San Jose, California, December 1984

Blueprint for innovation clusters

Everyone wants to emulate Silicon Valley, but clusters are rarely the result of central planning.

Last November, UK Prime Minister David Cameron used a trip to London's 'Silicon Roundabout', a cluster of Web and media start-ups centred on the Old Street roundabout at the north eastern corner of London's financial district, to roll out his vision for the UK economy.

He said: 'We're not just going to back the big businesses of today, we're going to back the big businesses of tomorrow. We are firmly on the side of the high-growth, highly innovative companies of the future.'

The elegant Victorian warehouses in the streets around Silicon Roundabout are now home to more than 100 Web and technology start-ups, working on everything from online business-card printing (Moo.com) to streaming music services (Last.fm, whose founders became local heroes when they sold their business to CBS for £140m).

There's a history of start-ups here that stretches back to before the dotcom bubble burst in March 2000, relatively low office rents, and a creative atmosphere, in part generated by an influx of artists and designers looking for cheap studios, which spawned the kind of cafes, bars, shops and clubs that help attract young staff.

Add in London's world-class universities, Cameron said, 'and it's clear that in east London, we have the potential to create one of the most dynamic working environments in the world.'

The question is, will it work? Can you wish a cluster into existence, or help it grow once it has formed? And why do these clusters matter so much anyway?

Why clusters matter

One reason governments promote technology clusters is a desire to demonstrate their modernity by backing entrepreneurship and a start-up culture. Another reason is to try and refresh the national economic base by countering the declining level of innovation in large companies, many of which have shed their central research and development (R&D) facilities due to cost concerns. These companies now concentrate R&D in their business units, where it quickly devolves into straightforward product or process development and so leaves undone the blue skies thinking that can create entirely new markets.

Most companies know what they have lost through giving up fundamental R&D, and try to compensate by working with universities and start-ups. This 'open innovation' strategy (as it was dubbed by Henry Chesbrough, an adjunct professor at UC Berkeley) sees companies collaborating to source and develop technology and to take the results to market. Done well, open innovation means an evolving relationship between multiple partners that offers them steadily increasing benefits as they grow to understand each other's needs more fully.

The apparent fit between open-innovation strategies and clustering is obvious: gather together companies and researchers with shared interests and they can form a tightly coupled network of experts that can share technical knowledge, market insights and specialist facilities easily, enabling them quickly to coalesce into focused collaborations when an opportunity arises.

Open innovation also enables companies to gather insights from unfamiliar disciplines, an increasingly important issue as the most valuable innovations are beginning to happen at the boundary between disciplines; think of medical devices, for example, or smart power.

Silicon Valley, USA

Silicon Valley in northern California is the textbook example of a successful technology cluster: it's why many other clusters, from Cambridge (Silicon Fen) to Scotland (Silicon Glen) to Shoreditch (Silicon Roundabout) have been given the 'Silicon' prefix.

Silicon Valley is home to some of the world's most important technology companies, such as Apple, Google and Intel, and has become the ultimate technology nursery, bringing together entrepreneurial people with strong personal networks, technical universities, industrial research centres such as the Xerox Palo Alto Research Center, experienced venture capitalists, and good market access.

A counter-culture vibe rooted in the 1960s, benign weather and the attractions of the California lifestyle helped attract the kind of people who wanted to change the world, and didn't mind taking a few risks and breaking a few rules to do it. When they succeeded, they took their money and went straight back to work, using their resources and experience to start more companies, becoming role-models of entrepreneurial success that others could emulate.

Cambridge, UK

Europe's most cited cluster is Cambridge, which emerged just over 50 years ago when two local entrepreneurs started a technology consultancy called Cambridge Consultants to put the brains of the University at the disposal of British industry.

This laid the foundations of the 'Cambridge Phenomenon', a culture of entrepreneurship and collaboration between industry and academia that has produced a lively group of information technology and biotechnology companies. It has been strengthened by the creation of Cambridge Science Park in 1970, as a place in which industry and academics could work more closely together, and the launch in 1988 of the St John's Innovation Centre to host early-stage companies.

Around 40,000 people in Cambridge now work in this cluster of 1,500 high-tech and service companies, some of which have become billion-dollar businesses. ARM Holdings, which designs the world's most widely used microprocessor, began in Cambridge, as did $6bn software company Autonomy.

There are other key clusters dotted around the globe. For example, Israel has a combination of engineering prowess, global personal networks, access to finance, entrepreneurial spirit and attitudes to risk that has made it an important player in some areas of the electronics, security and communications industries.

Massachusetts has become a key health and biotechnology cluster, playing host to Harvard's schools of medicine, dental medicine and public health, the Massachusetts Institute of Technology, the Joslin Diabetes Centre, the Dana Farber Cancer Institute, the CBR Institute for Biomedical Research, the Broad Institute, the Whitehead Institute for Biomedical Research and more. The academic and not-for-profit research centres are complemented by the presence of large pharmaceutical companies, as well as a string of biotechnology start-ups along Route 128, a road around the city.

What makes clusters work?

The endless stream of visitors from science parks who trailed through Cambridge and Silicon Valley in the late 1990s were all after one thing: the secret to successful clusters. Some of the more reflective may have asked themselves whether it was actually possible to create the kind of highly networked, fast moving, risk-taking cultures that they met on their visits, or whether they should just try to enhance what they already had.

David Cameron has considered the same question. In his November speech he said: 'We understand where previous governments have gone wrong. They believed that they could design and create a technology cluster from on high. But the lessons from Silicon Valley are instructive. There was no grand centralised plan.

'Yes, the US government and particularly its investment in defence industries gave it a head start. And new firms were attracted by the cheap rents, the venture capital and the pool of talent at Stanford University. But so much of Silicon Valley's growth was organic.

'This teaches government some simple things. Go with the grain of what is already there. Don't interfere so much that you smother. But do help out wherever you can. Help to create the right framework, so it's easier for new companies to start up, for venture capital firms to invest, for innovations to flourish, for businesses to grow.'

Part of this means breaking down boundaries. Speaking at an event held last autumn to celebrate 50 years of the Cambridge Phenomenon, Sir Leszek Borysiewicz, the newly appointed vice chancellor of the University, said one of the keys to Cambridge's commercial success was early and direct interaction across the industrial/academic divide.

'The boundary between industry and academia is like the boundary between East and West: it's important, the landscape is different on either side, but ultimately people can pass across it without noticing,' he said.

Mike Lynch, who founded Autonomy in Cambridge 14 years ago, highlighted access to talented people: 'The main thing was the cross-section of people we could get hold of.' Andrew Herbert, managing director of Microsoft Research Cambridge, said that the Cambridge brand has helped him recruit internationally.

Hermann Hauser, co-founder of seminal home computer company Acorn and doyen of Cambridge venture capitalists, added: 'Cambridge has become a low-risk environment in which to do high-risk things.'

Transitional places

One of the stumbling blocks for high-technology clusters is the mismatch between the output of academic research and the needs of the market; often the gap is too big to be closed in a single step, especially if you're expecting a start-up company to take it. Technology consultancies can provide what some call the 'missing mezzanine', a waypoint en route from academia to industry at which technologies can be matured until suitable for exploitation by industry. Such organisations strengthen a cluster and can have spin-outs of their own.

Germany's network of Fraunhofer Institutes serves a similar purpose, undertaking commercial R&D as well as helping to mature academic research into a form that can be commercialised. One of its biggest successes is the MP3 audio compression algorithm. Hauser has suggested the creation of a similar network in the UK, to be known as Maxwell Centres, to fulfil a parallel role.

Build your own cluster

Philips has taken some of these lessons to heart and developed a technology cluster of its own. The High Tech Campus was established over a decade ago on land alongside its research facilities in Eindhoven, the Netherlands. Since then it has become home to more than 90 companies and institutes, and 7,000 researchers, developers and entrepreneurs, who form what is said to be an 'open-innovation ecosystem'.

The Campus is trying to act as more than just a science park landlord, and so has encouraged initiatives such as the creation of MiPlaza, an independent Philips subsidiary that sells research services on a hotel-like basis, giving start-ups access to services otherwise beyond their reach. Campus management also orchestrates business support for start-ups, and indulges in a little social engineering to promote social interaction by insisting that all the tenants use the restaurants, cafes, sports, meeting and seminar rooms in a central facility known as The Strip.

Effective support

So what are the keys to a successful cluster? The basics are obvious: good physical and electronic communications; a stable business environment so that people can plan; a legal framework that protects intellectual property; good access, directly or through networks, to relevant end markets.

Many clusters are formed around a strong academic base, to provide both an educated workforce and the raw material of new ideas, although the denizens of Silicon Roundabout don't appear to rely on this too much. An attractive venue helps, although one young buck's dynamic and energising stamping ground may appear to another as little more than a terrifying and polluted road junction.

Access to finance is important, as is access to people with the experience to match the level and type of funding to the current phase of the business; there's no point in putting one man with an idea in front of a City venture capital firm, for example.

Some argue that direct government support, in the form of funding for start-ups, can help. Deborah Cadman, chief executive of the East of England Development Agency told the Cambridge Phenomenon conference that every pound it invests in innovation grants gives a return of £12 in economic or wider value.

'Is there a role for government in growing the Cambridge cluster? Absolutely,' she said. 'Competitors in Boston, Bangalore and Bangkok are investing in start-ups.'

She called for the government to keep providing grants for R&D and the development of proof-of-concept prototypes, and to help start-ups become ready to do business.

Cameron is erring on the side of indirect help, creating a framework in which it should be easy to start businesses, and equipped and advised to innovate. The Silicon Roundabout cluster will benefit from faster broadband from BT, advice from McKinsey and Qualcomm, and the presence in London of Vodafone's venture fund, a branch of Silicon Valley Bank, and a specialist banking facility from Barclays. There's also talk of Intel, Facebook and Google creating a local presence.

On the IP front, the government is considering establishing a 'fair use' policy similar to that which applies in the US, to enable the work of Web companies. It is also trying to rework the visa system to ensure that stricter controls on immigration don't stop talented people coming to the UK.

Where are they?

So if you build it, will they come? Can you wish a cluster into existence? Many would say no. Enabling entrepreneurial activity doesn't make people entrepreneurs: you need social acceptance of risk-taking and of failure. Some economies are just not geared to entrepreneurship; tightly regulated markets, excess bureaucracy, and widespread corruption all have a stifling effect on companies trying to do something new.

In 2005, author Thomas Friedman argued in his book 'The World is Flat' that skills and opportunity are increasingly evenly distributed around the globe. After the initial hubbub died down, a more nuanced view emerged, namely that the world is actually spiky, with a handful of places gathering huge talent pools and offering huge opportunities in an otherwise nondescript landscape of limited options.

Anna-Lee Saxenian, a professor at the School of Information at UC Berkeley, argues that knowledge workers have become 'new Argonauts', prepared to move wherever their skills can be most effectively deployed. Certainly, Silicon Valley's success is underpinned by the efforts of vast numbers of Indian and Chinese immigrants. The concern for established clusters is that, like Jason, many of the new Argonauts return home, to couple the entrepreneurial mindset learnt in the West with the under-used resources of their home countries.

The key to successful clusters is the attitudes of the people who work in them. No amount of targeted advice, cheap finance and low rents will turn someone who likes to be an employee into a risk-taking entrepreneur. What is possible is to create a benign framework for those who are naturally creative and entrepreneurial in which they can be supported in their endeavours. *

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