Clusters, Innovation and ICT - Reinventing Clusters

(This is a summary of my presentation in Urban Clusters)

Innovation today with global economies immersed in a deep recession and more traditional competitive advantages such as location or availability of technological knowledge rapidly disappearing, is certainly more relevant than ever. 

This is specially true in Spain and Catalonia. A quick look at the most common indicators, easily reveals a position that few will envy. In fact, the last European Innovation Scoreboard positions Spain in the lower middle, considering Spain a moderator innovator, with the worrisome situation of increasingly lagging behind in terms of innovation growth and therefore with a tendency of enlarging rather than shortening its distance from the leading pack.

In order to assess the position of Catalonia we need to revert to the Regional Innovation Index, and there again, the news are not precisely great. Catalonia occupies position 82 (4th in Spain), behind Madrid, the first Spanish region to appear, in position 31, Basque country in position 55 and Navarra the third Spanish region, holding position 76.

However, when dealing with the geographic nature of Innovation, or put in other terms, with its spatial concentration as clusters, we easily confront the paradox of globalization.

Maybe nobody has expressed better this paradox than Thomas L. Friedman, who in 2005 published a book entitled “The World is Flat: A brief History of the Twenty-first Century”. Because if in fact the world is flat, and location doesn’t matter anymore, aiming at creating conditions for gaining competitive advantage on a territorial basis is a wasted effort that should be better diverted into entrepreneurship and connecting industries and innovation agents.

Nevertheless, there is plenty of evidence that the world is not as flat as Friedman portrays in his book. Just for the shake of the example, only a 4% of high growth American startups get more than 30% of their revenue from outside USA. Or if the reader prefers a more intuitive insight, a quick look at any Internet connectivity graph will reveal lots of empty space and few agglomerations, not necessarily related to population.

It seems therefore, that location does matter. But it location still matters, what has been the impact of globalization and how can we take advantage of it? Answering these questions implies that we take a closer look at what has happened to innovation, ICT and clusters.

And, for understanding innovation, we need also to understand knowledge flows. A simple classification could consist of dividing know-how in three levels. High level will be occupied by basic science (e.g. solid state physics). At mid-level we will find the type of artifacts produced with science (e.g. circuit designs) and at grown level, the know-how that enables capturing and successfully applying the former two (e.g. the management of an specific fabrication plant).

Further on, we can also classify the resulting products and services in three levels: high level (e.g. microprocessors), mid-level (e.g. motherboards) and ground level (e.g. laptop computers).

In this scenario, probably the largest amount of change can be found in high-level knowledge. It is well known that science has become increasingly global and thanks to Internet also increasingly accessible. Diffusion of knowledge at this level is fostered by a powerful incentive that we often characterize as “publish or perish”.

However, it is also true that there is tendency towards democratizing high level knowledge. Open source, the Internet, etc ... has made this type of know-how increasingly public.         

Summarizing, important changes occurred and high level knowledge has become increasingly specialized, easily available and mostly public.

Nonetheless, an important issue is where value can be captured more efficiently. A way to answer this question is by taking a look at the most common practices of venture capital firms, and there, the evidence is clear and overwhelming. VC firms seeks for commercial successes in the 5-7 years range and try to avoid excessive uncertainty ruling out high level products and looking for economies of scale where business can grow fast. In short, they tend to concentrate in the mid-level + mid know-how part of the matrix.

A more intuitive, but equally valid, way or reaching a similar conclusion is to look at the products who manage to capture people’s imagination and attained public success. There, we will find a high percentage of these mid-level innovation, just to name some, the ipod/iphone, netbooks, etc...

However, in order to relate this process to clusters, we need to look at the mechanism that drives it, and the mechanism seems to be characterized as iterative versus incremental, evolutionary versus creationist, with close interactions with users and very rapid with small changes at a time, that at the end convey a large transformation.

This process, can also be portrayed as startup experimentation. Experimentation there doesn’t aim to falsify a theory but to answer questions about user acceptance, business model or to collect insights that could enhance the product, process or service.

However, what is the role of ICT in this process? ICT is a general purpose technology, resulting in being applied not only to almost every product, but also to every process or service. Therefore, their benefits cannot be reduced to direct saving in processes or added functionalities in services.

For the shake of the example lets examine web 2.0 sites, such as wikipedia, flickr, etc... What is happening there is that the coordination mechanism that once were in the hands of a managerial structure, is being transfered to the platform, to software. In fact, this process is not characteristic of web 2.0 sites, but common in all sort of industries and heavily influencing the way companies are managed and how they relate to each other. In addition to that, the link between connectivity, exposure to different people and environments and innovation is very well known, being innovation itself often described as a re-combinatory process.

Following this path, we can argue that is not ICT itself, but the capacity that a certain company or society has to effectively apply ICT what makes the difference. Obviously we are excluding innovation in the ICT sector itself, where the link is completely direct. There is plenty of evidence of this indirect connection between capacity of applying ICT and capacity to innovate. Just a glimpse to any ranking of the most innovative countries comparing an innovation indicator with the share of IT related investment easily points in this direction.

Cluster is the second most popular framework of Michael Porter (being the five forces the first one). A cluster is defined as “ a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”. In this definition we already find the two aspects that constitute a cluster: a) geographical proximity and b) intra-institution/company linkages. The validity of the model can be easily appreciated by looking at its most successful examples, Silicon Valley to name just one, and this validity seems to be as actual as ever.

However, clusters too are changing and probably some good insights on the nature of that change can be found looking at the mechanisms that successful companies use to devise and foster innovation.

Among these mechanisms, the one that is more characteristic of this time and emphasizes more recent changes is Open Innovation. Open Innovation shows how companies increasingly rely not only in their internal R&D capacity but actively seek external partners to incorporate their ideas and know-how. Open Innovation also tells us that the driving factor in this process is the business model and not the target product or service.

This provides us with two clear insights. On one side, we can see how the boundaries of clusters are dissolving, the same way that the boundaries of companies dissolved. But we also see the raising importance of the business model as a driver, in detriment of the product or technology. All that again points to this middle innovation area that we encountered in the beginning of the article.

Clusters nowadays are therefore better portrayed as hubs in a network rather than just local concentrations.

In summary, we are witnessing an innovation process focused in mid-level type of knowledge and mid level innovation that solves the conflict between global and local by benefiting from global, public and widely available know how while taking advantage of local knowledge on how to manage, what to apply and for tapping the imagination of sophisticated users.

This innovation is built on continuous and collaborative experimentation and sustained by the willingness of users and companies alike to buy and try new innovative, although many times imperfect products.

All these factors, point to the raising importance of the demand side in innovation, and therefore of users, intermediaries and an initial demand that enables the experimentation process.

The central problems that an innovation policy has to address have tilted from enhancing capacity, most notably technological transfer to demand, to the ability to tap in mid-level know-how, the capacity to experiment with users in real life scenarios (Living Labs) and the ability to generate an initial demand that can fuel and sustain the process.