innovation clusters: understanding life...

Attractive Cost Structure

Liveabillity

The BIG 6Success Factors

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Connective In-frastructure

Serendipity

SkilledWorkforce

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

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Innovation Clusters:Understanding Life Cycles

A BRIEFING PAPER FROM THE ECONOMIST INTELLIGENCE UNIT

ABOUT THIS REPORT

IInnovation clusters: Understanding life cycles was written by The Economist Intelligence Unit. It examines the life cycles of five innovation clusters and the factors that determine success. The report is based on desk research and ten expert interviews. The case studies have been selected to cover both established and emerging markets, and to explore a range of cluster success factors such as demographics and talent; infrastructure; quality of life, policy and geography. The report was written by Michael Martins. The editor was Adam Green. The study was commissioned by Dubai Tourism.TThe Economist Intelligence Unit would like to thank the following individuals (listed alphabetically) for sharing their insights and expertise during the research for this paper.

Professor Erkko Autio - Chair in Technology Venturing and Entrepreneurship, and Director of the Doctoral Programme at Imperial College London Business School

Dr Cristina Chaminade - Professor in Innovation Studies at Lund University

Dr Andrew Corbett - Professor of Entrepreneurship and Faculty Director for the John E. & Alice L. Butler Venture Accelerator, Babson College

DDr Riccardo Crescenzi - Associate Professor of Economic Geography at the London School of Economics

Dr Luisa Gagliardi - Fellow in the London School of Economics Department of Geography and Environment, and Research Af liate at Bocconi University

Clif Harald - Executive Director at Boulder Economic Council

Charlotte Holloway - Director of Policy, techUK

PProfessor Florian Taube - Emile Bernheim Chair of Entrepreneurship in a Global Context at Universite Libre de Bruxelles

Professor Tony Venables - BP Professor of Economics, Oxford University Professor Poh Kam Wong - Director of National University of Singapore’s Entrepreneurship Centre

© The Economist Intelligence Unit Limited 2016 Innovation Clusters: Understanding Life Cycles 2

Innovation clusters: Understanding life cycles

Innovation clusters are like the companies they host: they can grow rapidly at inception, peak, and eventually – if they do not adapt– they stagnate or die. There are thousands of clusters around the world, but many struggle to achieve sustainability or scalability. Sometimes, the very factors that made them successful, cause them to fail later on.

WWhat allows clusters to combine the innovative spirit of start-ups with the resilience of established conglomerates, to extend their life cycle? Through case study evidence across five countries, and an expert interview program, the Economist Intelligence Unit explores ‘cluster life cycles’ in Silicon Roundabout (UK), Bangalore (India), Boulder (United States), Singapore, and Estonia and draws out key lessons from their experiences.

Part 1: Innovation Clusters: Why companies are better together

Part 2: London’s next incarnation

PPart 3: Singapore: Built from scratch

Part 4: Plucky Estonia: Eastern Europe’s startup

Part 5: A talent magnet: The Beauty of Boulder

Part 6: T-Ecosystem: Bangalore’s growing pains

Part 7: Conclusion: Innovation clusters: The Success Recipe


Part 1:Innovation Clusters: Why companies

are better together

WRITTEN BY THE ECONOMIST INTELLIGENCE UNIT

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Innovation clusters require six key ingredients: skills, accommodating policy framework, infrastructure, low cost structures (in early stages), a good lifestyle offering and serendipity. Clusters are like the companies they host: they change over time, and their long term success depends on how well they adapt to the challenges of success, like congestion and increased rents

CClusters are strongly reliant on an open immigration policy at the national level – tightening borders reduces a cluster’s access to global talent

Innovation is often associated with triumphant lone inventors. The likes of Thomas Edison, Louis Pasteur or Bill Gates are the central characters in this narrative. But all innovators spring out of a specific context. The environments that foster their individual and collective success are very often ‘innovation clusters’: ecosystems that stimulate and nurture the best ideas and attract the brightest talents.

CClusters emerge when a network of companies coexists within a geographic location, allowing each of them to collaborate – and compete – in a way which delivers greater productivity gains than they would achieve in isolation. Silicon Valley is the most famous, but there are countless others across every continent.

CClusters attract innovative people. They network, leading to the crosspollination of ideas. Companies benefit from each other’s success: What one invents, rivals can access – think of a productivityboosting tool like Dropbox. And what one firm invents, others can build on. Think of the ‘sharing economy’, led by trailblazers Uber and Airbnb, in turn giving rise to an army of startups taking the same idea to new applications. The sharing of knowledge, the spillover effects of innovation and the networking that densely populated spaces enable are all key ingredients for startup success.


The ‘big 6’ success factors

Yet for all their benefits, innovation clusters are not straightforward to build – and many do not last, even with the ‘magic ingredients’ seemingly there. To prosper, clusters need six key success factors: skills and talent, accommodating policy frameworks, infrastructure, low costs (especially in the early stages), a good lifestyle offering to draw talent, and finally good luck, whether geography (proximity to key markets), historical accidents or even good fortune.

These six factors are necessary conditions, although they are not always sufficient. Many places in the world lay claim to these six, but never give rise to a successful cluster. These factors are best seen as the necessary conditions for clusters, but not – on their own – the silver bullet. Cluster success depends both on individual factors, but also the interplay between them. Good universities are little use if there is no connectivity with industry. A high standard of living is not helpful if immigration policies prevent global talent from moving to the cluster.


Part 2:London’s next incarnation


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London is a global metropolis that reinvented itself with Silicon Roundabout’. But rising rents are pushing the next generation of start-ups out.

London is a financial powerhouse, a central node in international financial markets. But over the last decade, the city showed its powers of reinvention by hosting ‘Silicon Roundabout’, a digital tech cluster than brought the world new gadgets and apps like Tweetdeck and Livefm.

SSilicon Roundabout is located between ‘the City’, the financial heartland of London, and Hackney, one of the poorest areas of London. In its early stages, it benefitted from several favourable conditions. The area is accessible to central London via public transport, allowing companies to travel around the city easily. Rents were low, and many entrepreneurs from Hackney could access the area via bicycle. There were already artists, media professionals and technology entrepreneurs in the area. Many specialised in financial services, and had linkages with the UK’s national broadcaster, the BBC. This fluid exchange of knowledge and ideas between technology, finance and media communities was ststimulated by the UK’s open immigration policy in the late-2000s.

The area attracted a large community of Americans who studied at London universities and started working in the city thereafter. Others came directly to Silicon Roundabout from San Francisco and Silicon Valley. These factors came together to create a knowledge-sharing ecosystem. Success soon followed. Live.fm and TweetDeck were early start-ups, bought by CBS for $280 million in 2007 and Twitter for $40 million in 2011, respectively.

However, as Silicon Roundabout’s star ascended, two factors that helped to drive success – low rent and the UK’s open immigration policies – both changed. Rents doubled in 5 years, pushing smaller firms and start-ups out. Developers acquired properties, and enforced larger security deposits and more stringent credit checks that prevented entry for smaller firms. They gradually moved on and out, to other areas of London like Whitechapel and Aldgate.

TThe second shift was the tightening of immigration policy: non-EU worker visas are now capped at 21,700 and recent non-EU graduates of UK universities are required to find a job within 3 months of graduating, sponsored by their employer (at a cost of £1,476), earning a minimum of £20,800. Some firms can absorb these costs. Others, especially fragile and cash-poor start-ups, cannot.


“If high growth firms cannot meet their talent needs through domestic or local talent, they need to be looking globally,” says Charlotte Holloway, Head of Policy at techUK, a technology industry association. “To be a global hub for technology, we really need to be a global hub for talent and that involves getting the best into our cluster,” she says. The new immigration policies, and other proposals currently in play, are concerning. “The industry has certainly felt a change of tone in recent times,” says Ms Holloway. In particular, she warns against visa rules making it harder for graduates to stay on in ththe country. “Our universities are fundamental drivers of growth and we need that talent to be retained.”


Part 3:Singapore: Built from scratch


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Singapore transformed itself from an agrarian society to an innovation world-leader in high tech sectors like electronics and life sciences. High quality education, public investment and far-reaching business climate reforms were critical engines. But is the city state now getting too crowded?

When Singapore became independent in 1965, it was a tropical island with few natural resources, little fresh water, rapid population growth and domestic ethnic and religious conflict. It also faced hostilities in the broader region: hardly an auspicious start for a new country.

Since then, Singapore has focused with laser-like precision on becoming as economically powerful as possible, as fast as possible. Singapore established itself first as a centre for low-cost manufacturing and later on electronics and, more recently, life sciences. Its innovation credentials have strengthened since the early 2000s, and it is now a world- leading centre in areas such as biotechnology.

IIts performance is largely down to three factors: talent, supportive government policy, and direct public investment. The first is the result of a sustained public commitment to education. From a very low base, Singapore now ranks consistently at or near the top of most major world education ranking systems over the last decade according to the OECD.

TThe strategy started with the ‘building’ stage of 1959-1978, which saw the rapid construction of schools, mass teacher recruitment and unification of a single Singaporean education system which was followed in 1979 to 1996 by improving education quality through to its final phase, from 1997 to the present day, which was focussed on refinement.

DDue to its small population, Singapore also looked to attract students from nearby countries through the ASEAN scholarship, which covers fees and tuition for qualified students, and the Tuition Grant Scheme (TGS) for international students, which covers up to ten semesters of tertiary education. Both schemes require that graduates remain in Singapore for up to 6 years and for 3 years, respectively. Such tactics, as well as a liberal immigration policy, have aided global inflows of highly skilled labour, leading to technology and skills transfer between large multinationals and domestic companies.


Supportive government policy also played a role – through efforts to create an efficient and easy business environment, and direct investments. As the economy shifted to knowledge- based sectors and the skills base improved, the government sought to attract multinational companies by offering tax incentives, eliminating political corruption, and bolstering IP protection.

AAlong with ease of business reforms, there are also grants to encourage business formation and start-ups, such as the ACE Start-up Grant, dedicated to newly formed, local majority- owned companies developing a differentiated business concept. The government has been a direct active investor in broader innovation infrastructures too, spending around $6 billion between 2000 and 2005 in biomedical sciences including the formation of Biopolis, a biomedical research and development hub. This is perhaps Singapore’s most promising cluster.

SSingapore began looking to biotechnology in the 2000s to diversify its economic base, and utilised a combination of tax holidays and incentives – such as paying up to 30% of building costs of companies undertaking basic drug research and development. Its ability to attract stem cell investment was also helped by a reduction in funding in the US due to ethical objections from the Bush administration. Singapore is a legally more liberal research environment, allowing a number of research practices, such as use of the early stage human embryos for therapeutic research, which is banned in other countries. As a result, top biotechnology experts from leading establishments such as the MaMassachusetts Institutes of Technology, the National Cancer Institute in Maryland and the University of California have come to Singapore over the last decade, citing greater funding, more organisational freedom, a more liberal research policy, and a greater appreciation of the benefits of long term R&D.


So far, Singapore has successfully adapted its model through each successive stage – moving from low cost manufacturing to electronics to a more diversified economy, positioning itself as a hub for multinationals wishing to build their Asian businesses. Nestle, Abbott Laboratories and Google are among the companies who have even set up research institutes in Singapore.

BBut as with all clusters and highly productive economic geographies, it faces emerging challenges – especially with regards to the workforce. While immigration brings new workers and ideas to the host country, it is not without risks. Singapore is a small island, roughly half the size of London, and two-thirds the size of Hong Kong, and is home to 5,469,700 people. The population has increased by 3% annually from 2005 to 2013, according to the World Bank, and population density, measured as the number of people per square kilometer, has increased 27.7% between 2000 and 2013, according to Singstat, the Singaporean statistical agency.

AAs the population has increased, so has the number of immigrants, more than doubling between 2000 and 2014. The strain on public services, and competition for space, has combined with ever-growing demand for housing, increasing property prices and prompting domestic dissent, according to Dr Poh Kan Wong, Director of National University of Singapore’s Entrepreneurship Centre.

DDr Wong argues that foreign immigration has perhaps reached a critical mass where enclaves of foreigners are starting to form, reducing assimilation and integration, in turn undermining the idea of a ’Singaporean identity’. At the same time, policy makers know that they are in a race for global talent and must remain open to highly skilled labour. As a result, the governing party has started focusing on filtering immigration, attracting highly skilled immigrants that can contribute to Singapore on the global value chain through knowledge and technology transfer, while making it more difficult for lower skskilled immigrants to settle. As with all clusters, Singapore’s success created its own new problems, which the city state has to adapt to.


A busy island

Part 4:Plucky Estonia: Eastern Europe’s

startup


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Estonia’s tech sector is the product of a unique history, including an engineering-focused education system in the USSR era

Government has actively rolled out digital technologies in a variety of citizen services, boosting the digital skills levels of the country’s civilians. The Estonian government has also invested in R&D, tripling R&D spending, from 0.6% of GDP in 2000 to 1.7% in 2013

EEstonia has turned challenges into opportunities. The country’s high ICT penetration rate left it exposed to cyber-crime, leading entrepreneurs to explore new ways of boosting security. Skype and Kazaa were among the resulting innovations.

From modest beginnings, this small East European economy has turned challenges into opportunities, even leveraging cyber threats to grow its telecoms industry. Despite being a small country of just 1.3 million people, Estonia has produced one of the most dramatic tech disrupters of the modern era: Skype. High quality skills and a digital-savvy population put this once barren economy on the technology map.

Key takeaways –

When Estonia gained independence from the Soviet Union in 1991, it was a small country with little infrastructure. Yet one of the benefits of its Soviet past was egalitarian access to higher education as well as Estonia’s strategic importance to the USSR during the Cold War, which created a native population with high levels of education in fields relevant to emerging technology sectors.


Soviet-era education focused heavily on science, engineering and mathematics. The post-1991 government also invested heavily in the knowledge ecosystem. In 2015, 30.7% of 55-64 year olds were educated to tertiary degree level, the highest in Europe and the sixth highest in the OECD. The Estonian government almost tripled R&D spending, from 0.6% of GDP in 2000 to 1.7% in 2013, and in 2011 and 2012 Estonia spent above the EU average before lowering spending in 2013.

The Estonian government did not just develop skills – it also invested in digital technology for public services, creating a population of ‘digital natives’. When it gained independence, roughly half of the population had access to a landline phone, but by May 2013, 4G services encompassed over 95 per cent of the country. By 1997, 97% of schools had internet access and, beginning in 2001, public wifi became more or less ubiquitous.1

EEU membership has also helped aiding Estonia to shift from a low-wage, low valued added economy that focused on manufacturing and agricultural exports to the USSR to a service sector oriented economy that exports high value added technology globally.2 64% of Estonians now work in the service sector compared to 20% in manufacturing and 4% in agriculture, and standards of living have increased dramatically: GDP per capita increased from 55% of the EU average in 2004 to 73% in 2014 (the earliest years for which Eurostat provides comparable data).3

1. The European Bank for Reconstruction and Development, “Transition Report 2014: Chapter 5, Policies Supporting Innovation“2. In 1997, the earliest year for which the OECD provides data, unit labour costs were 40% of the 2010 level and increased by roughly 5.87% annually from 1997 to 20123. Eurostat, “GDP per capita in PP“


EU membership also brought access to EU structural funds and the Single Market. The relatively small size of the Estonian economy along with domestic political opposition to the government running a budget deficit, can make it difficult for the government to invest in large scale projects like roads and hospitals. During 2007 – 2013, EU Structural Funds provided 3.4 billion euro for R&D and hospital investments, the former to support the Estonian ICT sector and the latter to foster innovations to Estonia’s pressing demographic problems.4

SSingle Market access increased gains from trade and technology and knowledge transfer. Because Estonia has a relatively small domestic market, many of its firms have to look to expand externally as soon as possible, and have in the process increased regional trade dramatically. Eight of Estonia’s top ten trading partners are EU members and in 2013, between the top five European Union trading partners, bilateral trade equalled 7.78 billion euro in imports and 7.365 in exports compared to 1995 when trade equalled 1.495 billion in imports and 1.141 billion in exports.5 Historical linkages with Scandinavian and Nordic countries also mean that many Estonians speak English. 55% of Estonians spspeak English for work, double the EU average, and 67% have learned a foreign language for work, 6% higher than the EU average.6

EU membership, however, has exacerbated problems associated with Estonia’s declining and ageing population. With half of Estonians fluent in English, emigration from Estonia increased by roughly 50% in 2005, the year after its ascension to the EU. This was especially the case among the young, 33% of whom speak English as a second language,and who faced an average unemployment rate of 14.3% from 2001 to 2014 and 17.1% from 2009 to 2014.7

Although an ageing population and youth emigration has placed a greater strain on public services like healthcare and pensions, innovations have also emerged. In 2011, two Estonians living in London, UK, one of whom was originally a Skype employee, were frustrated with having to pay high fees to transfer money between the two countries and so established a now globally recognized money transfer service, TransferWise, in order to send remittances home from abroad.

5.The Government of Estonia, “Estonian economy in numbers“6. The European Commission, “Europeans and their languages” July 2012.

4. KPMG, “EU Funds in Central and Eastern Europe“

7. Language Knowledge in the European Union, “Estonia” accessed 27 November 2015


In an attempt to bring Estonian entrepreneurs back home, the government is attempting to increase repatriation and immigration, fostering ‘brain circulation’ rather than ‘brain drain’. It has implemented two key programs: the Integration and Migration Foundation and e-Residency. The Foundation provides financial support for ethnic Estonians who have emigrated in the past ten years and wish to repatriate. Over the course of 2000 – 2012, it has supported the return of over 1100 people.8 The e-Residency program has been more successful. With the aim of competing for international business with other EU locations like Dublin, Ireland, maintain linkages with Estonia’s relatively large diaspora, anand to increase the likelihood that business owners will move to Estonia, the program makes opening and running a business easy. Individuals are allowed to establish online firms in Estonia, sign contracts remotely, and pay taxes while running their business remotely.9 Since its launch in December 2014, 7000 people from 119 countries have applied, and 6600 have been granted e-residency.10

Estonia stands out as an excellent example of how government investment in the broader innovation ecosystem – spanning education, digital service delivery, R&D spending, global marketing and fostering strategic trade partnerships – can catalyse clusters. It also helps that, according to Doris Põld, the Estonian ICT Cluster’s Cluster Project Manager, a trade body for Estonian ICT firms, ‘the government are the true believers. They always speak about Estonia and the ICT sector when they go on official visits. They are the best marketing people.’

8.The Integration and Migration Foundation, “Migration statistics”9. e-Estonia, “Estonian e-Residency”10. Government of the Republic of Estonia, “Estonian e-Residency Statistics“


Part 5:A talent magnet: The Beauty of

Boulder


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Boulder, in Colorado, has one of the highest innovation rates in the US as measured by patent applications. Its quality of life has been essential to attracting America’s best and brightest.

Smart people are not just interested in work: they also care about their surroundings, the quality of schools and hospitals, leisure and entertainment and all manner of lifestyle factors. Young, talented, professional workers can relocate more easily than those with larger families and more responsibilities. There are high ‘opportunity costs’ of location, so they have demanded vibrant neighbourhoods that offer attractive amenities, such as access to cultural resources and high-ranking public schools.

WWithout such ingredients, clusters can fail before they even begin. In Hong Kong, the government built ‘Cyberport’, a large campus where entrepreneurs could rent cheap office space and collaborate. The cluster failed due to its distance from the city centre, where people wanted to live and work. In contrast, the town of Boulder in Colorado has attracted talent from around the US thanks to its desirability as a place to live.

BBoulder is a town of around 100,000 people that punches above its weight as an innovation hub. It has the most highly educated population of any American city. From 2009 to 2013, there were 10 patents per 1,000 residents, the fifth highest in the US, after San Jose, California, and above San Francisco. It is home to clusters of aerospace companies like Ball Aerospace and Technologies Corporation, one of the top 100 defence contractors in the world, and biosciences companies like Covidien.


Part of Boulder’s cluster status is “thanks to large corporations, a university, and publicly- funded technical research organisations locating in Boulder in the past, which led to a large number of firm spin-offs,” according to Dr Andrew Corbett, Professor of Entrepreneurship at Babson College in Massachusetts.


In 1965 IBM established an office, and four years later a group of technicians left to found StorageTek. Over time both companies downsized, leaving many highly skilled people with roots in the local area. They founded companies that either still exist or served as the incubators for later firms. Much of this talent pool had affiliations and linkages with government research organisations in the area.

BBut in addition to historical happenstance, Boulder’s success is also linked to its high performance on liveability metrics. Boulder’s proximity to the Rocky Mountains, its parks and outdoor activities, and cultural and public amenities like art galleries and good public schools, make for a good quality of life for residents. Both the government of Boulder and Boulder’s private sector place emphasis on skills attraction and retention because “it is the skills, the talent, and the expertise that is attracting the world-class scientists, engineers, entrepreneurs, the companies and investment that are fuelling BoBoulder’s economy,” according to Clif Harald, Executive Director of Boulder Economic Council.

Open spaces are part of the offering. In 1967, Boulder increased the financing of land acquisitions in its hinterland. According to Clif Harald, these open spaces now account for three quarters of total square mileage in Boulder, and were purchased to preserve the environment and quality of life that locals’ treasure, and block urban sprawl. To maintain the city’s development, Boulder established a building height limitation in 1971 to preserve the view of the Rockies.

Boulder’s approach to preserving the environment has, however, sown the seeds of a new challenge: limited housing stock, pushing up rents. Public uproar against rezoning of land to facilitate commercial property development has had negative implications for the area’s innovation. Limited commercial and residential property drives up prices, raising barriers for smaller firms. Rental costs are now 20% higher relative to Colorado and 26% higher than the US average, for instance. High property costs can push people to larger cities in the state, like Denver, or areas with greater opportunities to scale up and access national and global markets, like San Francisco.


Part 6:T-Ecosystem: Bangalore’s growing

pains


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Bangalore became one of the fastest growing innovation clusters outside of the US in the 1990s. But creaking infrastructure, loose intellectual property rules and cut-throat competition have taken their toll.

Innovation clusters are commonly associated with wealthy countries, but rich countries no longer enjoy an unquestioned monopoly on innovation. Emerging markets have their challenges – from creaky infrastructure to bureaucratic legislation – but they also have unique advantages such as lower costs and, in some cases, ready availability of an educated and globally competitive workforce. Bangalore’s ICT cluster, in southern India, is the most striking example of an ecosystem that leveraged its home country’s human capital advantage effectively.

BBangalore emerged as one of the largest and fastest growing innovation clusters outside of the US in the 1990s, and is today the engineering, research and development centre of India. In 2008, it was home to 65% of the world’s IT services offshoring business, and in 2013 accounted for nearly 40% of the country’s technology and software development industry. Microsoft, IBM, Adobe, and Intel all have roots in Bangalore, alongside more than 800 domestic firms offering back-and-middle office tasks, and a wide range of analytics services to the global market.

EEducation is a key success factor. Bangalore is home to some of India’s and the world’s top ranked educational institutions for graduate and postgraduate studies, creating a strong pool of highly skilled workers at relatively low costs for global corporations. Bangalore also leveraged its 9.5 to 12.5 hour time difference to the US. It could provide back-end technological support that did not need to be co-located with front-line business and could be carried out on a 24/7 rotating shift basis.


According to Professor Florian Täube, Emile Berheim Chair of Entrepreneurship at the Université Libre de Bruxelles, Bangalore also has a “pleasant climate, similar to Northern California. It is dry with moderate amounts of rain, which proved a good location for hardware-based technology firms and labs that needed a moderate climate to do research, because of the potentially damaging effects of heat, moisture and humidity on components, electrical parts and IT equipment. Cooler climates are also helpful because significant IT assets emit heat which can more easily be managed if the general cliclimate is cooler. People also wanted to live there, as it was more temperate than other parts of India,” and this “acted like a magnet for individuals with high levels of human capital in the region.”

Direct policy also played a role in Bangalore’s evolution. In 1990, the Department of Electronics introduced the Software Technology Parks scheme – similar to China’s special economic zones, for Bangalore. Software firms were given tax cuts for five years and guaranteed access to high-speed satellite links and reliable electricity.


US-based technology firms began offshoring to Bangalore, incentivising local SMEs to specialise in services like coding. Initially, this often meant importing Indian programmers to the US to provide maintenance. However, in 1993, the US made it more difficult to obtain non-immigrant visas. This led US firms to outsource work back to Bangalore. Indian firms quickly adapted to the requirements of US firms, for example punctual delivery and product quality. Some Indian firms developed reputations as reliable suppliers in the US market, such as Infosys. Over time, the US-India relationship evolved yet fufurther. Once US firms saw the quality of top tier Indian companies, they began to outsource internal R&D tasks.

However, Bangalore now faces its own problems. Its ability to climb the value chain has been inhibited by India’s loose stance on intellectual property protection – foreign firms are increasingly reluctant to outsource R&D. Many of Bangalore’s companies still provide standardised services and, because there are now so many firms, multinationals have little incentive to create a long-term relationship with any single supplier.

The mushrooming of companies has led to a problem of ‘over-competition’. As of today, the top 20 Indian software exporters account for over 50% of total exports, leaving over 800 firms with the rest of the market. Competition is fierce among the bottom 800, leading to a lack of collaboration. Because competition is so aggressive, firms instil in their employees a culture of “get it right the first time.” This means low levels of experimentation and risk-taking. As a result, Bangalore is finding it difficult to climb the value chain.

BBangalore’s success has also created cost inflation due to rising wages, and congestion has increased. Infrastructure projects have been difficult to implement relative to China, one of India’s main global competitors. Even Bangalore’s new airport, built in 2008, cannot relieve the traffic that makes the two main technology parks inaccessible during the day, according to Cristina Chaminade, professor of innovation studies at Lund University. Taken together, cost increases, low R&D outsourcing and congestion all show the need for Bangalore to evolve if it wants to stay ahead.


Part 7:Conclusion: Innovation clusters:

The Success Recipe


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The Economist Intelligence Unit explores the ‘big six’ factors driving successful innovation clusters.

Innovation clusters are crucial laboratories in which novel tools, technologies and techniques are created and applied. But they are not just the ‘background’ to innovation; they are living organisms integral to everything that happens within their walls. No two clusters are the same – and there can be no hard and fast ‘formula’ for what makes clusters work. But there are principles necessary for laying the groundwork for success

A skilled workforceAAll successful clusters have an edge when it comes to human capital, either local or imported. This highly skilled workforce has emerged and manifested in several ways. A dense network of top tier higher education establishments has been critical to the success of Silicon Roundabout in London, Boulder in Colorado and Bangalore. Estonia lacked this kind of university network, but compensated by having a highly educated population thanks to the country’s fairly egalitarian access to education historically, buttressed by the government’s eagerness to promote digital skills in the population.SSingapore, with a small population, leveraged its national academic institutions along with a talent attraction strategy and a solid business environment – both of which have given it a strong national workforce whether indigenous or expatriate. While natural resources have supported the emergence of some clusters in history, they are knowledge intensive phenomena. Skills enhancement, combined with a diversified global workforce, have been key ingredients.

Accommodating policy frameworksGGovernments have a role to play in promoting clusters, but their interventions just as often prevent success as cultivate it. The best interventions are not necessarily fiscal and taxation policies related specifically to a cluster, but rather interventions which support the broader inputs that clusters depend on, such as education, infrastructure and connectivity.


More importantly, governments must carefully weigh the impact of other policy changes, such as migration caps or visa restrictions, on their national clusters’ access to talent. The best practice principle is for government to invest in the fundamentals and continuously evolve the nature of its intervention based on the needs of the growing cluster, and leave the specifics of the innovation cluster process to the companies and innovators themselves.

The infrastructure imperativeOOne of the key characteristics of successful clusters is the networking that they enable as firms collaborate, and skilled people intermingle to share ideas. Firms need to collaborate with one another and workers need freedom to move, for meeting suppliers, clients, financiers and so on. This requires efficient infrastructures that can allow workers to move around quickly and cheaply. Expensive public transport, or growing congestion such as faced by Bangalore, both reduce the efficiency of clusters where it matters most: the intermingling of people and ideas. It is worth looking to history for proof: accaccording to the economist Joseph Schumpeter, much of the innovation that emerged during the early high growth years of the US came about as a direct result of the burgeoning railroad system.

Chance and good fortuneSadly for planners, chance and good fortune play a role in determining the success of clusters. By chance , we refer to all of those dynamics which could not have been brought about with foresight or purpose, but which – having existed – came to catalyse innovation.

Historical circumstance is one example. Estonia’s past relationship to the USSR had two impacts on its later technological success: high levels of education, especially in maths and engineering, due to an egalitarian education system in the USSR era, and a cybersecurity threat in more recent years that impelled innovation. Boulder built on the decision of large technology companies to locate there in the distant past that set up a process of talent circulation leading to spinoffs who became innovators more recently.

GGeography is also a ‘good fortune’ factor, especially in positioning a cluster close to key markets. Costa Rica is a good example of a country whose life sciences cluster has benefited from its proximity to US markets.

BBut crucially, chance and good fortune does not mean there is no role for human decisions. Companies and governments must consciously recognise the benefits that such happenstance occurrences provide, and build on them. There are plenty of countries that were formerly part of the USSR, and are still closely located to Russia, that did not build on that as Estonia has. Similarly, there are many countries in Central America with proximity to the US, but who have not carved out a life sciences cluster such as Costa Rica.

Low cost structureLLow operating costs, especially rents on commercial property, have been essential drivers of cluster success in the early start up phases. This applies to rental of office space but also the residential needs of the workers. Other low costs can also help, such as tax breaks on innovation related activities.


Over time, low rental costs are the first advantage to disappear – this is as near to a hard law as one can find in the field of cluster analysis. The more successful a cluster, the more companies want to locate there, pushing up demand on the housing stock. This dynamic is hard to eradicate, but can at least be offset by policy makers if they wish to enable further building through planning reforms, or even imposing rental caps, although these are politically difficult to execute in practice.

LiveabilityIInnovation clusters are high performers in terms of liveability, at least relative to other cities within their countries where talented workers might otherwise choose to go. Liveability is not a specific metric and no two cities offer the same advantages. But it can cover such critical issues as public safety and political stability, good public amenities, culture and entertainment, and good schools and hospitals. These are all factors which policy makers or public institutions can influence if they want to nurture cluster success, in order to ensure their cluster appeals to those top tier skilled workers who, inin the modern era more than ever before, have so many choices about where to locate themselves.


While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

Economist Intelligence UnitTThe Economist Intelligence Unit (EIU) is the world’s leading resource for economic and business research, forecasting, and analysis. It provides accurate and impartial intelligence to companies, government agencies, financial institutions and academic organizations around the globe, inspiring business leaders to act with confidence since 1946.

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