Tenant 2
The main location decision factors of firms in the Mediacentrale are the proximity to other SMEs and the atmosphere of the Mediacentrale. The location of the Mediacentrale, which includes the access to public transportation is only ranked 3rd. The image of the Mediacentrale and the presence of ICT facilities have only been mentioned three times and the presence of the anchor tenant ranks last.
While proximity to other SMEs ranks first, no respondant states that proximity to one particular SME was their location decision factor. As the owner and founder of a recruitment agency states: “After visiting the
Mediacentrale while it was still being developed, we really liked the atmosphere of the Mediacentrale. The
prospect of working in such a building with other creative firms really appealed to us”. This is confirmed by the owner of a firm developing digital phone solutions , who stated that: “Being located near other firms seemed
critical for us. Both for the potential revenue, and for what we could learn from those with experience”
Based on the results in Table 1 and the responses given by the respondents it can be concluded that proximity to other firms was the most important location decision factor for firms in the Mediacentrale. This means that the prospect of being located in the same building with other SMEs, with the expected proximity effects, is an important location decision factors for the SMEs in the Mediacentrale.
Table 4: Location expectations Location decision factor Expectations before
locating in Mediacentrale
Positive outcome of the expectations
Proximity to other SMEs 17 5
Atmosphere of the Mediacentrale
The expectations firms had concerning proximity has only been met in five cases. This clearly indicates that the majority of the firms had certain expectations of potential proximity effects (see also Table 3) and that these expectations have not been met in the majority of cases.
Physical proximity is a necessity for continuous and meaningful social interaction (Hauser et al 2007), and social interaction is important for firms as it leads to trust (which in turn is a prerequisite for knowledge spillovers) and it plays a key role in mobilizing resources and discovering new opportunities (Stuart and Sorensen 2003). Since in the Mediacentrale barriers of space and time are minimal, it was expected that proximity effects, and
subsequent social interaction, would be higher compared to business locations with greater barriers of space and time. However, as can be seen in Table 4, only five firms in the Mediacentrale state that the expectations they had of proximity effects before locating in the Mediacentrale has been met
The owner and founder of a large advertising agency stated: “We really liked the architectural features and the
visiblity of the Mediacentrale. Being located in what was then promoted as an creative incubator with other creative firms really appealed to us. However, two years down the road we have to conclude that the amount of contact with other firms is disappointing. These contacts do not happen spontaniously, and with noone taking intiatives to stimulate contact, the promise of synergy in the Mediacentrale has not been met”.
The director of a hardware supplier and devloper adds: “Everyone just stays in their office, and even though most
doors are open people just won’t walk in unannounced. We really hoped and expected to do more business with firms in the Mediacentrale”. This is supported by another respondent, who stated: “Our door is always open and
anyone can walk in when they want, but no-one ever does. On the other hand I also never visit other firms I’m not doing business with.”
3.2 Image
The respondents were asked what they perceived the image of the Mediacentrale to be, and what importance this image has on their firm. The answers are grouped in Table 5.
Table 5: Image of the Mediacentrale
Image of the Mediacentrale Times Mentioned Important to firm?
Positive image in ICT industry in Northern NL 8 3
Positive image in Northern NL 5 2
No particular image in Northern NL 12 x
Other 4 x
Of the interviewed firms, sixty percent find that the MC does not have a particular image in the Northern Netherlands. Of the fourty percent that find that the MC does have a positive image in either the Northern Netherlands in general or just the ICT industry in particular only five stated that they find this image of importance to their firm. When looking at Table 3, the image of the Mediacentrale was only mentioned three times as a location decision factor, while proximity to other SMEs was mentioned seventeen times. So even though proximity to other firms was very important to SMEs locating in the MC, the image of the proximity network consisting of these SMEs was important for only three firms.
The Project Manager of a firm developing multimedia solutions states: “A different place is important for our
firm. We have to show others we are hip.” Concerning the importance of the image for his firm he states: “If you
are located in the Mediacentrale it is assumed that what you are doing is fun and innovative”. The owner and founder of the “incubator” for student enterprises, which has been located in the Mediacentrale since the redevelopment, states that “the image of the Mediacentrale has changed in the past years. From being hip it
changed to just another business location. This image is therefore not important to our firm”.
Firms need to gain reputation in order to overcome the liability of newness (Larson 1992, Gulati and Higgins 2003). By gaining legitimacy through a reputation network, the perceived risk of doing business with a young firm is lower (Lechner and Dowling 2003). From the results stated in Table 3 and Table 5, it can be concluded that of firms in the MC, only a few depend on the proximity network in order to gain legitimacy. The prospect of added legitimacy as a result from a location and its proximity network is also not important for firms in the Mediacentrale.
3.3 Strong and weak ties
Table 6: Strong and weak ties – Firm Age
Levene's Test for Equality t-test for Equality of Means
of Variances
location St. Std. Mean Std. Error
time N Mean Deviation Error Mean F. Sig. t df
Sig.
(2-tailed) Difference Difference
Weak ties 0-4 years 10 10,10 3,381 1,069 0,25 0,876 0,848 27,000 0,404 1,544 1,821
5-35 years 19 12,00 5,375 1,233 0,842 23,255 0,408 1,544 1,833
Strong ties 0-4 years 10 1,40 1,350 0,427 0,58 0,455 -0,038 27,000 0,970 -0,020 0,516
5-35 years 19 1,32 1,376 0,316 -0,039 26,008 0,969 -0,020 0,501
P<,05
Table 6 shows the amount of ties for firms aged 0 to 4 years and firms aged 5 years and older. The results show that there is no significant difference in the average amount of strong and weak ties between firms that are between 0 and 4 years old and firms that are between 5 and 35 years old. It can be concluded that for firms in the Mediacentrale, firm age is not a significant influence on the amount of strong and weak ties in the proximity network.
Theory (Lechner and Dowling 2006, Hite 2005) indicates that the amount of ties increases as a firm ages. Where in the start up stage the strong ties of the entrepreneur are especially important, during later stages weak ties become more important. However, in the case of the MC there is no significant relation between firm age and the amount of ties.
Table 7: Strong and weak ties – Time in Mediacentrale
Levene's Test for Equality t-test for Equality of Means
of Variances
location St. Std. Mean Std. Error
time N Mean Deviation Error Mean F. Sig. t df
Sig.
(2-tailed) Difference Difference Weak ties 0-19 months 10 10,10 3,381 1,069 1,89 0,180 -1,013 27,000 0,320 -1,900 1,877
20-34 months 19 12,00 5,375 1,233 -1,164 25,927 0,255 -1,900 1,632
Strong ties 0-19 months 10 1,40 1,350 0,427 0,06 0,804 0,158 27,000 0,876 0,084 0,534
20-34 months 19 1,32 1,376 0,316 0,159 18,740 0,876 0,084 0,531
p<.,05
Not just firm age, but the time a firm is located at a certain location could influence the amount of strong and weak ties. However, Table 7 shows that there is no significant difference in the average amount of strong and weak ties between firms that are located in the Mediacentrale for nineteen months or less, and firms that are located in the Mediacentrale for twenty months or more. It can be concluded that the location time of a firm in the Mediacentrale does not have a significant influence on the amount of strong and weak ties in the proximity network.
more proximity effects and that these expectations have not been met. Since network ties are a necessity for these proximity effects, and these proximity effects are below expectations of the firms located in the Mediacentrale, it can be assumed that either the amount of strong and weak ties, or the results of these ties, are below expectations for the firms in the Mediacentrale.
Figure 2: Strong tie network
In Figure 2 all the strong ties existing between firms in the Mediacentrale are displayed. When looking at Figure 2, two firms stand out as being located central in the network and having most strong ties: Kalooga and Dizain. TV Noord, the anchor tenant, is also taken into account as well as YEAH, which has the most weak ties of all firms in the Mediacentrale (see also appendix 2).
Table 8: Network centrality
Firm Degree Closeness Weak Ties
YEAH 4 47 24
Dizain 4 35 13
Kalooga 5 34 13
TV Noord 2 54 8
which has the most weak ties of all firms in the Mediacentrale, also does not take a central place in the network. This is an indication that the amount of weak ties of a firm does not determine or predict a firm’s centrality in a strong tie network.
4. Discussion and Implications
4.1 Proximity
The general agreement in literature is that proximity has a positive influence on the formation of network and the network’s effects. From the case study conducted in the Medicentrale no clear evidence has been found that the proximity network existing in the Mediacentrale leads to added legitimacy, knowledge spillovers and or the acquisition of resources and opportunities.
Strong ties are a prerequisite for succesful knowledge spillovers. However, little is known about the amounts of ties existing in networks. Firm age, size, industry, age and location are all factors which influence a firm’s network and therefor its amount of ties. However, since theory is very clear that knowledge spillovers require strong ties, the amount of strong ties, and the influence of proximity on the formation and amount of strong ties is important. In the case of the Mediacentrale, firms have an average of 1.35 strong ties. The exact nature of these strong ties has not been researched, so the amount of strong ties used for knowledge spillovers will likely be lower than 1.35 ties per firm. It is probable that firms in the Mediacentrale might have strong ties outside the proximity networks, and that those ties are also responsible for knowledge spillovers. However, Uzzi (1997) found in his research that firms in the New York fashion industry have an average of only one to two weak ties. Even though this study and the one performed by Uzzi research different networks with different characteristics, the results from Uzzi confirm that firms might only have few strong ties. Since strong ties are a prerequisite for knowledge spillovers, the amount and number of sources of knowledge spillovers might be fewer than literature (Lechner and Dowling 2006, Capaldo 2007) suggests.
When a firm enters later stages of development after the start-up, it’s success is partially defined by the succesful addition of network ties (Hite 2005), and especially weak ties (Uzzi 1997, Hauser et al 2007). In the case of the Mediacentrale, there is no correlation between the age of a firm and its amount of weak or strong ties. While theory states that proximity leads to improved social interaction (Christensen and Drejer 2005) and trust (Howells 2002), the data from the Mediacentrale suggests that neither a firms age nor its location time in the Mediacentrale has a significant influence on the amount of ties.
However, it is interesting that proximity to other SMEs was the most important location decision factor for firms in the MC, the results of this proximity is disappointing, both to the firms themselves and in the amount of strong ties and subsequent knowledge spillovers. Following the fact that expectations have not been met concerning proximity effects, and firms stating that there is less contact between firms than they wished, it can be concluded that by just removing barriers of space and time, contact between firms and the subsequent tie formation is not stimulated in a significant way. In other words, just putting SMEs in the same building does not mean that these firms will spontaniously interact. This view is also concluded by Hitters and Richards (2002) in the case of the Westergasfabriek, stating that there are several difficulties in managing cultural clusters.
This has important implications for policy makers and real estate developers. Just creating a building which reduces barriers of space and time between SMEs does not mean that the proximity network will lead to more and better externalities. Additional initiatives, designed to stimulate contact between firms at a certain location might also be necessary when looking to stimulate innovation through proximity.
Young firms seek to gain a reputation by connecting themselves to other firms with an established reputation (Lee et al 2001) in order to overcome liabilities of newness (Larson 1992, Gulati and Higgins 2003). It was expected that a location such as the Mediacentrale, where a large number of SMEs, established and not, and an anchor tenant are housed, that the location itself might have a reputation which would help firms located at the Mediacentrale to gain legitimacy. However, only three firms have stated that the image of the Mediacentrale is important to their firm, while half of the interviewed firms stated that the Mediacentrale did not have a specific reputation in the Northern Netherlands. There is no clear evidence that the reputation of the Mediacentrale is used by firms in order to gain legitimacy.
4.2 Location factors
The main location decision factors for firms in the Mediacentrale were proximity, atmosphere and the location. In the case of the Westergasfabriek (Hitters and Richards 2002), which is a comparable project to the Mediacentrale, the same three location decision factors were most important for firms in the Westergasfabriek. Even though the location was more important in the case of the Westergasfabriek, this can be explained by the differences in regions, with Amsterdam being more densely populated than Groningen. Since the results from these two cases are so comparable, it can be concluded that for SMEs in the creative, ICT or New Media industry in the Netherlands, besides atmosphere and location, proximity to other SMEs is an important location decision factor. This clearly indicates that SMEs active in these industries have certain expectations when deciding to locate at a location with other SMEs, indicating that possible proximity effects are deemed important by SMEs.
when deciding where to locate, as opposed to more mature and larger firms who may already have a sufficient network and do not look for possible positive externalities of a proximity network.
4.3 Strengths and weaknesses
Before discussing potential theoretical and practical implications of this research, the strengths and weaknesses of this study need some attention. First, this is only one case study. When more cases comparable to the Mediacentrale would be studied, the results could be tested and compared. Secondly, only one person of each firm, namely the founder or director, was interviewed. Ties that existed between other employees of the firm with other firms are therefore not taken into account. Due to time constraints regarding the interviews it was not possible to investigate the nature of each tie in detail.
Limitations regarding the literature study are that existing relevant literature on the subjects of proximity, innovation and networks have such different objects of research, that it is a matter of debate whether or not the conclusions and findings of these researchers are transferrable to different contexts. Also, a large number of important articles are theoretical in nature, and have not, or have not enough, been tested in real world situations.
A strength of this study is that this is the first study that focuses on entrepreneurial SME’s, located together in a building designed for stimulating the creation of network ties. The conclusions drawn from this research are interesting for the scientific community, but also for policy makers, who want to stimulate innovation, and real estate developers, who want to use the concept of an innovative location for marketing purposes. Also this is the first study that gives an indication of the amount of strong and weak ties that exist in a network, and can therefore be used as a reference for others researching proximity networks.
4.4 Theoretical and practical implications
Interestingly, the real estate developer TCN used the promises of synergy and positive networking effects as a tool to attract firms to rent office space in the Mediacentrale. For the firms located in the Mediacentrale, these promises of synergy and positive networking effects were the most important location decision factors. Even though these promises have not (yet) been fulfilled, it indicates that entrepreneurial SME’s find the prospect of synergy and network effects very important. For real estate developers, this means that in order to sell office space, promoting potential synergy and network effects of a certain location could prove to be a very effective marketing tool. For public bodies, such as city or regional councils, it implicates that by facilitating and promoting projects like the Mediacentrale, innovative SME’s can be encouraged to locate themselves in a particular city or region. Additionally, this article has shown that by just locating entrepreneurial SMEs in the same building proximity effects are not automatically stimulated. Public bodies should not just invest many in developing projects, but also invest in stimulating the tie formation process between firms at locations such as the Mediacentrale.
creation minimal. The fact that there is no significant influence of proximity on the presented network effects indicates that increasing proximity between firms might not be a succesful tool to increase the chances of growth, survival and succesful innovation for SMEs.
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Appendix 1: Location Decision Literature Summary
Author Sample Most important
location factor 2nd most important location factor 3rd Most important location factor Gailbraith et al (2008) 44 High-tech SME firms
Proximity to other high technology
Availability of technical labor
Employee labor productivity
Nijkamp and van Ommeren (2004
Dutch SME firms Accessibility by car Representative building
Parking space
Mazzarol and Choo (2003)
150 SME firms Close to
customers/suppliers
Access to highways
Close to central business district
Kupke and Pearce (2000) 87 SME industrial firms Close to central business district Direct access to roads Close to major industries Sing et al (2006) 342 medium-high tech firms
Image and prestige of office location
Accessibility by public
transportation Hitters and Richards
(2002)
Accessibility Clustering and collaboration
