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Innovation Clusters: Understanding Life Cycles

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Innovation Clusters: Understanding Life Cycles

  1. 1. Attractive Cost Structure Liveabillity The BIG 6 Success Factors BRIEFING PAPER Connective In- frastructure Serendipity Skilled Workforce Regulatory Framework Society Policy Research Geography Education Sharing Collaboration Set-up & Operating Costs Cosmopolitan Communities Public Amen- ities Education Global Work- force Social Infrastructure Access to Growth Markets Commercial Infrastructure 6 Innovation Clusters: Understanding Life Cycles A BRIEFING PAPER FROM THE ECONOMIST INTELLIGENCE UNIT
  2. 2. ABOUTTHISREPORT IInnovationclusters:UnderstandinglifecycleswaswrittenbyTheEconomistIntelligenceUnit.It examinesthelifecyclesoffiveinnovationclustersandthefactorsthatdeterminesuccess.Thereport isbasedondeskresearchandtenexpertinterviews.Thecasestudieshavebeenselectedtocover bothestablishedandemergingmarkets,andtoexplorearangeofclustersuccessfactorssuchas demographicsandtalent;infrastructure;qualityoflife,policyandgeography.Thereportwaswritten byMichaelMartins.TheeditorwasAdam Green.ThestudywascommissionedbyDubaiTourism. TTheEconomistIntelligenceUnitwouldliketothankthefollowingindividuals(listedalphabetically)for sharingtheirinsightsandexpertiseduringtheresearchforthispaper. ProfessorErkkoAutio-ChairinTechnologyVenturingandEntrepreneurship,andDirectorofthe DoctoralProgrammeatImperialCollegeLondonBusinessSchool DrCristinaChaminade-ProfessorinInnovationStudiesatLundUniversity DrAndrewCorbett-ProfessorofEntrepreneurshipandFacultyDirectorfortheJohnE.&AliceL. ButlerVentureAccelerator,BabsonCollege DDrRiccardoCrescenzi-AssociateProfessorofEconomicGeographyattheLondonSchoolof Economics DrLuisaGagliardi-FellowintheLondonSchoolofEconomicsDepartmentofGeographyand Environment,andResearchAfliateatBocconiUniversity ClifHarald-ExecutiveDirectoratBoulderEconomicCouncil CharlotteHolloway-DirectorofPolicy,techUK PProfessorFlorianTaube-EmileBernheim ChairofEntrepreneurshipinaGlobalContextat UniversiteLibredeBruxelles ProfessorTonyVenables-BPProfessorofEconomics,OxfordUniversityProfessorPohKam Wong- DirectorofNationalUniversityofSingapore’sEntrepreneurshipCentre ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles2
  3. 3. Innovationclusters:Understandinglifecycles Innovationclustersarelikethecompaniestheyhost:theycangrowrapidlyatinception,peak,and eventually–iftheydonotadapt–theystagnateordie.Therearethousandsofclustersaroundthe world,butmanystruggletoachievesustainabilityorscalability.Sometimes,theveryfactorsthatmade them successful,causethem tofaillateron. WWhatallowsclusterstocombinetheinnovativespiritofstart-upswiththeresilienceofestablished conglomerates,toextendtheirlifecycle?Throughcasestudyevidenceacrossfivecountries,andan expertinterviewprogram,theEconomistIntelligenceUnitexplores‘clusterlifecycles’inSilicon Roundabout(UK),Bangalore(India),Boulder(UnitedStates),Singapore,andEstoniaanddrawsoutkey lessonsfrom theirexperiences. Part1:InnovationClusters:Whycompaniesarebettertogether Part2:London’snextincarnation PPart3:Singapore:Builtfrom scratch Part4:PluckyEstonia:EasternEurope’sstartup Part5:Atalentmagnet:TheBeautyofBoulder Part6:T-Ecosystem:Bangalore’sgrowingpains Part7:Conclusion:Innovationclusters:TheSuccessRecipe ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles3
  4. 4. Part1: InnovationClusters:Whycompanies arebettertogether WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER Innovationclustersrequiresixkeyingredients:skills,accommodating policyframework,infrastructure,lowcoststructures(inearlystages),a goodlifestyleofferingandserendipity. Clustersarelikethecompaniestheyhost:theychangeovertime,andtheir longterm successdependsonhowwelltheyadapttothechallengesof success,likecongestionandincreasedrents CClustersarestronglyreliantonanopenimmigrationpolicyatthenational level–tighteningbordersreducesacluster’saccesstoglobaltalent Innovationisoftenassociatedwithtriumphantloneinventors.ThelikesofThomas Edison,Louis PasteurorBillGatesarethecentralcharactersinthisnarrative.Butall innovatorsspringoutofa specificcontext.Theenvironmentsthatfostertheir individualandcollectivesuccessareveryoften ‘innovationclusters’:ecosystemsthat stimulateandnurturethebestideasandattractthebrightest talents. CClustersemergewhenanetworkofcompaniescoexistswithinageographic location,allowingeachof them tocollaborate–andcompete–inawaywhich deliversgreaterproductivitygainsthanthey wouldachieveinisolation.SiliconValley isthemostfamous,buttherearecountlessothersacross everycontinent. CClustersattractinnovativepeople.Theynetwork,leadingtothecrosspollinationof ideas.Companies benefitfrom eachother’ssuccess:Whatoneinvents,rivalscan access–thinkofa productivityboostingtoollikeDropbox.Andwhatonefirm invents,otherscanbuildon.Thinkofthe ‘sharingeconomy’,ledbytrailblazersUber andAirbnb,inturngivingrisetoanarmyofstartupstaking thesameideatonew applications.Thesharingofknowledge,thespillovereffectsofinnovationand the networkingthatdenselypopulatedspacesenableareallkeyingredientsforstartup success. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles4
  5. 5. The‘big6’successfactors Yetforalltheirbenefits,innovationclustersarenotstraightforwardtobuild–and manydonotlast, evenwiththe‘magicingredients’seeminglythere.Toprosper, clustersneedsixkeysuccessfactors: skillsandtalent,accommodatingpolicy frameworks,infrastructure,lowcosts(especiallyintheearly stages),agoodlifestyle offeringtodrawtalent,andfinallygoodluck,whethergeography(proximityto key markets),historicalaccidentsorevengoodfortune. Thesesixfactorsarenecessaryconditions,althoughtheyarenotalwayssufficient. Manyplacesinthe worldlayclaim tothesesix,butnevergiverisetoasuccessful cluster.Thesefactorsarebestseenas thenecessaryconditionsforclusters,butnot–ontheirown–thesilverbullet.Clustersuccess dependsbothonindividualfactors, butalsotheinterplaybetweenthem.Gooduniversitiesarelittle useifthereisno connectivitywithindustry.Ahighstandardoflivingisnothelpfulifimmigration  policiespreventglobaltalentfrom movingtothecluster. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles5
  6. 6. Part2: London’snextincarnation WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER LondonisaglobalmetropolisthatreinventeditselfwithSilicon Roundabout’.Butrisingrents arepushingthenextgenerationofstart-ups out. Londonisafinancialpowerhouse,acentralnodeininternationalfinancialmarkets.Butover thelast decade,thecityshoweditspowersofreinventionbyhosting‘SiliconRoundabout’,a digitaltechcluster thanbroughttheworldnewgadgetsandappslikeTweetdeckandLivefm. SSiliconRoundaboutislocatedbetween‘theCity’,thefinancialheartlandofLondon,and Hackney,one ofthepoorestareasofLondon.Initsearlystages,itbenefittedfrom several favourableconditions. TheareaisaccessibletocentralLondonviapublictransport,allowing companiestotravelaroundthe cityeasily.Rentswerelow,andmanyentrepreneursfrom Hackneycouldaccesstheareaviabicycle. Therewerealreadyartists,mediaprofessionals andtechnologyentrepreneursinthearea.Many specialisedinfinancialservices,andhad linkageswiththeUK’snationalbroadcaster,theBBC.This fluidexchangeofknowledgeand ideasbetweentechnology,financeandmediacommunitieswas ststimulatedbytheUK’sopen immigrationpolicyinthelate-2000s. TheareaattractedalargecommunityofAmericanswhostudiedatLondonuniversitiesand started workinginthecitythereafter.OtherscamedirectlytoSiliconRoundaboutfrom San Franciscoand SiliconValley.Thesefactorscametogethertocreateaknowledge-sharing ecosystem.Successsoon followed.Live.fm andTweetDeckwereearlystart-ups,boughtby CBSfor$280millionin2007and Twitterfor$40millionin2011,respectively. However,asSiliconRoundabout’sstarascended,twofactorsthathelpedtodrivesuccess– lowrent andtheUK’sopenimmigrationpolicies–bothchanged.Rentsdoubledin5years, pushingsmaller firmsandstart-upsout.Developersacquiredproperties,andenforcedlarger securitydepositsand morestringentcreditchecksthatpreventedentryforsmallerfirms. Theygraduallymovedonandout, tootherareasofLondonlikeWhitechapelandAldgate. TThesecondshiftwasthetighteningofimmigrationpolicy:non-EUworkervisasarenow cappedat 21,700andrecentnon-EUgraduatesofUKuniversitiesarerequiredtofindajob within3monthsof graduating,sponsoredbytheiremployer(atacostof£1,476),earninga minimum of£20,800.Some firmscanabsorbthesecosts.Others,especiallyfragileand cash-poorstart-ups,cannot. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles6
  7. 7. “Ifhighgrowthfirmscannotmeettheirtalentneedsthrough domesticorlocaltalent,theyneedtobe lookingglobally,”saysCharlotteHolloway,Headof PolicyattechUK,atechnologyindustryassociation. “Tobeaglobalhubfortechnology,we reallyneedtobeaglobalhubfortalentandthatinvolves gettingthebestintoourcluster,” shesays.Thenewimmigrationpolicies,andotherproposals currentlyinplay,are concerning.“Theindustryhascertainlyfeltachangeoftoneinrecenttimes,”says Ms Holloway.Inparticular,shewarnsagainstvisarulesmakingitharderforgraduatestostay onin ththecountry.“Ouruniversitiesarefundamentaldriversofgrowthandweneedthat talenttobe retained.” ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles7
  8. 8. Part3: Singapore:Builtfrom scratch WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER Singaporetransformeditselffrom anagrariansocietytoaninnovation world-leaderinhightechsectorslikeelectronicsandlifesciences.High qualityeducation,publicinvestmentandfar-reachingbusinessclimate reformswerecriticalengines.Butisthecitystatenowgettingtoo crowded? WhenSingaporebecameindependentin1965,itwasatropicalislandwithfewnatural resources,little freshwater,rapidpopulationgrowthanddomesticethnicandreligious conflict.Italsofacedhostilities inthebroaderregion:hardlyanauspiciousstartforanew country. Sincethen,Singaporehasfocusedwithlaser-likeprecisiononbecomingaseconomically powerfulas possible,asfastaspossible.Singaporeestablisheditselffirstasacentrefor low-costmanufacturing andlateronelectronicsand,morerecently,lifesciences.Its innovationcredentialshavestrengthened sincetheearly2000s,anditisnowaworld- leadingcentreinareassuchasbiotechnology. IItsperformanceislargelydowntothreefactors:talent,supportivegovernmentpolicy,and direct publicinvestment.Thefirstistheresultofasustainedpubliccommitmentto education.From avery lowbase,Singaporenowranksconsistentlyatornearthetopof mostmajorworldeducationranking systemsoverthelastdecadeaccordingtotheOECD. TThestrategystartedwiththe‘building’stageof1959-1978,whichsawtherapidconstruction of schools,massteacherrecruitmentandunificationofasingleSingaporeaneducation system which wasfollowedin1979to1996byimprovingeducationqualitythroughtoits finalphase,from 1997to thepresentday,whichwasfocussedonrefinement. DDuetoitssmallpopulation,Singaporealsolookedtoattractstudentsfrom nearbycountries through theASEANscholarship,whichcoversfeesandtuitionforqualifiedstudents,andthe TuitionGrant Scheme(TGS)forinternationalstudents,whichcoversuptotensemestersof tertiaryeducation.Both schemesrequirethatgraduatesremaininSingaporeforupto6 yearsandfor3years,respectively. Suchtactics,aswellasaliberalimmigrationpolicy,have aidedglobalinflowsofhighlyskilledlabour, leadingtotechnologyandskillstransferbetween largemultinationalsanddomesticcompanies. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles8
  9. 9. Supportivegovernmentpolicyalsoplayedarole–througheffortstocreateanefficientand easy businessenvironment,anddirectinvestments.Astheeconomyshiftedtoknowledge- basedsectors andtheskillsbaseimproved,thegovernmentsoughttoattractmultinational companiesbyoffering taxincentives,eliminatingpoliticalcorruption,andbolsteringIP protection. AAlongwitheaseofbusinessreforms,therearealsograntstoencouragebusinessformation and start-ups,suchastheACEStart-upGrant,dedicatedtonewlyformed,localmajority- owned companiesdevelopingadifferentiatedbusinessconcept.Thegovernmenthasbeen adirectactive investorinbroaderinnovationinfrastructurestoo,spendingaround$6billion between2000and 2005inbiomedicalsciencesincludingtheformationofBiopolis,a biomedicalresearchand developmenthub.ThisisperhapsSingapore’smostpromising cluster. SSingaporebeganlookingtobiotechnologyinthe2000stodiversifyitseconomicbase,and utiliseda combinationoftaxholidaysandincentives–suchaspayingupto30%ofbuilding costsofcompanies undertakingbasicdrugresearchanddevelopment.Itsabilitytoattract stem cellinvestmentwasalso helpedbyareductioninfundingintheUSduetoethical objectionsfrom theBushadministration. Singaporeisalegallymoreliberalresearch environment,allowinganumberofresearchpractices, suchasuseoftheearlystagehuman embryosfortherapeuticresearch,whichisbannedinother countries.Asaresult,top biotechnologyexpertsfrom leadingestablishmentssuchasthe MaMassachusettsInstitutesof Technology,theNationalCancerInstituteinMarylandandtheUniversity ofCaliforniahave cometoSingaporeoverthelastdecade,citinggreaterfunding,moreorganisational  freedom,amoreliberalresearchpolicy,andagreaterappreciationofthebenefitsoflong term R&D. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles9
  10. 10. Sofar,Singaporehassuccessfullyadapteditsmodelthrougheachsuccessivestage– movingfrom low costmanufacturingtoelectronicstoamorediversifiedeconomy, positioningitselfasahubfor multinationalswishingtobuildtheirAsianbusinesses.Nestle, AbbottLaboratoriesandGoogleare amongthecompanieswhohaveevensetupresearch institutesinSingapore. BButaswithallclustersandhighlyproductiveeconomicgeographies,itfacesemerging challenges– especiallywithregardstotheworkforce.Whileimmigrationbringsnewworkers andideastothehost country,itisnotwithoutrisks.Singaporeisasmallisland,roughlyhalf thesizeofLondon,and two-thirdsthesizeofHongKong,andishometo5,469,700people. Thepopulationhasincreasedby 3%annuallyfrom 2005to2013,accordingtotheWorld Bank,andpopulationdensity,measuredas thenumberofpeoplepersquarekilometer,has increased27.7%between2000and2013,according toSingstat,theSingaporeanstatistical agency. AAsthepopulationhasincreased,sohasthenumberofimmigrants,morethandoubling between 2000and2014.Thestrainonpublicservices,andcompetitionforspace,has combinedwith ever-growingdemandforhousing,increasingpropertypricesandprompting domesticdissent, accordingtoDrPohKanWong,DirectorofNationalUniversityof Singapore’sEntrepreneurship Centre. DDrWongarguesthatforeignimmigrationhasperhapsreachedacriticalmasswhere enclavesof foreignersarestartingtoform,reducingassimilationandintegration,inturn underminingtheideaof a’Singaporeanidentity’.Atthesametime,policymakersknowthat theyareinaraceforglobaltalent andmustremainopentohighlyskilledlabour.Asaresult, thegoverningpartyhasstartedfocusingon filteringimmigration,attractinghighlyskilled immigrantsthatcancontributetoSingaporeonthe globalvaluechainthroughknowledge andtechnologytransfer,whilemakingitmoredifficultforlower skskilledimmigrantstosettle. Aswithallclusters,Singapore’ssuccesscreateditsownnewproblems, whichthecitystate hastoadaptto. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles10 Abusyisland
  11. 11. Part4: PluckyEstonia:EasternEurope’s startup WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER Estonia’stechsectoristheproductofauniquehistory,includingan engineering-focusededucationsystem intheUSSRera Governmenthasactivelyrolledoutdigitaltechnologiesinavarietyofcitizen services,boostingthedigitalskillslevelsofthecountry’scivilians.TheEstonian governmenthasalsoinvestedinR&D,triplingR&Dspending,from 0.6%ofGDP in2000to1.7%in2013 EEstoniahasturnedchallengesintoopportunities.Thecountry’shighICT penetrationrateleftitexposedtocyber-crime,leadingentrepreneurstoexplore newwaysofboostingsecurity.SkypeandKazaawereamongtheresulting innovations. From modestbeginnings,thissmallEastEuropeaneconomyhasturned challengesintoopportunities,evenleveragingcyberthreatstogrowits telecomsindustry.Despitebeingasmallcountryofjust1.3millionpeople, Estoniahasproducedoneofthemostdramatictechdisruptersofthe modernera:Skype.Highqualityskillsandadigital-savvypopulationput thisoncebarreneconomyonthetechnologymap. Keytakeaways– WhenEstoniagainedindependencefrom theSovietUnionin1991,itwasasmallcountrywithlittle infrastructure.YetoneofthebenefitsofitsSovietpastwasegalitarianaccesstohighereducationas wellasEstonia’sstrategicimportancetotheUSSRduringtheColdWar,whichcreatedanative populationwithhighlevelsofeducationinfieldsrelevanttoemergingtechnologysectors. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles11
  12. 12. Soviet-eraeducationfocusedheavilyonscience,engineeringandmathematics.Thepost-1991 governmentalsoinvestedheavilyintheknowledgeecosystem.In2015,30.7%of55-64yearoldswere educatedtotertiarydegreelevel,thehighestinEuropeandthesixthhighestintheOECD.The EstoniangovernmentalmosttripledR&Dspending,from 0.6%ofGDPin2000to1.7%in2013,andin 2011and2012EstoniaspentabovetheEUaveragebeforeloweringspendingin2013. TheEstoniangovernmentdidnotjustdevelopskills–italsoinvestedindigitaltechnologyforpublic services,creatingapopulationof‘digitalnatives’.Whenitgainedindependence,roughlyhalfofthe populationhadaccesstoalandlinephone,butbyMay2013,4Gservicesencompassedover95per centofthecountry.By1997,97%ofschoolshadinternetaccessand,beginningin2001,publicwifi becamemoreorlessubiquitous.1 EEUmembershiphasalsohelpedaidingEstoniatoshiftfrom alow-wage,lowvaluedaddedeconomy thatfocusedonmanufacturingandagriculturalexportstotheUSSRtoaservicesectororiented economythatexportshighvalueaddedtechnologyglobally.264%ofEstoniansnowworkinthe servicesectorcomparedto20%inmanufacturingand4%inagriculture,andstandardsoflivinghave increaseddramatically:GDPpercapitaincreasedfrom 55%oftheEUaveragein2004to73%in2014 (theearliestyearsforwhichEurostatprovidescomparabledata).3 1.TheEuropeanBankforReconstructionandDevelopment,“TransitionReport2014:Chapter5,PoliciesSupportingInnovation“ 2.In1997,theearliestyearforwhichtheOECDprovidesdata,unitlabourcostswere40%ofthe2010levelandincreasedbyroughly5.87%annuallyfrom1997to2012 3.Eurostat,“GDPpercapitainPP“ ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles12
  13. 13. EUmembershipalsobroughtaccesstoEUstructuralfundsandtheSingleMarket.Therelativelysmall sizeoftheEstonianeconomyalongwithdomesticpoliticaloppositiontothegovernmentrunninga budgetdeficit,canmakeitdifficultforthegovernmenttoinvestinlargescaleprojectslikeroadsand hospitals.During2007–2013,EUStructuralFundsprovided3.4billioneuroforR&Dandhospital investments,theformertosupporttheEstonianICTsectorandthelattertofosterinnovationsto Estonia’spressingdemographicproblems.4 SSingleMarketaccessincreasedgainsfrom tradeandtechnologyandknowledgetransfer.Because Estoniahasarelativelysmalldomesticmarket,manyofitsfirmshavetolooktoexpandexternallyas soonaspossible,andhaveintheprocessincreasedregionaltradedramatically.EightofEstonia’stop tentradingpartnersareEUmembersandin2013,betweenthetopfiveEuropeanUniontrading partners,bilateraltradeequalled7.78billioneuroinimportsand7.365inexportscomparedto1995 whentradeequalled1.495billioninimportsand1.141billioninexports.5Historicallinkageswith ScandinavianandNordiccountriesalsomeanthatmanyEstoniansspeakEnglish.55%ofEstonians spspeakEnglishforwork,doubletheEUaverage,and67%havelearnedaforeignlanguageforwork,6% higherthantheEUaverage.6 EUmembership,however,hasexacerbatedproblemsassociatedwithEstonia’sdecliningandageing population.WithhalfofEstoniansfluentinEnglish,emigrationfrom Estoniaincreasedbyroughly50% in2005,theyearafteritsascensiontotheEU.Thiswasespeciallythecaseamongtheyoung,33%of whom speakEnglishasasecondlanguage, andwhofacedanaverageunemploymentrateof14.3%from 2001to2014and17.1%from 2009to 2014.7 Althoughanageingpopulationandyouthemigrationhasplacedagreaterstrainonpublicserviceslike healthcareandpensions,innovationshavealsoemerged.In2011,twoEstonianslivinginLondon,UK, oneofwhom wasoriginallyaSkypeemployee,werefrustratedwithhavingtopayhighfeestotransfer moneybetweenthetwocountriesandsoestablishedanowgloballyrecognizedmoneytransfer service,TransferWise,inordertosendremittanceshomefrom abroad. 5.TheGovernmentofEstonia,“Estonianeconomyinnumbers“ 6.TheEuropeanCommission,“Europeansandtheirlanguages”July2012. 4.KPMG,“EUFundsinCentralandEasternEurope“ 7.LanguageKnowledgeintheEuropeanUnion,“Estonia”accessed27November2015 ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles13
  14. 14. InanattempttobringEstonianentrepreneursbackhome,thegovernmentisattemptingto increase repatriationandimmigration,fostering‘braincirculation’ratherthan‘braindrain’.It hasimplemented twokeyprograms:theIntegrationandMigrationFoundationande-Residency.TheFoundation providesfinancialsupportforethnicEstonianswhohave emigratedinthepasttenyearsandwishto repatriate.Overthecourseof2000–2012,it hassupportedthereturnofover1100people.8The e-Residencyprogram hasbeenmore successful.Withtheaim ofcompetingforinternationalbusiness withotherEUlocationslike Dublin,Ireland,maintainlinkageswithEstonia’srelativelylargediaspora, anandtoincreasethe likelihoodthatbusinessownerswillmovetoEstonia,theprogram makesopening and runningabusinesseasy.IndividualsareallowedtoestablishonlinefirmsinEstonia,sign contracts remotely,andpaytaxeswhilerunningtheirbusinessremotely.9Sinceitslaunchin December2014, 7000peoplefrom 119countrieshaveapplied,and6600havebeen grantede-residency.10 Estoniastandsoutasanexcellentexampleofhowgovernmentinvestmentinthebroaderinnovation ecosystem –spanningeducation,digitalservicedelivery,R&Dspending,globalmarketingand fosteringstrategictradepartnerships–cancatalyseclusters.Italsohelpsthat,accordingtoDoris Põld,theEstonianICTCluster’sClusterProjectManager,atradebodyforEstonianICTfirms,‘the governmentarethetruebelievers.TheyalwaysspeakaboutEstoniaandtheICTsectorwhentheygo onofficialvisits.Theyarethebestmarketingpeople.’ 8.TheIntegrationandMigrationFoundation,“Migrationstatistics” 9.e-Estonia,“Estoniane-Residency” 10.GovernmentoftheRepublicofEstonia,“Estoniane-ResidencyStatistics“ ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles14
  15. 15. Part5: Atalentmagnet:TheBeautyof Boulder WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER Boulder,inColorado,hasoneofthehighestinnovationratesintheUSas measuredby patentapplications.Itsqualityoflifehasbeenessentialto attractingAmerica’sbestand brightest. Smartpeoplearenotjustinterestedinwork:theyalsocareabouttheirsurroundings,the qualityof schoolsandhospitals,leisureandentertainmentandallmanneroflifestylefactors. Young,talented, professionalworkerscanrelocatemoreeasilythanthosewithlarger familiesandmore responsibilities.Therearehigh‘opportunitycosts’oflocation,sothey havedemandedvibrant neighbourhoodsthatofferattractiveamenities,suchasaccessto culturalresourcesandhigh-ranking publicschools. WWithoutsuchingredients,clusterscanfailbeforetheyevenbegin.InHongKong,the governmentbuilt ‘Cyberport’,alargecampuswhereentrepreneurscouldrentcheapoffice spaceandcollaborate.The clusterfailedduetoitsdistancefrom thecitycentre,where peoplewantedtoliveandwork.In contrast,thetownofBoulderinColoradohasattracted talentfrom aroundtheUSthankstoits desirabilityasaplacetolive. BBoulderisatownofaround100,000peoplethatpunchesaboveitsweightasaninnovation hub.It hasthemosthighlyeducatedpopulationofanyAmericancity.From 2009to2013, therewere10 patentsper1,000residents,thefifthhighestintheUS,afterSanJose, California,andaboveSan Francisco.ItishometoclustersofaerospacecompanieslikeBall AerospaceandTechnologies Corporation,oneofthetop100defencecontractorsinthe world,andbiosciencescompanieslike Covidien. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles15
  16. 16. PartofBoulder’sclusterstatusis“thankstolargecorporations,auniversity,andpublicly- funded technicalresearchorganisationslocatinginBoulderinthepast,whichledtoalarge numberoffirm spin-offs,”accordingtoDrAndrewCorbett,ProfessorofEntrepreneurshipat BabsonCollegein Massachusetts. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles16
  17. 17. In1965IBMestablishedanoffice,andfouryearslateragroupoftechnicianslefttofound StorageTek. Overtimebothcompaniesdownsized,leavingmanyhighlyskilledpeoplewith rootsinthelocalarea. Theyfoundedcompaniesthateitherstillexistorservedasthe incubatorsforlaterfirms.Muchofthis talentpoolhadaffiliationsandlinkageswith governmentresearchorganisationsinthearea. BButinadditiontohistoricalhappenstance,Boulder’ssuccessisalsolinkedtoitshigh performanceon liveabilitymetrics.Boulder’sproximitytotheRockyMountains,itsparksand outdooractivities,and culturalandpublicamenitieslikeartgalleriesandgoodpublic schools,makeforagoodqualityoflife forresidents.BoththegovernmentofBoulderand Boulder’sprivatesectorplaceemphasisonskills attractionandretentionbecause“itisthe skills,thetalent,andtheexpertisethatisattractingthe world-classscientists,engineers, entrepreneurs,thecompaniesandinvestmentthatarefuelling BoBoulder’seconomy,” accordingtoClifHarald,ExecutiveDirectorofBoulderEconomicCouncil. Openspacesarepartoftheoffering.In1967,Boulderincreasedthefinancingofland acquisitionsin itshinterland.AccordingtoClifHarald,theseopenspacesnowaccountfor threequartersoftotal squaremileageinBoulder,andwerepurchasedtopreservethe environmentandqualityoflifethat locals’treasure,andblockurbansprawl.Tomaintainthe city’sdevelopment,Boulderestablisheda buildingheightlimitationin1971topreservethe viewoftheRockies. Boulder’sapproachtopreservingtheenvironmenthas,however,sowntheseedsofanew challenge: limitedhousingstock,pushinguprents.Publicuproaragainstrezoningoflandto facilitate commercialpropertydevelopmenthashadnegativeimplicationsforthearea’s innovation.Limited commercialandresidentialpropertydrivesupprices,raisingbarriersfor smallerfirms.Rentalcosts arenow20%higherrelativetoColoradoand26%higherthanthe USaverage,forinstance.High propertycostscanpushpeopletolargercitiesinthestate, likeDenver,orareaswithgreater opportunitiestoscaleupandaccessnationalandglobal markets,likeSanFrancisco. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles17
  18. 18. Part6: T-Ecosystem:Bangalore’sgrowing pains WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER Bangalorebecameoneofthefastestgrowinginnovationclustersoutside oftheUSinthe1990s.Butcreakinginfrastructure,looseintellectual propertyrulesandcut-throatcompetitionhavetakentheirtoll. Innovationclustersarecommonlyassociatedwithwealthycountries,butrichcountriesnolonger enjoyanunquestionedmonopolyoninnovation.Emergingmarketshavetheirchallenges–from creakyinfrastructuretobureaucraticlegislation–buttheyalsohaveuniqueadvantagessuchaslower costsand,insomecases,readyavailabilityofaneducatedandgloballycompetitiveworkforce.  Bangalore’sICTcluster,insouthernIndia,isthemoststrikingexampleofanecosystem thatleveraged itshomecountry’shumancapitaladvantageeffectively.  BBangaloreemergedasoneofthelargestandfastestgrowinginnovationclustersoutsideoftheUSin the1990s,andistodaytheengineering,researchanddevelopmentcentreofIndia.In2008,itwas hometo65%oftheworld’sITservicesoffshoringbusiness,andin2013accountedfornearly40%of thecountry’stechnologyandsoftwaredevelopmentindustry.Microsoft,IBM,Adobe,andIntelallhave rootsinBangalore,alongsidemorethan800domesticfirmsofferingback-and-middleofficetasks, andawiderangeofanalyticsservicestotheglobalmarket. EEducationisakeysuccessfactor.BangaloreishometosomeofIndia’sandtheworld’stopranked educationalinstitutionsforgraduateandpostgraduatestudies,creatingastrongpoolofhighlyskilled workersatrelativelylowcostsforglobalcorporations.Bangalorealsoleveragedits9.5to12.5hour timedifferencetotheUS.Itcouldprovideback-endtechnologicalsupportthatdidnotneedtobe co-locatedwithfront-linebusinessandcouldbecarriedoutona24/7rotatingshiftbasis. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles18
  19. 19. AccordingtoProfessorFlorianTäube,EmileBerheim ChairofEntrepreneurshipattheUniversitéLibre deBruxelles,Bangalorealsohasa“pleasantclimate,similartoNorthernCalifornia.Itisdrywith moderateamountsofrain,whichprovedagoodlocationforhardware-basedtechnologyfirmsand labsthatneededamoderateclimatetodoresearch,becauseofthepotentiallydamagingeffectsof heat,moistureandhumidityoncomponents,electricalpartsandITequipment.Coolerclimatesare alsohelpfulbecausesignificantITassetsemitheatwhichcanmoreeasilybemanagedifthegeneral cliclimateiscooler.Peoplealsowantedtolivethere,asitwasmoretemperatethanotherpartsofIndia,” andthis“actedlikeamagnetforindividualswithhighlevelsofhumancapitalintheregion.” DirectpolicyalsoplayedaroleinBangalore’sevolution.In1990,theDepartmentofElectronics introducedtheSoftwareTechnologyParksscheme–similartoChina’sspecialeconomiczones,for Bangalore.Softwarefirmsweregiventaxcutsforfiveyearsandguaranteedaccesstohigh-speed satellitelinksandreliableelectricity. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles19
  20. 20. US-basedtechnologyfirmsbeganoffshoringtoBangalore,incentivisinglocalSMEstospecialisein serviceslikecoding.Initially,thisoftenmeantimportingIndianprogrammerstotheUStoprovide maintenance.However,in1993,theUSmadeitmoredifficulttoobtainnon-immigrantvisas.Thisled USfirmstooutsourceworkbacktoBangalore.Indianfirmsquicklyadaptedtotherequirementsof USfirms,forexamplepunctualdeliveryandproductquality.SomeIndianfirmsdevelopedreputations asreliablesuppliersintheUSmarket,suchasInfosys.Overtime,theUS-Indiarelationshipevolvedyet fufurther.OnceUSfirmssawthequalityoftoptierIndiancompanies,theybegantooutsourceinternal R&Dtasks. However,Bangalorenowfacesitsownproblems.Itsabilitytoclimbthevaluechainhasbeeninhibited byIndia’sloosestanceonintellectualpropertyprotection–foreignfirmsareincreasinglyreluctantto outsourceR&D.ManyofBangalore’scompaniesstillprovidestandardisedservicesand,becausethere arenowsomanyfirms,multinationalshavelittleincentivetocreatealong-term relationshipwithany singlesupplier. Themushroomingofcompanieshasledtoaproblem of‘over-competition’.Asoftoday,thetop20 Indiansoftwareexportersaccountforover50%oftotalexports,leavingover800firmswiththerest ofthemarket.Competitionisfierceamongthebottom 800,leadingtoalackofcollaboration. Becausecompetitionissoaggressive,firmsinstilintheiremployeesacultureof“getitrightthefirst time.”Thismeanslowlevelsofexperimentationandrisk-taking.Asaresult,Bangaloreisfindingit difficulttoclimbthevaluechain. BBangalore’ssuccesshasalsocreatedcostinflationduetorisingwages,andcongestionhasincreased. InfrastructureprojectshavebeendifficulttoimplementrelativetoChina,oneofIndia’smainglobal competitors.EvenBangalore’snewairport,builtin2008,cannotrelievethetrafficthatmakesthetwo maintechnologyparksinaccessibleduringtheday,accordingtoCristinaChaminade,professorof innovationstudiesatLundUniversity.Takentogether,costincreases,lowR&Doutsourcingand congestionallshowtheneedforBangaloretoevolveifitwantstostayahead. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles20
  21. 21. Part7: Conclusion:Innovationclusters: TheSuccessRecipe WRITTENBYTHEECONOMISTINTELLIGENCEUNIT BRIEFINGPAPER TheEconomistIntelligenceUnitexploresthe‘bigsix’factorsdriving successfulinnovation clusters. Innovationclustersarecruciallaboratoriesinwhichnoveltools,technologiesandtechniques are createdandapplied.Buttheyarenotjustthe‘background’toinnovation;theyareliving organisms integraltoeverythingthathappenswithintheirwalls.Notwoclustersarethe same–andtherecanbe nohardandfast‘formula’forwhatmakesclusterswork.Butthere areprinciplesnecessaryforlaying thegroundworkforsuccess Askilledworkforce AAllsuccessfulclustershaveanedgewhenitcomestohumancapital,eitherlocalor imported.This highlyskilledworkforcehasemergedandmanifestedinseveralways.A densenetworkoftoptier highereducationestablishmentshasbeencriticaltothesuccessofSiliconRoundabout inLondon, BoulderinColoradoandBangalore.Estonialackedthiskind ofuniversitynetwork,butcompensated byhavingahighlyeducatedpopulationthankstothe country’sfairlyegalitarianaccesstoeducation historically,buttressedbythegovernment’s eagernesstopromotedigitalskillsinthepopulation. SSingapore,withasmallpopulation,leverageditsnationalacademicinstitutionsalongwitha talent attractionstrategyandasolidbusinessenvironment–bothofwhichhavegivenita strongnational workforcewhetherindigenousorexpatriate.Whilenaturalresourceshave supportedtheemergence ofsomeclustersinhistory,theyareknowledgeintensive phenomena.Skillsenhancement,combined withadiversifiedglobalworkforce,havebeen keyingredients. Accommodatingpolicyframeworks GGovernmentshavearoletoplayinpromotingclusters,buttheirinterventionsjustasoften prevent successascultivateit.Thebestinterventionsarenotnecessarilyfiscalandtaxation policiesrelated specificallytoacluster,butratherinterventionswhichsupportthebroader inputsthatclusters dependon,suchaseducation,infrastructureandconnectivity. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles21
  22. 22. Moreimportantly,governmentsmustcarefullyweightheimpactofotherpolicychanges, suchas migrationcapsorvisarestrictions,ontheirnationalclusters’accesstotalent.The bestpractice principleisforgovernmenttoinvestinthefundamentalsandcontinuously evolvethenatureofits interventionbasedontheneedsofthegrowingcluster,andleavethe specificsoftheinnovation clusterprocesstothecompaniesandinnovatorsthemselves. Theinfrastructureimperative OOneofthekeycharacteristicsofsuccessfulclustersisthenetworkingthattheyenableas firms collaborate,andskilledpeopleintermingletoshareideas.Firmsneedtocollaborate withoneanother andworkersneedfreedom tomove,formeetingsuppliers,clients, financiersandsoon.Thisrequires efficientinfrastructuresthatcanallowworkerstomove aroundquicklyandcheaply.Expensivepublic transport,orgrowingcongestionsuchas facedbyBangalore,bothreducetheefficiencyofclusters whereitmattersmost:the interminglingofpeopleandideas.Itisworthlookingtohistoryforproof: accaccordingtothe economistJosephSchumpeter,muchoftheinnovationthatemergedduringthe earlyhigh growthyearsoftheUScameaboutasadirectresultoftheburgeoningrailroadsystem. Chanceandgoodfortune Sadlyforplanners,chanceandgoodfortuneplayaroleindeterminingthesuccessof clusters.By chance,werefertoallofthosedynamicswhichcouldnothavebeenbrought aboutwithforesightor purpose,butwhich–havingexisted–cametocatalyseinnovation. Historicalcircumstanceisoneexample.Estonia’s pastrelationshiptotheUSSRhadtwo impactsonits latertechnologicalsuccess:highlevelsofeducation,especiallyinmathsand engineering,duetoan egalitarianeducationsystem intheUSSRera,andacybersecurity threatinmorerecentyearsthat impelledinnovation.Boulderbuiltonthedecisionoflarge technologycompaniestolocatethereinthe distantpastthatsetupaprocessoftalent circulationleadingtospinoffswhobecameinnovators morerecently. GGeographyisalsoa‘goodfortune’factor,especiallyinpositioningaclusterclosetokey markets.Costa Ricaisagoodexampleofacountrywhoselifesciencesclusterhas benefitedfrom itsproximitytoUS markets. BButcrucially,chanceandgoodfortunedoesnotmeanthereisnoroleforhumandecisions.  Companiesandgovernmentsmustconsciouslyrecognisethebenefitsthatsuch happenstance occurrencesprovide,andbuildonthem.Thereareplentyofcountriesthat wereformerlypartofthe USSR,andarestillcloselylocatedtoRussia,thatdidnotbuildon thatasEstoniahas.Similarly,there aremanycountriesinCentralAmericawithproximityto theUS,butwhohavenotcarvedoutalife sciencesclustersuchasCostaRica. Lowcoststructure LLowoperatingcosts,especiallyrentsoncommercialproperty,havebeenessentialdriversof cluster successintheearlystartupphases.Thisappliestorentalofofficespacebutalso theresidentialneeds oftheworkers.Otherlowcostscanalsohelp,suchastaxbreakson innovationrelatedactivities. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles22
  23. 23. Overtime,lowrentalcostsarethefirstadvantagetodisappear–thisisasneartoahard lawasone canfindinthefieldofclusteranalysis.Themoresuccessfulacluster,themore companieswantto locatethere,pushingupdemandonthehousingstock.Thisdynamicis hardtoeradicate,butcanat leastbeoffsetbypolicymakersiftheywishtoenablefurther buildingthroughplanningreforms,or evenimposingrentalcaps,althoughtheseare politicallydifficulttoexecuteinpractice. Liveability IInnovationclustersarehighperformersintermsofliveability,atleastrelativetoothercities within theircountrieswheretalentedworkersmightotherwisechoosetogo.Liveabilityisnot aspecific metricandnotwocitiesofferthesameadvantages.Butitcancoversuchcritical issuesaspublic safetyandpoliticalstability,goodpublicamenities,cultureand entertainment,andgoodschoolsand hospitals.Theseareallfactorswhichpolicymakersor publicinstitutionscaninfluenceiftheywantto nurtureclustersuccess,inordertoensure theirclusterappealstothosetoptierskilledworkerswho, ininthemoderneramorethanever before,havesomanychoicesaboutwheretolocatethemselves. ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles23
  24. 24. Whileeveryefforthasbeentakentoverifytheaccuracyofthisinformation,TheEconomist IntelligenceUnitLtd.cannotacceptanyresponsibilityorliabilityforreliancebyanypersononthis reportoranyoftheinformation,opinionsorconclusionssetoutinthisreport. EconomistIntelligenceUnit TTheEconomistIntelligenceUnit(EIU)istheworld’sleadingresourceforeconomicandbusiness research,forecasting,andanalysis.Itprovidesaccurateandimpartialintelligencetocompanies, governmentagencies,financialinstitutionsandacademicorganizationsaroundtheglobe,inspiring businessleaderstoactwithconfidencesince1946. Copyright ©©2016TheEconomistIntelligenceUnitLimited.Allrightsreserved.Neitherthispublicationnorany partofitmaybereproduced,storedinaretrievalsystem,ortransmittedinanyform orbyany means,electronic,mechanical,photocopying,recordingorotherwise,withoutpriorpermissionofthe EconomistGroup.Whilsteveryefforthasbeentakentoverifytheaccuracyofinformationpresented inthisdocument,neitherTheEconomistGroupnoritsaffliatescanacceptanyresponsibilityorliability forreliancebyanypersononthisinformation. LONDON 2020CabotSquareLondon E144QW UnitedKingdom Tel:(44.20)75768000Fax:(44.20)75768500E-mail:london@eiu.com NEW YORK 750ThirdAvenue5thFloor New York,NY10017,USTel:(1.212)5540600Fax:(1.212)5860248 EE-mail:newyork@eiu.com HONGKONG 6001,CentralPlaza 18HarbourRoad Wanchai HongKong Tel:(852)25853888 FFax:(852)28027638 E-mail:hongkong@eiu.com GENEVA Ruedel’Athenee321206GenevaSwitzerlandTel:(41)225662470 Fax:(41)223469347 E-mail:geneva@eiu.com ©TheEconomistIntelligenceUnitLimited2016 InnovationClusters:UnderstandingLifeCycles24

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