COMPASS MAGAZINE #10
COMPASS MAGAZINE #10

CLUSTERS OF INDUSTRY Governments worldwide nurture ecosystems to stimulate economic innovation

States, regions and nations are pursuing different methods to create industry “clusters,” concentrations of one-industry, technology-based economic activity that spawn innovative startups, attract private investments and give the entire area an economic boost.

South Korea is trying to do it in Daejeon and in Gyeonggi province. France is working on it in 12 cities starting with Grenoble. Mexico has at least 38. Even the Canary Islands is trying it.

The “it” everyone is trying to accomplish, inspired by the spectacular success of California’s Silicon Valley and Boston’s Route 128, is to spur economic growth by creating technology-based clusters of a single industry. An online search for the words “creating technology clusters” produces an astounding 25.2 million results.

“Clusters are an old theory which has its most compelling examples in the United States,” said Mark Muro, senior fellow and director of policy at the Metropolitan Policy Program at the Brookings Institution in Washington, DC. “Nations around the world are stressing the importance of the innovation economy, which is why they are attempting to build these early-stage ecosystems or clusters.”

US UNIVERSITIES FUEL THE R&D ENGINE

Silicon Valley and Route 128 began with the decades-long flows of US government research money into those areas’ universities and research institutes, which developed waves of new ideas. Entrepreneurs sought to commercialize them, and venture capital investors flocked to finance them. Large companies opened listening posts to scout partnerships with promising startups. State and local governments, plus chambers of commerce and public-private partnerships, attempted to round out these “ecosystems.”

“NATIONS AROUND THE WORLD ARE STRESSING THE IMPORTANCE OF THE INNOVATION ECONOMY, WHICH IS WHY THEY ARE ATTEMPTING TO BUILD THESE EARLY-STAGE ECOSYSTEMS OR CLUSTERS.”

MARK MURO SENIOR FELLOW AND DIRECTOR OF POLICY, METROPOLITAN POLICY PROGRAM, BROOKINGS INSTITUTION

At first, many technologists believed that clusters occurred completely by accident – until several were created by design. Austin, Texas, for example, created a semiconductor and electronic gaming cluster around the University of Texas, and San Diego created a wireless cluster around the University of California, San Diego, and a biotech cluster around the Scripps Research Institute.

Today, dozens of clusters exist across the United States, and state and local governments continue to create new ones.

CHINA’S APPROACH TO CREATING CLUSTERS

In China, the world’s second largest economy, the first industry cluster appeared organically in northwestern Beijing near the Peking and Tsinghua universities. The district, called Zhongguancun, developed in the 1980s and gave birth to Lenovo, now a global personal computer and mobile phone manufacturer, and to Baidu, the dominant search engine within China.

The Chinese government has attempted to create other technology clusters in Shanghai and Shenzhen, but Chinese experts believe that those cities’ concentrations of international supplier networks, created when foreign companies outsourced manufacturing to China, actually drove their success.

“Chinese and foreign firms set up semiconductor foundries in Shanghai to serve large foreign companies making electronic products there – that’s how Shanghai became the most significant semiconductor site in China,” said Yu Zhou, a professor of geography at Vassar College and co-editor of the new book, China as an Innovation Nation.

As a result, private-sector Chinese semiconductor design firms were able to launch in growing numbers, creating a cluster. Similarly, the cellphone cluster in Shenzhen arose from a concentration of foreign companies focused on supply chains and manufacturing.

“Chinese companies started to build their own knockoff cell phones because of the extremely flexible and comprehensive supply chain that existed,” Zhou said.

The Chinese cluster model does not depend on the flow of ideas from universities, partly because the government directs most of its R&D money to government-owned research institutes.

“The intellectual property emerging from universities and research institutes is rather minor at this point,” Zhou said. “What we’re seeing is companies introducing technology from a variety of sources and adapting them to the Chinese demand patterns.”

The challenge facing government-mandated clusters is creating what Zhou calls the “invisible industrial ecosystem”: the right mix of skills, supplier and financial relationships and personal connections.

“You can declare that a place is a cluster, but if the invisible ecosystem is not in place and if companies don’t want to locate there, you basically have a real estate development project,” she said.

GERMANY’S SECRET WEAPON: 60 FRAUNHOFER INSTITUTES

Germany structures its clusters around 80 research units, including 60 Fraunhofer Institutes, each dedicated to specific technologies. The institutes receive subsidies from the Federal Ministry of Education and Research as well as local and regional governments, but senior leaders often hold two positions: one at an institute and one in the private sector. Collectively, they serve as a uniquebridge between research institutions and private-sector companies.

One such cluster is called Intelligent Technical Systems OstWestfalenLippe, commonly known as “it’s OWL.” This cluster is aimed at helping German companies in the OstWestfalenLippe region in northwest Germany become more advanced in manufacturing. This technology-based revolution, known in Germany as “Industrie 4.0,” emphasizes advanced expertise in the Industrial Internet of Things, robotics and 3D printing.

“THE FINANCE INDUSTRY IN GERMANY IS MORE RISK-AVERSE. THIS IS UNFORTUNATE BECAUSE THERE ARE A LOT OF GREAT TECHNOLOGIES
AND IDEAS THAT HAVE POTENTIAL TO CREATE
PROMISING BUSINESS MODELS.”

ROMAN DUMITRESCU MANAGING DIRECTOR OF STRATEGY AND R&D, INTELLIGENT TECHNICAL SYSTEMS OSTWESTFALENLIPPE

“The different institutes are dedicated to specific technologies but can still have a broad range of topics,” said Roman Dumitrescu, managing director of Strategy and R&D at it’s OWL and a director at the Fraunhofer Research Institution for Mechatronic Systems Design. Altogether, 174 businesses, universities, research institutes and organizations collaborate in it’s OWL. Another widely admired piece of the German model is its dual educational and vocational training system. Some students go to universities, but others become apprentices in 342 recognized trades and attend vocational schools. Trades help ensure that companies in emerging technologies can find sufficient numbers of employees with relevant skills.

NATIONS RACE TO CREATE THE PERFECT FORMULA

Each of these models has strengths and weaknesses, but few planned clusters have achieved the magic combination of government-funded R&D, a critical mass of businesses, creative startups with growth potential and ready access to capital that emerged organically in Silicon Valley and along Route 128.

For example, American clusters tend to be driven at the state, regional or metropolitan level, so several governments may compete for the same companies. In contrast, central governments in countries like South Korea and Singapore control which location can host specific technology clusters.

“You can declare that a place is a cluster, but if the invisible ecosystem is not in place and if companies don’t want to locate
there, you basically have a real estate development project.”

YU ZHOU CO-EDITOR OF THE BOOK 'CHINA AS AN INNOVATION NATION'

“There are other weaknesses of the US model,” Muro said. “We’re good at early-stage deployment, but we aren’t good at later-stage development and we’re not very good at all at creating large pools of technically appropriate workers with skills relevant to growing technology industries.”

Germany, meanwhile, provides little support to startup companies, Dumitrescu said. The it’s OWL project therefore works primarily with large companies, including Miele and Hella, that can afford to spend millions of euros in just a few years to create full-fledged collaborations with research organizations. “Small and medium-sized enterprises do not have large R&D departments and cannot handle close cooperation like that,” Dumitrescu said.

Venture capital also is relatively unknown in Germany. “The finance industry in Germany is more risk averse,” Dumitrescu said. “This is unfortunate because there are a lot of great technologies and ideas that have potential to create promising business models.”

China supports startups well and benefits from plentiful venture capital, but its clusters have tended to encourage companies that adapt existing technologies and business models to the Chinese domestic market.

Cluster boosters worldwide are discovering that establishing the “invisible industrial ecosystems” that enable technology-based growth depends heavily on managing complex relationships among educational and research institutions, companies, financiers and governments. So far, no one has achieved a perfect model, but dozens of nations are working to improve their game.

by William J. Holstein Back to top