Implications of the New Economy for Cities: Innovation and Clusters

1
Implications of the New Economy for Cities
Innovation and Clusters

• David A. Wolfe
• Program on Globalization and Regional Innovation
  Systems
• Centre for International Studies
• University of Toronto
• Presentation to the Symposium on Thinking Smart
  Cities
• Institute of Political Economy, Carleton
  University
• Ottawa, November 15, 2002

2
The Knowledge-Based Economy/Society

• Knowledge is the driving force in economic growth
• - KBE/S defined as "economies which are directly
  based on the production, distribution and use of
  knowledge" (OECD 1996)
• Change in mode of production and distribution of
  knowledge
• New dynamic between the formation of tacit versus
  codified knowledge
• As more factors of production are widely
  available (ubiquified), increased value is placed
  on those that are location bound (tacit)
• Increase in the importance of networked knowledge
• Acceleration of the process of learning
• both individual and social (Lundvall)

3
Innovation in the Knowledge Economy

• Innovation is defined as
• the processes by which firms master and get into
  practice product designs and manufacturing
  processes that are new to them, whether or not
  they are new to the universe. . . (Nelson and
  Rosenberg 1993)
• Definition includes
• New forms of organization
• Institutional innovations
• Innovation is by definition a discontinuous
  process
• gales of creative destruction (Schumpeter)
• disruptive technologies (Christenson)

4
The Innovation Systems Approach

• Network of institutions that interact to
  initiate, import and diffuse new technologies
• government policy
• corporate RD
• education and training system
• structure of industry
• Patterns of interaction between firms as
  collective learning process in acquisition and
  use of new knowledge
• internal organization of firms
• network of interfirm relationships
• role of public sector
• degree of RD intensity
• nature of RD organization

5
National System of Innovation
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From the National to the Regional

• Shift in focus from the national to the regional
  level
• Recognition that spatial proximity facilitates
  the sharing of tacit knowledge and capacity for
  localized learning
• Firms clustered in a region share a common
  regional culture that facilitates learning
• Localized learning is facilitated by a common set
  of regional institutions
• Regional Innovation System
• The set of economic, political and institutional
  relationships occurring in a given geographic
  area which generates a collective learning
  process leading to the rapid diffusion of
  knowledge and best practice (Nauwelaers and Reid)

7
Spatial Scales

• National
• Industry structure - Corporate organization and
  governance
• Legal/regulatory framework
• Fiscal (taxation) and macroeconomic environment
• Framework of industrial relations and labour
  training
• Financial system
• Government policy
• State/Provincial
• Regional areas of specialization
• Research infrastructure higher education sector
• Specialized training institutions
• Industrial attraction and retention
• Government policy/support
• Local /Cluster
• Physical infrastructure transportation and
  communications
• K-12 educational system
• Civic governance

8
Role of Regions in Innovation

• Innovation is social process
• Networks and relationships facilitate the
  translation of new ideas, ie. research into
  commercial products
• Innovation includes
• New forms of organization
• Institutional innovations
• Innovation is place-based
• Occurs in an institutional, political and social
  context
• Spatial proximity facilitates sharing of
  knowledge and capacity for localized learning
• Localized learning is facilitated by common set
  of regional institutions

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Knowledge Spillovers in the RIS

• Strong geographic spillovers between public
  research centres and industrial RD
• Distance Matters
• Firms located close to research centres benefit
  disproportionately
• Benefits of knowledge spillovers (Martin and
  Salter)
• Increasing the stock of useful knowledge
• Training skilled graduates
• Creating new scientific instrumentation
• Forming networks and promoting social interaction
• Increased capacity for scientific and
  technological problem solving
• Creating new firms

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Sources of Competitive Advantage

• Untraded interdependencies - technological
  spillovers
• Knowledge and practices transferred between firms
• Tacit dimension
• Transferred through networks
• Networking - based on trust
• Shared intelligence of group of firms
• Grounded in a regional economy
• Social capital - shared norms and trust (Morgan)
• Trust is a unique asset it has value, but no
  price
• Earned by discharging obligations to your
  partners
• Facilitates cooperation among firms and sectors
• Expedites learning and speeds the flow of
  knowledge

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Conceptions of Social Capital

• Features of social organization of a region that
  facilitate coordination and cooperation among
  economic actors
• Capital refers to asset
• Social connotes that it is attained through
  community
• Two concepts of social capital
• Communitarian attributable to historic and
  cultural factors buried deep in the regions
  past
• Performance-based built up through the dense
  interactions of firms engaged in interrelated
  economic activities that generate high level of
  trust in mutual dealings
• Silicon Valley swift trust (Brown and Duguid)

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Cluster Definitions

• Defined as
• Clusters are a geographically proximate group of
  interconnected companies and associated
  institutions in a particular field linked by
  commonalities and complementarities. Clusters
  encompass an array of linked industries and other
  entities important to competition. . . .
  Including governmental and other institutions
  such as universities, standard setting agencies,
  think tanks, vocational training providers and
  trade associations. (Porter)
• A cluster is a concentration of firms across
  several industries that create quality jobs,
  export, share common economic foundation needs,
  the public sectors of economic development,
  legislators, universities, community colleges,
  K-12 educational community, workforce
  development, support foundations and all
  community stakeholders. (Breault)

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Cluster Characteristics

• Competitive advantage of clusters
• Superior access to specialized inputs reduces
  transaction costs - availability of specialized
  and experienced personnel thick labour market
• Diverse specialization focus on core
  competences and increases flexibility
• Improves capacity to innovate through access to
  knowledge
• Stimulates process of firm formation through
  startups and spinoffs

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Critical Factors for Cluster Emergence

• Strong, diverse and tech-savvy talent pool
• Floridas three Ts (thick labour market)
• Presence of established pillar companies
• with global reach
• Supply architecture and demand drivers
• Strong knowledge infrastructure
• Research universities, government labs etc.
• Specialized support services such as
• Tech-savvy law and accounting firms
• Risk tolerant venture capital and angel investors
• Supportive policy framework and
• Sustained development strategies by civic
  entrepreneurs and local governments (social
  capital)

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Institutions of Collaboration

• Formal and information organizations that
• Facilitate exchange of information and technology
• Foster cooperation and coordination
• Create social capital and improve competitiveness
  by
• Creating relationships and establishing trust
• Facilitate organization of collective action
• Create collective institutions
• Identify common strengths or mutual needs
• Contribute to development of a common economic
  agenda

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Creating Social Capital

• The presence of collaborative institutions and
  organizations, such as cluster organizations,
  professional networks, research-industry
  consortia and entrepreneurial support networks,
  greatly facilitates this environment. These
  alliances, networks and other relationship-buildin
  g mechanisms create connections and linkages
  vital to economic development in a
  technology-driven world. . . . many regions
  fortunate enough to have university research
  assets underuse these knowledge economy
  resources, precisely because relationships have
  not been established to connect the university
  and local industry. . . Relationships matter.
  (Montana et al. 2001)

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Collaborative Institutions

• General
• Chambers of Commerce
• Professional Associations
• University partner groups
• Joint public/private advisory councils
• Local economic agencies or business associations
• TOP, Communitech, OCRI, etc.
• Cluster Specific
• Industry associations
• Specialized professional bodies or societies
• Groups of core cluster companies
• Incubators

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Benefits of Clustering

• Competition and cooperation are complementary
• The old dichotomies no longer apply
• Cluster members are both suppliers and buyers
• Provide complementary inputs
• Beneficial outcomes of cluster collaboration
• Creates trust linkages among firms
• Facilitates specialization
• Focus on core competence
• Builds critical mass
• Improved marketing
• Enhanced resources for the cluster
• specialized financing, education, policy supports
• Attracts customers, new investment, skilled
  talent
• Growth of a thick labour market

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Ontarios ICT Clusters

• Ottawa
• 1100 firms across four major segments
• Origins linked to NRC labs and CRC
• Fateful decision to locate BNR labs in 1958
• Differentiated by strong research focus
• 90 of RD in industrial telecommunications
• Major firms
• Newbridge (Alcatel), Nortel, Cisco, JDS, Corel,
  Mitel, Zarlink, Tundra, Mosaid
• Supported by strategic federal policy MSD
  program 1989
• Dynamic photonics cluster
• Strong links to PRO and NRCs Photonics
  Fabrication Facility
• Recent formation of Ottawa Photonics Research
  Alliance
• 52 of 900 m in VC investment in Ottawa in 2001

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Institutions of Collaboration

• Ottawa
• Strength of local institutions of collaboration
• OCRI founded in 1983
• 700 members, 4.5 million budget
• Sponsors 120 events annually
• Absorbed economic development function of the
  City of Ottawa
• Dense network of partnerships with federal and
  provincial agencies
• Works closely with NRCs Regional Innovation
  Centre
• Economic Generators Initiative, 1999-2000
• The Ottawa Partnership (TOP)
• 300 individuals participated
• Formulated 33 specific goals for 7 clusters
• flagship initiatives to strengthen the whole
  region
• SmartGrowth, Talentworks, Starting Startups
• 10 of 33 goals have achieved tangible results

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Policy Support for Cluster Development

• Federal Government
• Invest in foundations of science and technology
• Improve innovation policy context
• IP protection
• Tax incentives to foster RD and university
  Industry collaboration
• Align federal resources with cluster development
• NRC cluster strategy
• Coordinate federal agencies in regional and local
  clusters
• Encourage regional economic development
  strategies
• Support regional foresight/strategic planning
  exercises
• Provide federal matching funds for innovation
  focused provincial and local strategies

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Policy Support for Cluster Development

• Provincial Government
• Invest in foundations of science and technology
• Expand research capacity
• Sponsor programs to encourage cluster development
• Focus business recruitment around strong clusters
• Create regional dimension to economic development
  strategies

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Policy Support for Cluster Development

• Regional and Local Government
• Strong support for K-12 education system
• Upgrade business infrastructure
• Transportation infrastructure
• Communications infrastructure
• Develop regional strategy that involves all
  stakeholders
• Encourage common vision and collaboration among
  firms, universities and training centres
  (colleges)
• Foster cluster development

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Policy Support for Cluster Development

• Cluster Specific Institutions for Collaboration
• Promote cluster awareness
• Engage in dialogue of clusters competitive
  position
• Develop training and management programs
• Build incubators, angel networks and supportive
  institutions
• Participate with government in recruitment
  efforts
• Expand cluster to include all constituents