What is the role of knowledge spillovers in industrial clustering?

• A. They are internal benefits that only large firms receive.
• B. They are externalities where nearby firms benefit from others' knowledge.
• C. They occur only within universities.
• D. They are eliminated by free market competition.

Answer: (B)

Knowledge spillovers in industrial clustering are external benefits that firms gain when they are located near other firms and institutions, allowing knowledge to move informally across the local network. When many related activities cluster in one region, ideas spread through worker mobility, casual conversations, shared suppliers, and collaboration with local universities or research centers. Proximity makes learning cheaper and faster, so firms can innovate more quickly and copy useful practices without paying high search or enforcement costs. This is why clusters form: the value of being near others’ knowledge grows as more firms co-locate.

So the role is that nearby firms benefit from others' knowledge, not just internal gains for large firms, not limited to universities, and not something that free market competition inherently eliminates.