1. Clustering: A Contact Sport RE$EARCH MONEY Conference Technology Clusters: By Accident or Design? Presented by: Roger Voyer Senior Associate, The Impact Group February 19 th, 2003

2. 2 The Impact Group © 2003 Knowledge-Based Industrial Cluster No clear definition Could be: region (Silicon Valley) technopole (Ottawa) industrial research park (Hsinchu) Common features: proximity and linkages among the players.

3. 3 The Impact Group © 2003 Industrial Clustering: The Theory No firm captures all the economic benefits of its innovation process; Spillovers can be captured by other firms; Geographical proximity of firms increases the potential of capture; and A supportive local infrastructure nurtures the process.

4. 4 The Impact Group © 2003 Some Canadian Clusters Montréal: IT, Biotech, Multimedia, Aerospace Ottawa: IT, Telecom, Photonics Toronto: IT, Biotech, Multimedia/Film, Finance Kitchener-Waterloo: IT Saskatoon: Biotech Calgary: IT, Telecom Vancouver: IT, Film

5. 5 The Impact Group © 2003 Even Our Largest Clusters are Relatively Small See our IT clusters for example; Municipality Private Sector Employment (firms with more than 100 employees) Silicon Valley, CA 1 300,000 New York 2 170,000 Boston 3 145,000 Dallas 4 120,000 Los Angeles 5 110,000 Washington, DC 6 100,000 Toronto 7 90,000 Chicago 8 80,000 Montreal 9 70,000 Atlanta 10 60,000 Philadelphia 11 50,000 Houston 12 45,000 Seattle 13 40,000 Ottawa-Gatineau 13 40,000 Source; FAB DATA - 2001

6. 6 The Impact Group © 2003 IPOs In Information Technology & Biotech (1995-99) More than 100 New York, San Francisco 50-99 Boston, Los Angeles, Washington DC 25-49 Atlanta, Dallas, Montreal, Philadelphia Seattle, Toronto Less than 25 Chicago, Detroit, Houston, Miami Ottawa-Gatineau Source; Montreal Techno Vision 2000

7. 7 The Impact Group © 2003 The Firm Idea + R&D + Eng. + ProductionMarket Universities Colleges & Research Labs Suppliers & Competitors Customers Financing Advanced Physical Infrastructure (e.g. - Communications) Quality of Life Innovation Process in High-Technology Firms

8. 8 The Impact Group © 2003 Recognition of Potential by Local Leaders Terman wanted job opportunities for Stanford Graduates in California; Frêche wanted to diversify the Montpellier economy from tourism; and Japans Technopolis program was aimed at regional development and alleviating pressure on Tokyo. Recognition of the Opportunity Usually Comes out of Meeting a Need:

9. 9 The Impact Group © 2003 Support of Specific Local Strengths and Assets Technological strengths ( universities, government laboratories and major firms); Local market strengths (e.g.- government procurement, banking); and Social, cultural and entertainment infrastructure are important assets because skilled people are Foot-Loose and migrate to areas with good quality of life.

10. 10 The Impact Group © 2003 Champions are Important Individuals (e.g., Terman, Kozmetsky, Lafitte, Frêche) or Institutions (e.g., Chambers of Commerce, Economic Development Groups)

11. 11 The Impact Group © 2003 Entrepreneurial Drive Central to firm and cluster development; Found in individuals whether they are growing firms (e.g., Terry Matthews of Newbridge/March Systems) or in supporting organizations (e.g., Gerry Turcotte in the early days of OCRI); and Where it is weak clusters stagnate (e.g., Tsukuba, Sophia-Antipolis).

12. 12 The Impact Group © 2003 Various Sources of Financing Full spectrum of instruments is needed; Angel and venture capital and government funds at the start-up phase; and Debt/equity instruments for the growth where about $1 of working capital is needed to support $1 of sales.

13. 13 The Impact Group © 2003 Information Networks Can be: F Informal where the focus is on the transfer of tacit knowledge (e.g., Il Fornaio Restaurant in Palo Alto; Starbucks at Pinecrest Mall in Ottawa) F Formal (e.g., Industry Associations, Chambers of Commerce) Where such structures are weak clustering suffers (e.g., Route 128)

14. 14 The Impact Group © 2003 Educational & Research Institutions Necessary to provide skilled people and technological expertise; But, not sufficient for success unless there are strong linkages to industry (e.g., Silicon Valley); and Where linkages are weak clustering stagnates (e.g., Taedok, Baltimore).

15. 15 The Impact Group © 2003 Staying Power It can take 30 (+) years for a cluster to reach maturity (e.g., Ottawa); Growth can be supported through sustained government support (e.g., Hsinchu); and Growth can also be accelerated by attracting the design functions of multinational firms (e.g., Bangalore).

16. 16 The Impact Group © 2003 Eight Characteristics of Success Recognition of Potential by Local Leaders Support of Specific Local Strengths and Assets Influence of Champions Entrepreneurial Drive Various Sources of Financing Information Networks Educational & Research Institutions Staying Power

17. 17 The Impact Group © 2003 Four Models Laissez-Faire: Ottawa, Canada Planned: Hsinchu, Taiwan Design Centres of MNEs: Bangalore, India Production Functions of MNEs: Ireland

18. 18 The Impact Group © 2003 Ottawa - A Laissez-Faire Cluster The Ottawa cluster is a post-war phenomenon which now has some 1400(+) firms and 63,000 professionals, mainly in Telecommunications. 75% of Canada's Telecom research is undertaken in the region. The two main drivers were government laboratories and Nortel Networks. The two universities became players only recently.

19. 19 The Impact Group © 2003 Ottawa - A Laissez-Faire Cluster (contd) Local government recognized the potential only in the 1980s and established the Ottawa Centre for Research and Innovation (OCRI) in 1984 to stimulate interactions among the players. The cluster is remote from major markets. Its focus is mainly design rather than production.

20. 20 The Impact Group © 2003 Ottawa - A Laissez-Faire Cluster (contd) Recognition of Potential by Local Leaders: a relatively recent phenomenon; Support of Specific Local Strengths and Assets: government labs, Telecom R&D, quality of life; Influence of Champions: McClaren brothers, Denzil Doyle; Entrepreneurial Drive: developed over the years;

21. 21 The Impact Group © 2003 Ottawa - A Laissez-Faire Cluster (contd) Various Sources of Financing: full spectrum of mechanisms; Information Networks: well developed through OCRI; Educational and Research Institutions: two universities; two colleges; concentration of government and private sector laboratories; and Staying Power: 50 (+) years.

22. 22 The Impact Group © 2003 Hsinchu Science-Based Industrial Park - Taiwan Established in 1980 to emulate Silicon Valley and to lure back Taiwanese researchers working abroad. About half the firms in the park are run by returned Taiwanese; More than 220 firms with 60,400 employees and revenues of $12 Billion; 2 universities and a technology institute;

23. 23 The Impact Group © 2003 Hsinchu Science-Based Industrial Park - Taiwan (contd) Specialization in computers, semiconductors and telecommunications; Major incentives offered; 5 year tax exemptions, prefabricated factories, generous grants, etc.; and Government investment has been $500 million since 1980.

24. 24 The Impact Group © 2003 Hsinchu: A Planned Cluster Recognition of Potential by Local Leaders: Government Support of Local Strengths and Assets: Government Labs (e.g., ITRI) Influence of Champions: Politicians Entrepreneurial Drive: Returning Ex-Patriots

25. 25 The Impact Group © 2003 Hsinchu: A Planned Cluster (contd) Various Sources of Financing: Government programs dominate Information Networks: Catalyzed by ITRI Education and Research Institutions: Two universities and ITRI Staying Power: nearly 20 years of sustained support

26. 26 The Impact Group © 2003 A Bastion of Laissez-Faire Admits That: Taiwans Hsinchu Park is an example of intelligent government intervention…….This year the government will break even on the project's $40 million a year running costs. The Economist March 9 - 15, 1996

27. 27 The Impact Group © 2003 Bangalore India: A Design Centre State Government of Karnataka created the Electronics City, a 300 acres industrial park in the early 1980s, despite the lack of basic infrastructure (e.g., transportation, electricity); In 1985, Texas Instruments, attracted by the low costs skills base set up a design centre and exported its software via satellite; Software Technology Park set up in 1991;

28. 28 The Impact Group © 2003 Bangalore India: A Design Centre (contd) Currently there are about 180 companies with 20,000 skilled professional exporting 85% of its software products as merchant exports ($350 million U.S. in 1996-97, growing at 64% per year); Karnataka has a long history of supporting the development of higher education and research and development. There are: F 51 engineering colleges F 186 polytechnics F 249 industrial training institutions F 712 general colleges;and F 10 universities Government incentives offered include duty free imports and 5 year tax exemptions.

29. 29 The Impact Group © 2003 Bangalore: A Software Design Centre for MNEs Recognition of Potential by Local Leaders: State Government of Karnataka Support of Local Strengths and Assets: low cost software skills base Influence of Champions: Politicians, scientific leaders (e.g., Tata) early -on Entrepreneurial Drive: developing with more indigenous firms

30. 30 The Impact Group © 2003 Bangalore: A Software Design Centre for MNEs (contd) Various Sources of Financing: mainly government programs and MNEs Information Networks: limited Educational and Research Institutions: well developed Staying Power: early days yet (17 years since Texas Instruments came)

31. Ireland: Assembly / Production Functions Moving Towards Design Ireland is now the second largest exporter of software after the U.S.; Transformation began in 1973 when Ireland joined E.U. and accessed major funds to build new infrastructure including two new technical universities; Attracted MNEs with incentives (e.g., 10% corporate tax rate) including Intel in mid 1980s; The Impact Group © 2003 31

32. Ireland: Assembly / Production Functions Moving Towards Design (contd) Encouraged strategic partnerships between MNEs and local suppliers - especially for design and development; Encouraged the development of indigenous firms; 600 firms today with 40 - 50 start ups each year; Encouraged export of software; and Consensual decision-making. The Impact Group © 2003 32

33. Ireland: Assembly / Production Functions Moving Towards Design (contd) Recognition of Potential by Local Leaders: government Support of Local Strengths and Assets: education, infrastructure Influence of Champions: political level Entrepreneurial Drive: improving with new firm creation The Impact Group © 2003 33

34. Various Sources of Financing: mainly government and E.U. programs Information Networks: improving linkages Educational and Research Institutions: two new technical universities Staying Power: about 15 years since Intel Ireland: Assembly / Production Functions Moving Towards Design (contd) The Impact Group © 2003 34

35. 35 The Impact Group © 2003 Relative Status of Three Clusters Champions Entrepreneurship Financing Information Networks Education and R&D Institutions Staying Power Regional StrengthsRecognition of Potential 10 5 + + + Silicon Valley Ottawa-Hull Hsinchu + + + + + + + + + +

36. 36 The Impact Group © 2003 Relative Status of Three Clusters Champions Entrepreneurship Financing Information Networks Education and R&D Institutions Staying Power Regional Strengths Recognition of Potential 10 5 + + + + + Silicon Valley Bangalore Ireland + + + + + + + +

37. 37 The Impact Group © 2003 Some Lessons and Directions The eight characteristics of success need to work together at the level of the cluster; Laissez-faire clusters take a long time to reach critical mass; Cluster development can be accelerated through planning and sustained support;

38. 38 The Impact Group © 2003 Some Lessons and Directions A commercial rather than a scientific orientation is needed to stimulate cluster development. Capture design functions of MNEs where possible; and Move to higher value-added functions in clusters where assembly / production functions dominate.