Innovation
Global Tech Cluster Rush: More failures than successes likely - Part 1
By Michael Hennigan, Finfacts founder and editor
Mar 24, 2014 - 6:49 AM

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Global Tech Cluster Rush: The desire of cities across the world to clone California's Silicon Valley high tech model is not new and in the age of the Internet and the smartphone, with high tech firms having wide recognition among the general public, political leaders have been eager to support the ambition to nurture the genesis of the next Apple, Samsung, Google or Facebook. Tech clusters or science parks have been opened in big cities on every continent. Some will succeed, many will fail.

Many policy-makers seem to forget that high tech sector employment in an economy as a percentage of a workforce is typically in low single digits -- that point shouldn't be confused with the importance of different forms of innovation in an economy - - in particular a small one where the ambition to nuture new Microsofts, is simply stupid.

In the past decade, high-tech clusters have attracted more than $472bn in FDI (foreign direct investment) and created 1.4m jobs, according to data from greenfield investment monitor fDi Markets, which is published by fDi Intelligence, a unit of The Financial Times. Moreover, investments into sectors such as life sciences, software and IT, and ICT not only create new, well-paid jobs, but they are also seen to bring with them a certain cachet.

fDi Markets says that it is unsurprising, therefore, that thousands of locations are competing to become the next Silicon Valley. "Sensing this growing trend, Cardiff-based app development start-up Tradebox Media developed its own three-step 'manual' for building a tech hub – which suggested mapping the area to pinpoint existing tech companies, creating a recognisable brand and associating the cluster with a well-known landmark. Yet the real question is not how to create a tech hub, but how to create one that brings capital, jobs and the Facebooks and Apples of the future."

We noted last week that Israel is the only overseas example of the successful cloning of the Silicon Valley model and is now the most likely place for people to start a tech firm: the country has an estimated 375 startups per million inhabitants versus nearly 190 in America.

Last month AT Kearney, an American consultancy, reported on the top 100 global companies in a study that looked primarily at nine sectors within the ICT (information, communications, telecommunications), industry: IT services, IT hardware, software, communications equipment and services, consumer electronics, handsets, PCs/laptops/tablets semiconductors, and electronic components.

AT Kearney said that the world’s top 100 ICT companies in these segments generated $1.67tn in revenue in 2012, an increase from $1.59tn in 2011. For Europe, however, industry representation is low. Of the nine top-100 ICT companies from Europe, one will drop off the list when Microsoft officially acquires Nokia’s devices and services division this spring -- a move that will leave Europe with no representatives among the world’s top 10 handset makers. “Europe’s brightest spots are in B2B (business to business e.g. SAP of Germany), and there are also some leaders in smaller sectors that don’t make the top 100,” said Axel Freyberg, co-author of the study and EMEA leader of AT Kearney's Communications, Media, and Technology Practice. “However, in total, Europe has few large-scale ICT companies big enough to act as consolidators in each segment’s endgame. This leaves the others vulnerable to buyouts by larger rivals from other regions.”

In our globalised world, there is a trend for a small number of companies to dominate in key industry sectors from cars, chemicals, power generation, commercial aircraft and so on.

The example of Japan's Sony shows that once the culture of a country or company cannot adapt rapidly to change, it's almost impossible to regain a lost crown.

In the years before the launch of Apple's iPhone in 2007, Nokia was outspending the US company in R&D at a ratio of 4:1.

Nokia had transformed itself from a wood products group (it sold toilet paper in Ireland before phones under the brand 'Jeyes' -- remember 'Jeyes Fluid'?). While it ultimately was a failure, it did spawn a home-grown tech industry in its native Finland.

Today it's easier and cheaper to launch tech startups than a decade ago as costs of data storage, software, laptops and fast web connections have plummeted.

In January, The Economist wrote in a special report [pdf] on tech startups:

Digital startups are bubbling up in an astonishing variety of services and products, penetrating every nook and cranny of the economy. They are reshaping entire industries and even changing the very notion of the firm. "Software is eating the world," says Marc Andreessen, a Silicon Valley venture capitalist. This digital feeding frenzy has given rise to a global movement.

Most big cities, from Berlin and London to Singapore and Amman, now have a sizeable startup colony (ecosystem). Between them they are home to hundreds of startup schools (accelerators ) and thousands of coworking spaces where caffeinated folk in their 20s and 30s toil hunched over their laptops. All these ecosystems are highly interconnected, which explains why internet entrepreneurs are a global crowd."

The report says the current startup boom has more durability that the dot-com bubble and the authors delve back to the Cambrian explosion of 540m years ago when at that time the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly. They write: "Similarly, the basic building blocks for digital services and products - - 'the technologies of startup production,' in the words of Josh Lerner of Harvard Business School ‹have become so evolved, cheap and ubiquitous that they can be easily combined and recombined."

However, the big downside is what's called the App Economy or Gig Economy -- where freelancers try to scratch a living while a few hit the jackpot.

New York Times 2012: As boom lures app creators, tough part is making a living

General Motors had over 618,000 employed in the US in 1979 - - in well-paid jobs; today, General Electric employs 133,000 and Apple about 50,000 - - with a world price for its products, the majority of Apple's staff in the US are poorly paid. They work in retail and earn an average of $25,000 annually according to The New York Times.

Finfacts 2014: Google chief says jobs problem will be "the defining one" for next 20/ 30 years

Who is an entrepreneur these days?

Fast Company 2014: The sad tale of a “micro-entrepreneur” in the Gig Economy

Gary Reber, founder and executive director, For Economic Justice, says what President Obama and other politicians as well as economists and national media pundits, should be advocating is equal opportunity for every citizen to become a capital owner.

President Obama’s intent to bolster the tech sector with skilled workers is a worth-while objective, but what we, as a nation, must realize is that our scientists, engineers, and executive managers who are not owners themselves of the technological assets they create for corporations, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital 'worker' owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital (non-human means of production) are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming.

Clusters

Michael Porter, the Harvard Business School academic and author of the 1990 book, 'The Competitive Advantage of Nations,' defined a cluster as, "A geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities (external economies)."

Prof Porter told BusinessWeek that "the more there are no barriers, the more things are mobile, the more decisive location becomes. ..Now that globalisation continues to power forward, what has happened is that clusters must become more specialised in individual locations. The global economy is speeding up the process by which clusters get more focused. There is a footwear cluster in Italy, for example, where they still produce very advanced products. The design, marketing, and technology still are in Italy. But much of the production has shifted to Romania, where the Italians have developed another cluster. All of the production companies actually are Italian-owned. Taiwan has done the same by shifting production to China. The innovation is in Taiwan, but its companies are moving aspects of their cluster that don't need to be in Taiwan."

"I think the US is facing some very serious challenges. But the most important drivers of competitiveness are not national. They are regional and local. National policies and circumstances explain about 20% to 25% of why a regional economy is doing well. What really matters is where the skills and highly competitive institutions are based. Some of these assets take a very long time to build. But competitiveness essentially is in the hands of regions."

A recent paper from the US Kauffman Foundation, "Beyond Metropolitan Startup Rates: Regional Factors Associated with Startup Growth," [pdf] reports on entrepreneurship activity in 356 U.S. metros as examined from three angles: the startup rate for all industries, the startup rate for high-tech sectors and the rate for high-growth firms.

Contrary to the conclusions of most earlier studies, this regionally focused analysis found that the public sector can affect few significant factors to encourage entrepreneurship. For example, despite billions of dollars in government research expenditures, which widely are believed to trickle down to the private sector, area research universities and patents do not contribute to higher rates of entrepreneurship.

Education appears to be the most significant factor that the public sector may affect. Metropolitan areas with more college graduates will produce more startups; however, while college completion often is considered the minimum indicator of high skill, the study showed that a higher high school completion rate will further increase the area's startup rate.

The big questions in a July 2013 MIT Technology Review business report are why technology clusters arise and what the ingredients are to create one (see "Silicon Valley Can’t Be Copied"). Unhappily for regions that have spent billions attempting to become the next Silicon Valley, the answers to these questions are still in debate. “Clusters exist - - it’s empirically proven,” Yasuyuki Motoyama, a senior scholar at the Kauffman Foundation, said. “But that doesn’t mean governments can create one.”

Vivek Wadhwa, an Indian-born entrepreneur and academic in the US, says in the MIT piece that the first serious attempt to re-create Silicon Valley was conceived by a consortium of high-tech companies in New Jersey in the mid-1960s. They recruited Frederick Terman, who was retiring from Stanford after having served as provost, professor, and engineering dean.

Prof Wadhwa said:

What Porter and Terman failed to recognize is that it wasn’t academia, industry, or even the US government’s funding for military research into aerospace and electronics that had created Silicon Valley: it was the people and the relationships that Terman had so carefully fostered among Stanford faculty and industry leaders."

He cites Anna Lee Saxenian, a University of California, Berkeley professor, who  understood the importance of people, culture, and connections. Her 1994 book 'Regional Advantage: Culture and Competition in Silicon Valley' compared the evolution of Silicon Valley with that of Route 128 - - the ring around Boston - - to explain why no region has been able to replicate the California success story - -  with the exception of Israel in the interval.

Saxenian noted that until the 1970s, Boston was far ahead of Silicon Valley in startup activity and venture capital investments. It had a huge advantage because of its proximity to East Coast industrial centers. By the 1980s, Silicon Valley and Route 128 looked alike: a mix of large and small tech firms, world-class universities, venture capitalists, and military funding. And then Silicon Valley raced ahead and left Route 128 in the dust.

The reasons were, at their root, cultural. It was Silicon Valley’s high rates of job-hopping and company formation, its professional networks and easy information exchange, that lent the advantage.

Wadhwa says more than half of Silicon Valley's innovators are foreign-born and it also helps that Silicon Valley has excellent weather, is close to mountains and the ocean, and has a myriad of state-park hiking trails -- these help foster a culture of optimism, openness, tolerance, and sharing.

These are the ingredients that can't easily be recreated and venture capital only follows innovation, it goes where the opportunities for building wealth are, it doesn't create new opportunities. Any region wanting to build its version of Silicon Valley should focus on its people and culture.

Conor Lenihan, ex-Irish minister of innovation, advising on Russia's second attempt to create a Silicon Valley

In Russia, the Skolkovo Innovation Center outside Moscow is the latest project to aspire to copy Silicon Valley and $10bn is being invested by 2020 to do better than the last attempt. It is the brainchild of Viktor Vekselberg, an oligarch said to be worth $17bn,

According to the San José Mercury News, in 1959, Nikita Khrushchev, Soviet Union leader, visited IBM's San José's Cottle Road plant to see "a typical American plant in action," as Thomas Watson Jr., IBM president, told those assembled. "We have hundreds of such people," Watson told Khrushchev, who wanted to talk to production people, "average Americans in an average American company."

In the early 1960s, the communists began constructing their Silicon Valley in a place called Zelenograd - - apparently with the help of American spies.

The Economist says that the latest version of Silicon Valley at nearly 400 hectares, is twice the size of London’s Olympic Park. It will boast a research university with 1,800 students, 40 corporate research and development (R&D) centres and a “Technopark” housing up to 1,000 start-ups.

The Massachusetts Institute of Technology (MIT) has agreed to set up the Skolkovo Institute of Science and Technology.

Conor Lenihan, former Irish minister of innovation, is an adviser to the project and presumably, he doesn't welcome the prospect of economic sanctions following the annexation of Crimea.

"I personally was leading a team of people that raised in the last three years $1.2bn worth of investment - - that's R&D investment by major companies like Intel, IBM, Microsoft, Honeywell, Samsung, EADS, Boeing and other companies," says Lenihan. Around 30 'majors' have committed to the project, along with 1,000 start-ups - - "all hungry Russian companies with high growth potential," he says according to an Irish Independent report.

"Most of the major companies in Skolkovo have operations in Ireland. When I went around pitching the Skolkovo project to them, they would talk very fluently and at great length about their positive experience in Ireland. It's not just about the tax - - it's about the quality of the people, the set-up, the infrastructure around science and research."

However, apart from Crimea, the challenges are evident in a culture where President Putin's enforcers arrive in wartime gear at firms that are not regime insiders.

"I was sitting there for a meeting with a senior executive from Intel – and I saw these guys with flak jackets walking through the corridors very swiftly and decisively," Lenihan said in respect of a meeting with an executive from Intel, the American chip giant. "The Intel executive asked me 'What's happening, Conor?' I told him it was either a fire drill - - or an FSB raid. It was the latter."

A SWAT team from the FSB - - the post-Soviet version of the KGB -- had arrived at the Skolkovo offices as part of an anti-corruption sweep ordered from the top. Lenihan says the raid came as a shock but uncovered nothing.

"This happens frequently in Russia and is one of the things that worries and concerns external investors in Russia that you can be the subject of a very predatory raid or enforcement action either by judicial or tax or other regulatory bodies."

The deck is already stacked against the prospects of a Russian Silicon Valley without Kremlin harassment and now economic sanctions.

More to come in Part 2....

Finfacts 2014:

Venture Capital 2013: US financing at $33bn; Europe $7.1bn; China $3.5bn; Israel $2.3bn

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