Innovation is the buzzword of the decade. All over the world, national leaders are looking to innovation and entrepreneurship to revive flagging economies and bring prosperity. Indeed, innovation – the transformation of novel ideas into marketable products– is a driver for economic vitality and is causing major shifts in the paradigms of daily life.
Around the globe there are geographical ‘hot spots’ where innovation rules. New technologies germinate at an astounding rate. New companies capturing opportunities from these technologies are ‘born global’, targeting global markets from their inception. Pools of capital, expertise and talent foster the development of new industries and new ways of doing business.
What distinguishes these innovation clusters from the industrial business clusters described by Michael Porter and others? From 20 years of observation of Silicon Valley, the archetypal Cluster of Innovation, Jerry Engel distilled the unique components and behaviors that made possible the evolution of Silicon Valley and its continuing expansion and re-invention. These attributes, as previously described in detail in several articles, are:
Components—The Innovative Engine of Clusters of Innovation (COI)
● Entrepreneurs: What differentiates entrepreneurs in COI is their orientation to create and grow businesses that will become major enterprises.[expand title=”More…”]They seek opportunities for big potential upsides and understand that achieving these goals often requires raising outside equity capital. Successful entrepreneurs take an investor’s perspective, striving to create value for themselves, their employees, and their shareholders through a sale (or public offering of the shares) of the business. These entrepreneurs often recycle themselves (and their wealth and their relationships) into subsequent startups. Such ‘professional entrepreneurs’ are the core actors in a COI. This perspective is quite different from the owner/operator perspective that dominates entrepreneurial behavior in many economies where one endeavors to create an enterprise that one will control for a lifetime and perhaps even pass on to one’s children. Such traditional entrepreneurs tend to create regional firms that do not evolve as quickly, don notdemand the investment of outside risk capital, and are not as inclined to innovation and rapid value creation.[/expand]
● Mature corporations: Large corporations everywhere are generally hungry for growth, new products and new markets.[expand title=”More…”]The innovations they seek are generally incremental (e.g. exploiting existing technology in new markets) or radical (e.g. unprecedented performance or cost saving) and not disruptive (e.g. new platforms that displace their existing business model or core competency). In a COI, mature corporations are often just a decade or two away from their own entrepreneurial beginnings and better understand how to collaborate with young startups to achieve their own innovation goals. These interactions can take many forms from simple contractual agreements to equity investments and partnerships. Such arrangements are fraught with existential challenges for the startup and require special skills and experience on both sides to make such Open Innovation processes a win-win. This approach differentiates the behavior of mature corporations in COI from their brethren in industry-based clusters.[/expand]
● Universities: It is common for universities to adopt practices that support local economic strengths (training students for appropriate skills, collaborative industry research, etc.). [expand title=”More…”]These practical and supportive roles do not provide the seeds for revolutionary innovations that lead to disruptive opportunities, new industries or new entrepreneurial ventures.What differentiates the role of the university in a COI is its support for the commercialization of university research, as exemplified by the role of Stanford University and the University of California, Berkeley, in the development of Silicon Valley.[/expand]
● Industrial research centers: When coupled with strong Open Innovation practice that supports the spin-out of technology to new firms, these centers can function much like universities in creating opportunities. [expand title=”More…”]Some centers are government-funded research labs; others are R&D centers related to universities, such as Stanford Research Park, or strategically located corporate R&D centers. Their presence often creates sparks for new ventures, as trained scientists and engineers exit to seek entrepreneurial outlets for their technical insights.[/expand]
● Venture capital: High potential entrepreneurship is intrinsically a resource-starved activity. Entrepreneurs are by definition ‘in pursuit of opportunities beyond the resources under their control’.[expand title=”More…”]A vital venture capital community is key to the success of Silicon Valley and other entrepreneurial clusters. In many regions this is a highly volatile resource, and few communities have been successful at sustaining a sufficient level of early stage capital. Financing innovations are rapidly appearing, however, with government initiatives and new sources of private financing emerging, and the capital requirements for some powerful IT-related innovations have been drastically reduced. All this is leading to a relative expansion in early stage venture funding and an increased opportunity for creating powerful global opportunities with fewer capital or geographic constraints.[/expand]
● Service providers: In COI, the classical professions of law and accountancy, as well as related service specialties, adapt their practices to match the entrepreneurial methods of their clients. [expand title=”More…”]They shed their demands for prompt payment and standard hourly rates, adapting more flexible approaches and pinning their economic rewards to the eventual success of the venture. Other than accountants, who are sometimes precluded by professional standards from participating in client ownership, service providers often seek a small stake in the venture in exchange for these fee concessions. In this way young startups can be supported by the best professional talent in a structure that aligns the interests of all parties with the ultimate success of the venture and an economic return to its investors.[/expand]
● Management: High potential startups soon outgrow the capabilities of the founding entrepreneurs to manage all the diverse activity, and a skilled and experienced management team is needed. [expand title=”More…”]In COI, compensation design often incorporates significant equity sharing arrangements structured so that management is incentivized to achieve the entrepreneur’s and the investors’ goals of rapid growth and early liquidity, since they will also share in this wealth creation. As a result of such practices, COI are often blessed with a professional class of entrepreneurial managers who have diverse experience and are motivated to step into high potential opportunities, even though the salaries are not the highest and the duration may only be for a few years.[/expand]
● Government: The role of government in enabling and sustaining Clusters of Innovation has received considerable attention.[expand title=”More…”] While many have identified the active initiatives of government, including providing funding, tax incentives, incubation space and research support, the most profound contribution of government may be to provide a safe stable society where the rule of law is respected. The rule of law includes legal process and penalties for civil and criminal acts, the ability to execute and enforce contracts, and the ability to protect one’s property, and it requires the timely adjudication of claims in a transparent manner that is perceived as fair and impartial. The rule of law can be difficult to achieve and must not be taken for granted. Bribery and corruption, often deeply embedded in emerging economies, can sap an economy’s ability to incentivize entrepreneurs and those who would invest in them.[/expand]
Behaviors—The Critical Differentiator in Clusters of Innovation (COI)
Unlike the industry-based business clusters described by Porter, Clusters of Innovation specialize in new business formation rather than a specific industry. This explains how innovation clusters are able to spawn waves of evolving industries and develop concentrations of new, seemingly unrelated industries. This is well illustrated by the waves of innovation in Silicon Valley.
Key behaviors in Cluster of Innovation are:
● Mobility of Resources: In a Cluster of Innovation an intrinsic sense of motion permeates the entire environment. [expand title=”More…”]add missing text[/expand]
● Alignment of Interests, Incentives and Goals: Enterprises and individuals within a Cluster of Innovation benefit from a web of shared values, business practice and culture. [expand title=”More…”]While fierce competition certainly exists within a cluster
community, the grander competition is often with incumbent solutions and their providers. Although the innovators compete with each other, they participate together in a win-win challenge to displace existing methods and introduce new solutions. Similarly, venture capitalists share deal flow and co-invest as a regular practice in spite of fierce competition among firms. Shared ownership arrangements, such as stock options, break down traditional barriers between owners and employees and align interests of founders, managers, employees, advisors, and investors with the success of the venture.[/expand]
● Global Ties and Bonds: The inter-relationships among people and firms within a COI naturally extend to relationships with other clusters. Immigrant professionals and executives often help their firms to access resources and markets in their countries of origin. ‘Born global’ companies forge similar international ties to gain access to assets and collaborations; such international connections transcend religious, ethnic, territorial and national boundaries and give these startups a global advantage for exploiting opportunities. The Global Network of Clusters of Innovation, identifies three types of international linkages: weak ties, durable bonds, and covalent bonds. Weak ties are casual connections from peer networking, sharing information, or doing business together; they are fluid and often the conduit for important intelligence, opportunity or personal mobility. Durable bonds are articulated commitments of doing business together, such as contracts or employment relationships, which permit mobility of assets and people with low transaction costs. Covalent bonds arise when geographically distant entities establish permanent embedded relationships that go beyond efficiency to mutual dependency, with single actors often performing vital functions in multiple locations. When the connections between two clusters evolve to multiple permanent interdependent bonds that cause entities in the clusters to operate in a coordinated fashion, these strongly linked clusters can be considered a Super-COI, where the development of each COI is tied to a certain degree to what happens in the other cluster. These relationships have been investigated and illustrated by Engel & del-Palacio.