Innovation tech hubs: the accelerating strengths of proximity

By Xavier Ferràs

For firms, innovation is a strategic choice and a key driver of economic performance. But innovation is more likely to thrive when firms are physically close to innovation ecosystems, a fast-growing worldwide trend.

Innovation clusters are emerging all over the world. These spatial concentrations of innovative activity have become a contested asset in modern nations.

Innovation tech hubs are the building blocks of global competitiveness

Major corporations, SMEs, entrepreneurs, leading research centres, universities, venture capitalists and government institutions are thriving and interacting within these technology hot spots to collectively design, produce and export successful products and services.

These clusters are the building blocks of global competitiveness. It is not Apple or Google, but Silicon Valley as a whole that competes with other innovation ecosystems in the global arena.

Creating technology hot spots – and understanding the positive innovation dynamics that take place inside them – is a key success factor for national competitiveness.

Enhancers of innovation

Our research in European Management Review proposes that innovation itself is strengthened within innovation clusters and that it may originate a further positive effect: the more innovative firms are located in a cluster, the more the innovativeness of the cluster increases, which in turn enhances the innovation levels of individual firms.

This enhancer effect could at least partially explain the rapid growth of innovation clusters in recent years.

Innovation clusters also accelerate a region's development. A clear example is the emergence of China as an innovation superpower, supported by emerging innovation clusters such as Shenzhen and Shanghai.

Innovation in Shanghai

5 strengths to accelerate innovation

Our findings suggest that the following five strengths accelerate innovation in tech hot spots:

1) Attraction

Attraction is a capacity-building strength that generates a positive spiral of increasing innovative capacity. This strength builds on attracting talent in the surrounding area. Talent attracts more talent. Innovation attracts further innovation.

For example, entrepreneurs attract venture capital, which in turn attracts more entrepreneurs. Research centres attract scientists, who attract funds and new projects. R&D activity attracts advanced manufacturing and proximity improves the ramp-up process of lab to fab. Manufacturing attracts more R&D and specialised suppliers and employees.

2) Information

Information about budding trends and emergent technologies is essential to creating and commercialising innovations.

In innovation clusters, information flows through formal channels (corporate meetings, forums, fairs, conferences, seminars, etc.) and informal channels (pubs, restaurants, bars, etc.). These clusters reduce the costs and risks involved in sharing information.

Information has the nature of a public good: sharing it among firms generates spillovers, which constitute a powerful agglomeration force. This is the case of Airbnb, where the combined strengths of information and attraction gave birth to a new business model in an entrepreneurial community: information about San Francisco's hotels being fully booked due to an upcoming conference was the seed of the now famous home-sharing model.

3) Interaction

Interaction creates opportunities to develop technological and social innovations. Innovation clusters are a key environment where interaction thrives. The larger the number of agents in a given space, the greater the likelihood of interactions among them.

Personal relationships are the key to stimulating creativity

Creativity is raw material for innovation and personal relationships are the key to stimulating creativity. Interactions between a firm and its collaborators generate new ideas. This is especially true of interactions that come not from formal networks of strategic alliances but from weak ties.

Without interaction there is no systemic innovation, for there is no system - just a simple set of actors. The level of interaction among institutions increases the amount of knowledge created, as well as its transformation to innovation and its expansion.

4) Rivalry

Rivalry among local competitors is an intense and emotional phenomenon. Local rivals observe one another up close, know each other well and compete for the same human resources.

Proximity facilitates rapid best-practice transmission and knowledge spillovers through informal interaction and flows of people in the local labour market.

When a company innovates, it is rapidly imitated. This increases the pressure of competition and, in turn, forces companies to innovate faster to regain differentiation.

Firms with nearby rivals are more innovative than firms whose main rivals are further away.

Examples of how local rivalry intensifies strategic competition and stimulates innovation appear in almost all clusters: Google and Apple in Silicon Valley; the motorcycle manufacturers Honda, Yamaha and Suzuki in Hamamatsu (Japan); and the car manufacturers Porsche, Mercedes-Benz and Daimler in Stuttgart (Germany).

5) Anticipation

Sophisticated and demanding customers anticipate the future and press firms to innovate. Sophisticated demand from local customers also reveals new segments where firms can differentiate themselves. Sensing the needs of the future from a social and human perspective opens new greenfields for innovation.

Extremely sophisticated demand in high-tech industries can be stimulated through innovative public procurement. Governments can anticipate the emergence of disruptive innovation and cover the risk of high-tech, high-risk projects that would otherwise not be carried out without public intervention.

The impact of NASA's space missions on US contractors' industrial capabilities is an example of this sort of demand stimulation. Public state-of-the-art technology purchasing has the potential to become a key instrument in the creation of early-stage new markets.

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