THE ROLE OF PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS

Transcription

1 THE ROLE OF PROXIMITY AND KNOWLEDGE Blackwell Publishing Ltd INTERACTION BETWEEN HEAD OFFICES AND KIBS HEIDI WIIG ASLESEN* & STIG-ERIK JAKOBSEN** *NIFU STEP (Studies in Innovation, Research and Education), Wergelandsveien 7, N-0167 Oslo, Norway. **SNF (Institute for Research in Economics and Business Administration), Breiviksveien 40, N-5045 Bergen Norway. Received: February 2006; revised June 2006 ABSTRACT The extant literature suggests that a mutual dependency exists between head office location and the location of knowledge-intensive business services (KIBS) in major cities and capital regions. This is often referred to as a joint head-office corporate-service complex. However, few studies have looked into the functioning and outcomes of these complexes. How concentrated are KIBS and head offices in major cities? How important is geographical proximity in the knowledge interaction between head offices and KIBS? What are the actual outcomes of head office KIBS relationships, especially as far as innovation is concerned? These issues are discussed by using empirical evidence from Norway. The empirical results indicate that geographical proximity in itself is neither a sufficient nor a necessary condition for successful relations between KIBS and head offices in cities. However, agglomeration in city regions can provide positive externalities for both parties. Other types of proximity, such as social and cognitive proximity, also play a vital role in the outcome of KIBS-client relations. There is therefore a certain degree of heterogeneity, but not all projects lead to profound learning and innovation in the actors in this complex. Key words: head office, KIBS, Norway, survey and case studies, major cities, geographical proximity, innovation INTRODUCTION AND PRINCIPAL RESEARCH QUESTIONS The last decades have witnessed the development of a new and more specialised knowledge-intensive economy, characterised by outsourcing, specialisation and sharply increasing growth rates in knowledge-intensive business services (KIBS). In Europe, the general pattern is that KIBS are concentrated in major city regions. Several studies report a strong concentration in a country s capital or main business region (Howells 1988; Marshall 1988; Daniels 1991; O Farrell et al. 1992, 1993; Wood et al. 1993; Sassen 2000, 2001). KIBS offer specialist knowledge in a rapidly changing, increasingly uncertain and internationallyoriented economic environment (Wood 2002a). KIBS provide services to various types of business. One group of customers of particular interest are the head offices of large companies. Despite information technology facilitating dispersal, an urban concentration of control functions for large companies is still a vital feature of the modern economy (Ross 1987; Healey & Watts 1987; Lyons 1994; Sassen 2000; Jakobsen & Onsager 2005). Important functions for these head offices are formulating corporate strategy, developing the company s organisational structure, Tijdschrift voor Economische en Sociale Geografie 2007, Vol. 98, No. 2, pp Published by Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

2 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 189 and introducing organisational innovations. Sassen (2000) argues that a mutual dependency exists between head office and KIBS locations. The locations of KIBS are presumed to be intimately connected to the agglomeration of corporate head offices, and they are often thought of as forming a joint head-office corporate-service complex located in major cities or capital regions. Existing studies into the business service sector tend to emphasise either the business services firm and its performance (see Wood et al. 1993) or customers and their demand for services (see O Farrell et al. 1993). Past studies have also tended to concentrate on firms located in the United Kingdom (see Bryson & Daniels 1998) or the United States (see Sassen 2001). This study adds to this literature by analysing the characteristics of the interconnection and co-location of the supply side (KIBS) and the demand side (head offices of large companies) in a smaller economy (Norway). We also provide insights on the actual operation of a head-office corporate-service complex which is characterised by the co-location of KIBS and head offices. This area has so far been given little attention in the extant literature. The following research questions will be used to elaborate on these issues: How strong is the concentration of KIBS and head offices in major cities? How important is geographical proximity in the knowledge interaction between head offices and KIBS? What are the actual outcomes of head office KIBS relations, especially as far as innovation is concerned? The analysis is performed using empirical evidence from Norway, which has a small, open and advanced economy. Though Norway may not be at the forefront of the European economic scene, several characteristics of the larger economies are evident there. Identifying characteristics that may have been overlooked in the existing literature is also possible (Rusten et al. 2005). The requisite data have been collated from two different projects in which the authors were involved. The first project concerns the performance of the KIBS sector (Aslesen 2004), the second the operation of large companies head offices ( Jakobsen & Onsager 2005). The rest of the paper is structured as follows. In the following section the theoretical basis of the empirical analyses is presented. The third section contains a discussion of the set of data employed. The fourth section empirically outlines the patterns of location of head offices and KIBS, the importance of geographical proximity for KIBSclients relations, and the outcome of such relations. The final section provides the conclusions. KNOWLEDGE INTENSITY AND THE HEAD- OFFICE CORPORATE-SERVICE COMPLEX IN THE CITY Knowledge intensity and proximity in cities The increasing demand for services in all industries is a key aspect of the growing importance of cities (Sassen 2000). The last few decades have been characterised by a sharply increasing growth rate in producer services and heightened employment specialisation within these sectors. Cities are the preferred production sites for such services, whether at a global, national or regional level. The economy is also characterised by an urban concentration of control functions for large companies. Head offices are essentially engaged in information processing, and networking with other actors is important in the collection, interpretation and dissemination of information. Cities offer head offices and business services the advantages of geographical proximity and lower transport and transaction costs for knowledge, ideas and people. In general, it appears that the city then prospers and becomes a major centre for innovation. The density of actors and institutions within the city generates a dynamic milieu, and cities are seen as rich sources of tacit and codified knowledge, with tacit knowledge being understood as knowledge expressed in skills and experiences and codified knowledge as information that can be written down such as scientific and engineering knowledge (Polanyi 1967). It is important not to draw a crude bi-polar dichotomy between tacit and codified knowledge, since codified knowledge actually requires tacit knowledge for its interpretation (Howells 2002). The accumulation of codified knowledge is often based on some significant, prior, tacit knowledge gained through experience and practice (Maskell & Malmberg 1999). These various types of knowledge are distributed and attained through reciprocal ties and exchange within localised business networks. Urban density also permits labour

3 190 HEIDI WIIG ASLESEN & STIG-ERIK JAKOBSEN pooling, technological spillovers and further growth through cumulative causation. An industrial atmosphere may also exist in metropolitan areas, which encourages further knowledge spillovers. In addition, metropolitan areas provide richer market opportunities and the benefits of product specialisation (Krugman 1991; Cooke et al. 2002). Because of the growing complexity of information and knowledge, and the greater uncertainty of the economic environment, the city is seen as an important source of competitive advantage for organisations operating in a globalised economy (Storper 1997). This entails a more intense focus on proximity as a means of explaining the patterns of innovation and economic growth (Becattini 1990; Scott 1990; Amin & Wilkinson 1999; Porter 2000). Within economic geography, the concept of proximity has traditionally been linked to the physical distance between actors. All other things being equal, the greater the distance between actors, the less intensive the positive externalities (Krugman 1991; Knox & Agnew 1994). Empirical studies have also shown that firms with sources of knowledge nearby enjoy better innovative performance than firms located elsewhere (see, for instance, Jaffe et al. 1993). However, Amin & Thrift (2002) are critical of the strong emphasis on co-location and localised knowledge as the essential source of learning and innovation. The advantages of local production systems are the result of the combination of tacit and codified knowledge, and local business networks are not the only source of tacit knowledge (Amin & Cohendet 1999). Firms and people can have a rich collection of trust-based linkages that extend beyond these local business milieux. In relation to our discussion of head offices and KIBS, firms should be understood as being integrated into the internal (within the region) and external (outside the region) flow of knowledge and information. Accordingly, companies are involved in multi-level linkages which affect their strategies and growth (Amin & Thrift 2002). A more nuanced proximity concept is therefore needed. For example, a distinction can be made between geographical proximity and social proximity (Boschma 2005). 1 Geographical proximity is connected to the spatial distance between actors, while social proximity is related to the extent to which actors have developed trust-based interaction. The social proximity dimension originates from the embeddedness literature (e.g. Granovetter 1985; Maskell & Malmberg 1999), and it has been claimed that social proximity encourages an open attitude of communicative rationality rather than a pure, calculative market orientation between actors. Nevertheless, too much social proximity may have negative repercussions as members of established networks may be locked into established ways of doing things. However, too little social proximity can restrict processes of learning and innovation due to a lack of trust and commitment (Boschma 2005, p. 67). A third dimension, cognitive proximity, may also be associated with the proximity concept. The effective transferral of knowledge presupposes an absorptive capacity in firms to identify, interpret and exploit any new knowledge (Cohen & Levinthal 1990). In order to understand and process the new knowledge successfully, the cognitive base of a firm should not be too far from the knowledge provider (Boschma & Lambooy 1999). As a rule, firms search close to their existing knowledge base when looking for new knowledge input, and a certain cognitive proximity facilitates effective communication between participants (Boschma 2005). However, too much cognitive proximity may restrict learning and innovation processes as knowledge creation often depends on the combination of diverse and complementary bodies of knowledge (Noteboom 2000). Thus, interactive learning processes must be based both on a certain cognitive proximity to ensure recognition and efficient communication, and a certain cognitive distance to trigger new ideas and creativity. Head-office corporate-service complex Sassen (2000) argues that there is a mutual dependency between head office location and the location of KIBS. KIBS are intimately connected to the agglomeration of corporate head offices, the latter being important clients for the former. KIBS are often thought of as forming a joint head-office corporate-service complex, located in major cities and capital regions, which is characterised by interdependency, knowledge spillovers and networking. This suggests interdependency between geographical, social and cognitive proximity. In the following subsection, the characteristics of KIBS and head office organisations will be discussed.

4 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 191 KIBS are defined as private sector firms providing knowledge-based services to other business and non-business organisations. The knowledge provided usually comprises strategic, technical and professional advice, primarily employing the skills of information gathering, processing, and in particular, interpretation (Wood 1991). KIBS are highly innovative in their own right, but perhaps even more important is the function which consists of facilitating innovation in other economic sectors through the provision of knowledge about change. KIBS use their knowledge to produce services in the form of intermediate inputs in their clients own knowledge-generating and information-processing activities (e.g. communication and computer services). KIBS can supply clients with expertise in different fields, facilitate the exchange of empirical knowledge and best practice from different branch contexts, offer specific methodologies and tools for processes of change within organisations, and integrate different stocks of knowledge and competencies (Wood 1996; Strambach 2002; Wood 2002b). These services are intensively tailored to clientspecific needs, and client participation is a fundamental characteristic of knowledge-intensive services. The final product finds its form in the making. A head office is a company s top administrative level or corporate centre. A head office has three core functions or roles: formulation of strategy, co-ordination of activities and a control function (Chandler 1966; Hungenberg 1993; Young et al. 2001; Jakobsen & Onsager 2005). In a knowledgeintensive economy characterised by a more prominent role for knowledge and collective learning, large firms delegate a greater variety of functions and more responsibilities to the subsidiary level, which enables subsidiaries to operate efficiently and respond rapidly to change (Ghoshal & Bartlett 1990; Morris 1992; Amin & Cohendet 1999; Jones 2002). Head offices of large companies are then nodes in the internal and external flow of knowledge and information ( Jakobsen & Onsager 2005). Head offices are essentially engaged in information processing, and KIBS have a vital role in providing information and competence. KIBS can also assist head offices in formulating strategy and managerial and organisational changes. Thus, the head-office KIBS relationship involves the transfer of knowledge. This includes codified knowledge in the form of, for instance, methods, tools, documents and articulated experience from previous projects. In addition, the head-office KIBS relationship involves tacit knowledge. Tacit knowledge is borne by individual consultants, who use their tacit or personal experience when adapting the consultancy firm s general methods and tools to the needs of a specific client. Successful consultancy requires sustained interaction with clients, and depends on the relationships between the individuals involved (Wood 2002b). The theoretical discussion above has focused on the role of the city as a centre of innovation due to agglomeration of activities and the potential of lower costs of transferring knowledge, ideas and people between city actors. The focus is especially on the role of geographical, social and cognitive proximity between KIBS and head offices in city regions. In this empirical analysis, the interdependency between various forms of proximity will be discussed. The point of departure is that geographical proximity does not always involve social or cognitive proximity. However, social and cognitive proximity between actors can exist, or be developed, despite geographical distance. An important issue is how firms balance the need for a certain social and cognitive proximity in processes of interactive learning and innovation and how geographical proximity influences the output of such linkages. The research questions derived from this are as follows: Does geographical proximity matter for KIBS-head office propensity to interact, and what is the outcome of the KIBS-head office projects held in common? METHOD AND DATA The empirical analysis is based on data collated from two different projects in which the authors have been involved. The timeframe for the projects was The first project concerns the performance of the KIBS sector; the second is related to the operation of the head offices of large companies. Combining data from different projects with minor variations in definitions and categories is a challenge. Nevertheless, the authors are confident that this combined set of data will enrich the discussion of the head-office corporate-service complex. There are four sets

5 192 HEIDI WIIG ASLESEN & STIG-ERIK JAKOBSEN of data in total: a survey of the head offices of the 198 largest firms in Norway, intensive case studies of 21 of these head offices, a survey of 600 KIBS firms, and intensive case studies of 13 management consultants. Findings from these projects on other issues, such as the organisation of head offices, the regional linkages between head offices and the performance of KIBS firms, are presented elsewhere (see, for instance, Jakobsen & Onsager 2003, 2005; Aslesen 2004; Aslesen et al. 2004). In this paper, the authors shall present extracts from these sets of data to discuss the co-location of head offices and KIBS in metropolitan areas. In brief, the characteristics of the four datasets are outlined below. Head office survey A postal survey was conducted of the head offices of the largest companies in Norway (198 companies) and combined with telephone interviews. The survey yielded a response rate of 62 per cent (123 responses), reflecting the structure of the population according to sector, size and location. The survey comprised questions on the use of consultants and the importance of proximity. Nearly all of the questionnaires were completed by a respondent who was part of the firm s executive group. In the head office database, 67 (54%) of the companies were located in the capital region, 23 (19%) in other urban regions and 33 (27%) in other areas. Intensive case studies of head offices To gather more detailed information on the use of consultants, the survey was followed up by 21 intensive case studies. The criteria used to select the cases were geography (head office located in the capital region 11 cases and head offices in regional centres 10 cases), sector (head offices of companies in traditional industrial sectors and in new sectors), and status/ownership (company head office and national head offices of foreign-owned companies). In all cases, the person or persons interviewed were part of the executive group of the company (e.g. CEO/ President or Executive Vice-President). KIBS survey The third set of data used is a telephone survey with responses from 600 firms involved in computers and related activity and other business services (NACE 72 and 74). The set of data includes information on what KIBS supply to their clients, the reason why clients buy their services, and the importance of proximity to customers. The firms are located in three different types of region in Norway: the capital region, other urban regions (including the Bergen, Stavanger and Trondheim regions) and a group of medium-sized cities. Intensive case studies of management consultants in the capital region Finally, qualitative interviews were carried out with 13 company managers of management consultancies in the capital region, including a number of the largest global consultancies. The interviews were intended to reveal which types of consultancy activity the firms performed, for which kinds of customers (customer characteristics), and to what degree the consultants contributed to innovation in client firms. KIBS AND HEAD OFFICES: AGGLOMERATION, PROXIMITY AND OUTCOMES The geographical concentration of knowledgeintensive activities A general pattern in Europe is the concentration of KIBS in city regions (see introduction for references). The location of KIBS in Norway clearly follows the same pattern; the proportion of firms and employment of KIBS is skewed towards city areas, especially the capital region of Oslo. More than 40 per cent of all KIBS firms are located in the Oslo region, and one finds approximately half of KIBS employment there (Table 1). However, the Oslo region has about 22 per cent of all the jobs in Norway. There were 1.8 times as many firms and 1.6 times as many employees in KIBS in 2001 as there were in The growth of firms and employment in KIBS has also been slightly stronger in the Oslo region than in the rest of the country. As with KIBS, there is a strongly urban concentration of head offices, especially in the capital region. Head offices of large companies are concentrated in cities at the higher level of the hierarchy system, where economic and political decisions affecting the rest of the urban system are made (Ross 1987; Lyons 1994). The same pattern is found in the United Kingdom, (Healey & Watts 1987), Canada (Ley & Hutton 1987) and Australia (Sassen 2000), suggesting

6 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 193 Table 1. Regional distribution of KIBS firms, 2001.* The capital region Other urban regions** Other areas Relative share of firms (%) Relative share of employees (%) Source: Statistics Norway s Central Register of Establishments and Enterprises. Notes: * KIBS are defined as: Computers and related activity (NACE 72) and Other business services (NACE 74). ** In this table, the urban regions of Bergen, Stavanger and Trondheim include the counties of Hordaland, Rogaland and South Trøndelag. that command functions are still concentrated in major cities, despite information technology which facilitates dispersal (Sassen 2000). In 2000, the head offices of 70 of the top 100 companies in Norway were located in the capital region (Table 2). 2 This figure has been more or less stable since 1970, with a weak tendency towards increasing concentration. In other urban regions, Stavanger has strengthened its position. Stavanger is the Norwegian oil capital, and a large number of companies within this sector, both national and foreign-owned, have located their head offices there. The number of head offices among the top 100 companies has declined in nonmetropolitan (rural) areas, particularly so in the early 1980s, a period of marked decline within manufacturing industries, which traditionally had a strong position in rural areas. The importance of geographical proximity between supply and demand of KIBS It seems appropriate to begin this discussion of the importance of proximity by outlining the geographical structure of the market. For all firms in the KIBS survey, the local market is important. The Oslobased firms derived 44 per cent of their business from local customers, while the share for KIBS in other urban regions (the Bergen, Stavanger and Trondheim regions) was 39 per cent, the share for medium-sized cities was 36 per cent. The smaller the city region, the lower the proportion of local sales, which indicates that the market is too small or that these regions do not have a sufficient business structure with an extensive enough demand for knowledge-intensive services. Our findings correspond with evidence from other studies. A study of various types of knowledgeintensive business services found that firms in inner London have a higher orientation towards local clients than firms in other regions. In fact, about 40 per cent of clients of inner London firms were located within a twenty mile radius (Wood et al. 1993). Even though the local market appears to be vital, on average KIBS in all regions have a higher proportion of sales outside their region Table 2. Location of head offices of the top 100 companies (by turnover) in Norway * The capital region Other urban regions the Bergen region (9) (6) (6) (9) (8) (9) (7) (5) the Stavanger region (3) (5) (9) (4) (8) (7) (8) (10) the Trondheim region (4) (3) (3) (3) (8) (5) (2) (2) Other areas Sum Source: The largest firms in Norway (Norges største bedrifter) 1970, 1975, 1980, 1985, 1990, 1995, 1998, 2000, Økonomisk Litteratur Norge, Oslo. Note: * The data include both company head offices and national head offices of foreign-owned companies.

7 194 HEIDI WIIG ASLESEN & STIG-ERIK JAKOBSEN than inside (i.e. the local market). In our interviews with management consultants in Oslo, however, the importance of proximity to the consultants main customers was emphasised, and it was said that this was the primary reason for starting business in that region. The local market is of prime concern for these consultants. The Oslo region, being the capital of Norway, is populated by a large number of firms and public service institutions, and therefore provides a large and diversified market for consultants. The clients are often firms that need to change to perform better, that have a solid capital base, that consist of branches where demand for innovation and development is strong, that are relatively large in terms of employment and turnover, and that compete on the international market. Besides being oriented towards private firms, consultants are to a greater degree also oriented towards semi-public enterprises that are adapting to private market actors. Management consultants working solely with point strategy must, for instance, relate to the executive group at head offices, and will therefore often find their customers in the capital region. This implies much dayto-day exchange, which reflects the importance of close client consultancy interaction. Interviews with KIBS indicated that the customer client interaction was often long lasting; either the project extended into another project, or the project itself lasted for several months, and the main criterion of success was that a client returned in the future. The strong concentration of KIBS in larger cities and the capital region especially, and the fact that KIBS derive a considerable share of their business from local customers indicate a more intense state of competition in these urban areas. Through client work, consultants are able to gain an insight into how their competitors work. This will affect consultancy firms learning and competitiveness, and fierce competition between KIBS can lead to better consultancy. Thus, proximity in a dynamic competitive environment is also important to the development and viability of KIBS. The discussion has illustrated that in some cases there is geographical proximity between consultants and clients when it comes to the sale of services, while other transactions are characterised by a certain geographical distance between seller and buyer. To elaborate on this issue further, the authors shall, by using data from head offices, discuss when and why geographical proximity between these clients and consultants appears to be important from the head offices point of view. As discussed, consultant client relations involve the transfer of intangible resources, personalisation, and a strong element of customisation, all of which favour geographical proximity between consultants and clients. In the interviews it was found that head offices in the capital region of Oslo primarily buy their consultancy services, both standardised and more specialised, from the thick KIBS market in their own region. As far as the use of the local KIBS market is concerned, the situation differs slightly for head offices outside the capital. In general, it appears that head offices outside the capital region to a certain extent use the KIBS market in the capital region in issues of strategic importance, while suppliers in their own region are used for more standardised operations. A representative from a head office in Bergen with units in several countries made the following observation about the local KIBS market: We have used firms in the region on minor changes of our portfolio of legal entities, but when it comes to solving problems at an international level you cannot use the local providers. My impression is that there is deeper knowledge among consultants in the capital region. They also have more extensive, international experience. Another company representative agrees with these observations: If we use a consultant in Oslo, they have a lot of experience and that is a security for us. They have been involved in a number of companies operating internationally, and they can use their knowledge and experience when solving our problem. If you ask a local firm, they might have been involved in one similar case, but that was 20 years ago. Head offices outside the capital region have observed that the KIBS companies in the capital represent more specialised knowledge than consultants in their own region. One company executive told us: If we are looking for the state of the art within organising and project management, then we have to go to the capital. In some cases, head offices of companies operating at an international level and located both in the capital region and in other areas,

8 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 195 choose to engage consultants from abroad, especially for highly specialised, complex and/ or industry-specific issues. A representative of the head office of a large shipping company made the following comment: When financing the building of new ships we have to involve financial consultants internationally and a consortium of finance companies, since this is a capital-intensive operation, in certain cases we have used American banks in funding the fleet. We have also looked into the Danish and English leasing market, and the American market for bond issues, to find sources that can supply the traditional bank market. In general, it appears that the higher the level of strategic interest for the client and the KIBS, the less emphasis is placed on the importance of geographical proximity. Other studies have also found that strategic interest enhances the willingness to overcome obstacles which possibly result from the geographical distance of each partner (Hyypiä & Kautonen 2005). This indicates that geographical and social proximity is not necessarily interlinked. It is then possible to develop a trust-based relationship on highly complicated issues despite geographical distance. Findings from the interviews are confirmed by the head office survey. In general, head offices in the capital area give the best appraisal of the quality of the local KIBS sector, followed by head offices in other urban regions and head offices in other areas (Table 3). This applies to all types of KIBS that have been evaluated (management consultancies, legal services, bank and financial services and communication consultancies). The outcome of KIBS and client relations In the KIBS survey, we asked respondent KIBS firms what they thought they provided the client firms with. Three out of four consultants responded that they provided advice on solutions in a project (Table 4). The consultant s role of sparring partner in a project was also emphasised in interviews with consultants, which suggests that there is a relatively high degree of knowledge interaction in such relationships. Two out of three consultants reported that they carried out specific elements of a project that is led by client firms. This might suggest less interaction between the consultant and the client, and could be linked to a clearly defined Table 3. How do you measure the quality of the regional supply of KIBS?* All head offices Head offices in the capital region Head office in other urban regions* Head office in other areas N Management consultancy (58/15/35) Legal services (60/16/36) Bank and financial services (60/16/36) Communication consultancy (56/16/34) Source: Head offices survey. Note: * Firms have measured the quality on a scale from 1 (very bad) to 6 (very good)). Includes the Bergen, Stavanger and Trondheim regions. Table 4. What do KIBS provide to client firms? (N = 600).* Provide advice on different solutions in a project Carry out specific elements of a project that is led by the client Develop and implement the consultant s own solutions Sell and implement blueprint solutions Total 74.5% 65.7% 47.2% 41.7% Source: KIBS survey. Note: * KIBS are defined as: Computers and related activity (NACE 72) and Other business services (NACE 74).

9 196 HEIDI WIIG ASLESEN & STIG-ERIK JAKOBSEN specialist and technical professional task. More than 40 per cent of the consultants reported that the consultant sells and implements blueprint solutions, which suggests that the relation involves more standardised tasks. These findings imply that the consultancy client relationship cannot always be expected to be an interactive, knowledge-intensive collaboration. To elaborate on the outcome of KIBS clients relations, we asked consultants if they could tell us in which parts of the client organisations they provided their services. Results from the KIBS survey showed that the greatest proportion of consultants responded that they took part in developing new or changing existing products/services for the client (Table 5). A large number of the consultants also reported that they contributed to the introduction of new solutions for the clients, daily routines (administration, executive work, etc.) and competence building among clients. This illustrates that consultants see themselves as contributing to a great extent to bringing about innovation for their client. Use of KIBS varies between head offices and different circumstances can trigger this. For instance, mergers, buy-ups and changes in ownership often involve adjusting and redefining the company s organisational structure, which generates the need for organisational, legal and financial expertise. In addition, increasing market competition or a weakened market position can call for a strategic appraisal that involves KIBS. In general, improvement in the economic climate and growth processes often increase the demand for KIBS, while downward economic trends, where firms watch expenditure more carefully, appear to involve a more restricted policy on the purchasing of KIBS services. The interviews with head offices were conducted during an economic recession, which may have produced the bias towards the more critical appraisal of consultancies. In interviews with head offices, the reasons for KIBS use and the outcome of these relations were discussed. A representative from the national head office in Norway of a large Nordic financial company informed the authors of the extensive use of KIBS over the last couple of years, especially management consultancies and financial consultancies. This was a period of transition for the company, as thanks to buyups and mergers it was growing from a Swedishbased financial company into an important, Nordic constellation. The respondent replied: It was especially important to involve consultants that had experience with similar merger processes on an international level. Both advantages and disadvantages relating to the use of KIBS were also stated: Regarding the price we have to pay for them, a consultant has to be more than an advanced secretary. They need to carry out tasks that we cannot carry out by ourselves. On the other hand, some of the consultants are good at asking important questions. They make us think through important processes. They also contribute in fact finding. A representative from the head office of another company involved in banking and finance said that the company did not want to be tied up to certain consultants, and argued for a critical appreciation of consultancy use: We only want consultants for clearly defined tasks. We do not want them on a more or less permanent basis. We are working continuously with strategic questions, and now and then we Table 5. In which parts of the client s organisation do consultants contribute? Share of firms (N = 570). Share of firms Development of new or change of existing products/services for the client 68.9% Introduction of new solutions in the client s daily routines (administration, executive 60.2% work, etc.) Competence building for the client s employees 44.0% Introduction of new methods/solutions for marketing and sales for the client 23.3% Development of the client s organisation and management 18.8% Introduction of new methods/solutions for delivery and distribution for the customer 18.6% Source: KIBS survey.

10 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 197 have asked (management) consultants to contribute to the process. Another respondent stated: We used a consultancy to reveal how we could activate synergies, and to give us their opinion on the way forward for our organisation. We took notice of some of their points, while we found others less important. CONCLUDING DISCUSSION The extant literature suggests the presence of an intimate and mutual dependency between head office location and the location of KIBS in cities, forming a joint head-office corporateservice complex. In this lies a belief that geographical proximity between head offices and KIBS is closely related to social and cognitive proximity and that this leads to positive outcomes such as learning, knowledge creation and innovation for the parties. Regarding the concentration of KIBS and head offices in major cities, this study confirms that Norway, as in other European countries, has a concentration of KIBS and head offices in the capital region. Around 40 per cent of all KIBS firms are located in the capital region, while head offices are even more strongly concentrated. Our results from analysing the importance of geographical proximity for the operation of this head-office corporate-service complex in cities support Boschma s (2005) ideas that geographical proximity per se is not a decisive factor for learning to take place. This study illustrates that head offices can establish tight, complex and innovation-inducing linkages to externally located KIBS. Head office representatives respond that the quality of KIBS is of greater importance than their location. Head offices, for instance, in the urban centres of Bergen and Stavanger often choose to use consultants from the capital (Oslo) or even from abroad. This is in line with other findings showing that large-scale companies usually search for leading experts, no matter their geographical distance (O Farrell et al cited in Hyypiä & Kautonen 2005; Wood 1998). What role does geographical proximity to clients mean for KIBS themselves? The study findings show that KIBS in general have a greater share of clients outside the region, both nationally and internationally, which suggests that geographical proximity is not strictly necessary for client projects. This KIBS survey does not allow for a distinction between types of KIBS (local vs national or global players), nor a differentiation between the types of services (standardised vs specialised) sold on different markets, which may have provided more explicit knowledge on the role geographical proximity plays for KIBS. The findings also show that head office and KIBS interaction is not constrained by space. In a modern urban economy, where firms and institutions are relay stations in a world of flow, knowledge is distributed in more or less distanciated economic relations, some local others external (Amin & Thrift 2002), suggesting mechanisms other than being geographically close can induce learning and innovation. Even if the occurrence of social proximity, i.e. the development of a trust-based relationship and a common understanding, may be strengthened through geographical proximity, it can also occur in relationships characterised by greater geographical distance. This study s first contribution to the theoretical debate on geographical proximity is that geographical proximity between KIBS and clients is neither a sufficient nor a necessary condition for the establishment of successful relations. The survey results show that head offices in the Oslo region do perceive the quality of KIBS locally to be higher than head offices in other urban areas. Being near a KIBS agglomeration is said to lower the cost of finding relevant KIBS and the cost of carrying out the consultancy project (meeting face-to-face, etc.). However, these advantages are not the sole reason for the (re)location of head offices. There also appears to be variation between KIBS in large cities in Norway regarding the importance of geographical proximity to clients. KIBS in the capital region (Oslo) have a greater share of sales locally than do the other large cities; they also experience stiffer local competition than in other city areas, which suggests that the agglomeration of KIBS and potential clients in the capital region does have an economic effect on KIBS. Based on the findings from the capital region (the largest agglomeration), the second contribution to the debate on proximity is that geographical proximity between the actors in a head-office corporate-service complex provides positive externalities for the actors. Frequent

11 198 HEIDI WIIG ASLESEN & STIG-ERIK JAKOBSEN exchange over short distances involving highly competent KIBS firms and demanding clients can also facilitate the development of social proximity between the actors. Which factors influence the geography of KIBS head office relations? Interviews with head offices show that on strategically important issues, head offices search for the best consultant, regardless of location. Head offices choose to use consultants outside their region when they assume that these consultants have a more extensive and specialised knowledge base than locally-based consultants. The study s empirical findings show that it is possible to achieve personalisation and trust-based relationship, i.e. social proximity, between head offices and KIBS despite geographical distance. Norway is regarded as being relatively non-hierarchical and egalitarian, and in this sense, is an open society. Norwegians have relatively open access to others irrespective of status or position, making it much easier to obtain information informally, as well as formally (Jakobsen & Onsager 2005). This openness can make it easer to overcome the possible disadvantages of geographical distance. Other studies have also found that strategic interests enhance the willingness to overcome obstacles resulting from the geographical distance of each partner (Hyypiä & Kautonen 2005); the higher the level of strategic interest for head offices and for KIBS, the less emphasis is placed on the importance of geographical nearness. Strategic motivation combined with knowledge on whom, what and when, lends an impetus to overcoming the obstacle of distance. Rusten et al. (2005), using empirical evidence on consultancies in Norway, argued that geographical distance may sometimes be an advantage. For example, clients may prefer forms of dislocated knowledge when they want an objective and independent perspective on a sensitive issue. Further, the danger of knowledge lock-ins promotes a search for knowledge providers regardless of geographical distance. Too much social proximity may lock clients and knowledge providers into established ways of doing things, and weaken the innovative capacity of intraorganisational networks (Boschma 2005). Uzzi (1997) argues that the innovative capacity of firms may increase if they have a balance of arms-length ties and socially embedded relationships. Our empirical findings suggest a certain mixture of relationships: there are linkages characterised by geographical nearness and linkages characterised by geographical distance (the geographical proximity dimension), and some of the linkages involve social closeness while others are based on objective calculation (the social proximity dimension). These two dimensions are combined in various ways. A supplementary dimension is new relations versus the re-use of established relations. As already indicated some of the linkages between head offices and KIBS are long lasting; one project often leading onto another, with variety in project content and intensity over time. In other cases, head offices seek new providers of knowledge to ensure a certain cognitive distance that can trigger new ideas and creativity. These new relations are often found through head offices complex set of linkages, both near and far reaching. As KIBS competitive advantage is reputation (Bryson et al. 2004, p. 87), other business partners suggestions of relevant KIBS are seen as an important source of new KIBS relations for head offices, and as such buzz of the industry is an important source for new relations. Our final contribution to the theoretical discussion on geographical proximity is the more strategic the collaboration with KIBS (suggesting more specialisation), the less the role geographical proximity appears to play for clients. A second issue related to the discussion of the co-location of head-office KIBS is the outcome of head-office KIBS relations. Head offices especially emphasised the KIBS role of bearers of new knowledge, thereby presenting them with the experiences and solutions of other firms, important benchmarking regarding international developments within the sector, and general fact-finding that could support the decisionmaking processes which are indirectly vital for organisational innovation. This, together with the fact that there has been a comprehensive increase in the use of consultancies within the urban economy, indicates that KIBS are important for knowledge transfer and organisational innovation in the economy. KIBS reuse of knowledge between projects intensifies and lubricates the knowledge spillovers from business to clients. In this way, the sector plays a significant role as a vehicle for fuelling knowledge spillover locally. That said, it is difficult to

12 PROXIMITY AND KNOWLEDGE INTERACTION BETWEEN HEAD OFFICES AND KIBS 199 estimate the precise importance of KIBS within innovation. But as bearers and diffusers of new knowledge, consultants are important facilitators of change and organisational innovation for head offices. This is especially the case when KIBS provide links to international methods and practice. However, some of the projects between KIBS and head offices are characterised by a low level of interaction and a high degree of standardisation, suggesting that many KIBS head office relationships are not likely to induce profound change. But even these standardised KIBS inputs will involve a certain degree of learning since the client has to use his or her existing (tacit) experience and expertise to adapt to this highly codified knowledge (Howell 2002). Anyhow, the authors would argue that KIBS-client relations on strategically important issues are more likely to encourage profound knowledge accumulation and innovation in clients. The study s first contribution to the theoretical discussion on the outcome of the head-officecorporate-service complex is that the outcome of KIBS head office relations is characterised by heterogeneity. It can facilitate learning and possible innovation for clients, in other cases the interaction take the form of standardised tasks involving more restricted learning for the actors. Research has found that the most effective interactions took place between clients and consultants with a similar level of expertise (Wood 1996). This is related to the cognitive proximity dimension. In general, firms tend to search close to their existing knowledge base when looking for new knowledge input, but there is a danger that similarities in knowledge base restrict the processes of learning and innovation. Being engaged essentially in knowledge processing, the head offices of large companies can be portrayed as organisations with a high absorptive capacity. This study s empirical discussion also illustrates that head offices, especially on issues of a highly strategic interest, are willing to search beyond well known territory both geographically and cognitively when looking for consultants input. This indicates that knowledge-intensive organisations, such as the head offices of large companies, can surpass the potential dilemma of cognitive proximity. Several of the head offices spoken to in the study have emphasised the importance of input from external consultants or consultants abroad when it comes to international benchmarking and providing the organisations with new solutions. Innovation often requires dissimilar and complementary bodies of knowledge. Nevertheless, the cognitive distance between head offices and these consultants is not that great, ensuring efficient communication. They have also developed trust-based relationships with some of these external consultants, illustrating KIBS-client linkages with a balanced input of social and cognitive proximity. In other cases, this networking has been less successful, especially when the competence and knowledge base of the consultant does not match the client s requirement. The final contribution to the theoretical discussion on the outcome of the head-office corporate-service complex interaction is then that a balanced mix of social and cognitive proximity can facilitate processes of learning and innovation especially in KIBS-client relations on strategically important issues. This study has contributed to the theoretical debate by elaborating on the importance of colocation of KIBS and head office in city regions. It has been shown that geographical proximity is not always important for processes of learning and innovation. Other types of proximity, such as the social and cognitive, also play a vital role regarding the outcome of KIBS-client relations. Further research should explore in detail how different dimensions of proximity are interrelated. Methodologically, this might be undertaken by performing case-oriented empirical studies which emphasise the dynamics of networking. Another challenge is to reveal the variance in outcome between different types of KIBS interacting with various types of head offices (sector, size, market etc). Cross-country comparison is also needed for a more advanced understanding of how the head-office corporate-service complex operates at various levels. Acknowledgement The work was financially supported by the Research Council of Norway (the programme Byutviklingdrivkrefter og planleggingsutfordringer). Notes 1. Other proximity dimensions discussed in the literature include organisational and institutional