Green, Roy --- "Spikiness in a flat world" [2008] MonashBusRw 4; (2008) 4(1) Monash Business Review 20

Spikiness in a flat world

Roy Green

Innovative and entrepreneurial industry clusters, especially when linked with foreign direct investment mean the whole can become more than the sum of its parts, says Roy Green.

Discussion of new policy directions in recent years has been strongly influenced by New York Times journalist Tom Friedman’s much cited book, The World is Flat. Friedman was referring to a ‘globalised’ world economy where increasing interconnectedness among people and businesses is driven by the changing shape of markets, organisations and institutions, as well as new developments in information and communications technologies.

Less well known is the response in Atlantic Monthly magazine by academic Richard Florida entitled ‘The World is Spiky’, which highlights the specific attributes of regions and localities – such as superior knowledge, skills and infrastructure – for establishing competitive advantage in this flatter world. Florida argues that these attributes are not accidental but often arise from geographically concentrated ‘clusters’ of entrepreneurial activity, with an emphasis on inter-firm collaboration and linkages with research and educational institutions.

The phenomenon of industry clustering is not new. It was first examined by the early 20th century Cambridge economist Alfred Marshall who wanted to understand the factors behind what was then world competitive manufacturing in the potteries of the midlands and north of England. While Marshall was later overshadowed by Keynes, his was arguably the more significant contribution to understanding the ‘micro-foundations’ of the modern economy. Other later examples of clustering include northern Italy’s ‘third district’ producers of machine tools, household appliances, footwear and clothing, whose market presence was established through value-adding quality and design.

However, regional clusters really took off in the public imagination with the commercial application of ICT (Information and Communications Technology) in California’s Silicon Valley and along Route 128 in Massachusetts, both with world class university research hubs and a vibrant, risk-taking venture capital community. Other ICT clusters evolved in such diverse locations as Finland, Taiwan and the south of France, with medical technology and bio-science clusters also taking hold from Minnesota to Munich. Scale is an issue for creative communities as these clusters tended to be based in small economies or cohesive regions of larger ones – clearly geography matters.

Nor has the phenomenon of clustering been confined necessarily to ‘breakthrough’ technologies, as Clayton Christensen, among others, demonstrated in his study of the increasing organisational significance and market impact of ‘incremental’ innovation. This occurs in a number of ways, including integration of existing technologies with new business models whose contribution to industry and firm-level competitiveness is very often based on knowledge exchange, customer-supplier relationships and the operation of real and virtual networks in the ‘extended enterprise’ – the essence of cluster activity. Eric von Hippel has made the further observation that customers are in a position to drive this activity, though the point cannot be taken too far as it is confined to examples such as Lego Mindstorms (Lego bricks with electronic motors and sensors), computer operating system Linux and the mountain bike.

In recent years, analysis of the ‘success factors’ for competitive clusters, based on technological and organisational innovation, has become a major field of academic study (see figure 1). Anne Markusen from the University of Minnesota famously called these clusters “sticky places in slippery spaces”, and Michael Porter concluded from his innovation research program at Harvard that “the enduring competitive advantages in a global economy lie increasingly in local things – knowledge, relationships, motivation – that distant rivals cannot match”. Interestingly, the slogan “think global and act local” has resonance not only for political movements but companies seeking to establish market presence through collaboration.

Figure 1 Critical success factor identified within global literature search

Source: ECOTEC

Figure 2 Key elements for action

Source: DTI: 2004

Know no boundaries

Moreover, policymakers themselves worldwide have also begun to take a greater interest in these ideas, with advice on cluster development and programs for action at local level (see figure 2). However, a key challenge, with particular salience for Australia, is to link foreign direct investment (FDI) to the development of clusters and networks, providing local enterprises with a platform to penetrate international markets while enhancing the value of the FDI subsidiaries. The OECD conducted an investigation of this challenge in the late 1990s and found that “the full benefit of the presence of foreign production firms depends on the extent to which they can be integrated into their environment.”

In Ireland, for example, public agencies were already engaged in an ambitious strategy of FDI attraction in global growth sectors, particularly ICT, medical technology and pharmaceuticals. So were agencies from other countries, but the Irish approach was different. It was to ‘embed’ investors in the local economy through a range of measures linking them to supply chains, graduate labour markets and research and innovation infrastructure. This generated what my colleagues and I at the National University of Ireland, Galway, depicted in an OECD multi-country report on Innovative Clusters: Drivers of National Innovation Systems as “boundaryless clusters.”

This approach had three further, related objectives. First, it would enable small to medium enterprises (SMEs) to achieve critical mass through collaboration in clusters. Much of Ireland’s policy framework, especially through the delivery agency Enterprise Ireland, was directed to building innovation capability at the organisational level, supplementing venture capital with loans, grants and equity stakes to encourage start-up activity, including in partnership with research and educational institutions. In the case of ICT firms, Enterprise Ireland established the unique Webworks program to promote collaboration and linkages.

Second, this approach was designed to facilitate devolving R&D activity from head offices to Irish subsidiaries of the FDI companies. The government’s various research funding initiatives, particularly Science Foundation Ireland, made it a key priority to underwrite new Centres for Science, Engineering and Technology (CSETs) as joint activities of FDI companies and higher education institutions. Examples at the National University of Ireland, Galway, include the Digital Enterprise Research Institute (DERI) led by Hewlett-Packard which investigates the next generation of web technology – the ‘semantic web’ – and the Regenerative Medicine Institute (REMEDI), led by Medtronic, whose agenda is to pioneer applications of stem cell research. These centres of excellence, following the model of the US National Science Foundation, had as their core mission to identify research leaders in the field internationally and recruit them to work in Ireland.

Third, Ireland’s policy approach also encouraged FDI subsidiaries to provide a springboard for local firms in cluster relationships looking to enter global markets and supply chains both in association with the FDI companies themselves and in their own right. Again, Enterprise Ireland played a part, not by trying to substitute for the market but by taking best advantage of local capabilities through the funding of ‘innovation partnerships’ and the development of ‘industry-led networks’, which linked SMEs to the new opportunities opened up by the deepening presence and activities of FDI companies. The approach is pragmatic and evidence-based and builds on a national consensus around knowledge and ingenuity as a key source of competitive advantage.

The potential relevance of this approach to Australia’s current and emerging areas of competitive advantage should be apparent. It was highlighted in the Business Council of Australia’s 2006 report, New Pathways to Prosperity: A National Innovation Framework for Australia, whose key policy recommendations have largely been endorsed by the Rudd Labor government. For example, if we look at the rapidly growing technology corridor in northern Sydney, with Macquarie University at its hub, we need only ask where are the linkages and relationships that would add value to this concentration of leading international companies and their local supply chains and would consequently drive the competitiveness and capability of the embryonic cluster – in other words, enabling the whole to become more than the sum of its parts.

To conclude, there is increasing recognition throughout the world, reflected most comprehensively in the OECD’s national innovation systems program that, “networks of innovation are the rule rather than the exception… To successfully innovate, companies are becoming more dependent on complementary knowledge and know-how in companies and institutions other than their own”. The European Union, as well as member states such as Ireland, promotes clusters as “regional innovation systems” and has shifted the policy focus to building not only innovation but also networking capability in firms and organisations. This may well become a feature of the Rudd government’s proposed Enterprise Connect program, to be implemented by the new, significantly re-titled Department of Innovation, Industry, Science and Research.

It became evident in Ireland, however, that the practice of clustering there conflicted with the theory, which in Michael Porter’s standard version envisaged a number of preconditions, including a role for national champions in competition for market share. The Irish government’s National Economic and Social Council (NESC) concluded from its own extensive research that if this standard theory applied, Ireland as a small regional economy would have no clusters and no possibility of establishing any in the future. What this suggested to Irish policymakers is that the theory itself was deficient in that it was based on US experience which had not captured the significance of ‘agglomeration effects’ in a small economy and the key role of FDI companies in leading ‘boundaryless clusters’. The unique but transferable feature of Ireland’s cluster activity is that it is global as well as local, unbounded and open as well as bounded by geography and adept at deploying ‘spikiness’ in a flat world. The challenge in Australia is also to understand what can be done, adapting the theory to the extent required for effective action, and to do it.

Cite this article as

Green, Roy. 'Spikiness in a flat world'. Monash Business Review. 2008.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 20–23. DOI:10.2104/mbr08004

About the author

Roy Green

Professor Roy Green is Dean of the Macquarie Graduate School of Management and heads the Federal Government’s recently announced review of the Textiles, Clothing and Footwear sector. Previously he was Dean of Commerce at the National University of Ireland, Galway, and a member of Enterprise Ireland’s Research Funding Support Board.