🗊Презентация Economics of innovation. Lecture 6: Clusters, Innovation & the Division of Labour

ECONOMICS OF INNOVATION

Example of a cluster: Silicon Valley (Santa Clara County) Silicon Valley between San Jose and San Francisco in California is the classic cluster Centre of the US (and world) computer industry- and other high tech industries such as biotechnology and clean technology Grew out of electronics expertise in Stanford University, and US military spending on electronics Proliferation of Start-ups (e.g. Intel and Apple) with innovation culture and innovation strategy “network firms” Risk and venture capital resources

Silicon Valley

What is in Silicon Valley? 5 airports

Clusters Alfred Marshall (1890) talked about ‘industrial districts’: A local pool of specialized labour Firms specializing in intermediate stages of production Knowledge spillovers Interest in clusters revived in 1980s with ‘new industrial districts’ and new work identifies the importance of: supportive socio-cultural attributes that create an innovative culture (way of doing things in the locality, tacit knowledge) a network of public and private institutions supporting firms in the locality an intense set of backward, forward and horizontal linkages between firms based on non-market as well as market exchanges ‘Clusters’ (the rebranded term) became a popular concept for innovation studies following the work of Porter (1990) and Krugman (1991)

What Characterizes Innovation Clusters? Geographical Concentration High Degree of Specialization Large Number of Start-ups and Small Firms Ease of Entry and Exit High Rate of Innovation

Share some examples of clusters in your region/country What cluster is it? In which industry? Size of the firms? Relationships among the firms? Performance of firms within the cluster? Why do firms cluster?

Why do companies cluster? Advantages and Disadvantages

Statistical /econometric evidence Companies located in strong clusters often grow faster than average Strong clusters attract disproportionate amounts of new firm entry (“start-ups”) In high-tech industries (e.g. biotech), proximity of the science base (e.g. major university) attracts entry Strong clusters generate disproportionate amounts of innovation and patenting

Clusters and Innovation Recall the two perspectives on innovation (lecture 1) Innovation stems from division of labour (depth: specialisation) Innovation stems from combination of diverse knowledge (breadth: diversity) Both of these mechanisms can work better in the cluster than in isolation

How Do Clusters Facilitate Innovation? Division of labour, specialization Networking Ease of entry and exit Resource mobility

How Do Clusters Facilitate Innovation? 1. Division of Labour and Specialization SMITH: Division of labour Invention MARX: Division of labour Invention RAE: Invention Division of labour

How Do Clusters Facilitate Innovation? 1. Division of Labour and Specialization A large number of firms in the same industry allows firms to specialize in what they are good at They can provide specialist goods and services and cluster firms can draw on a range of specialised suppliers These will include specialised firms that support innovation in the cluster (patent agents, venture capital firms etc. )

Why are companies in clusters more specialised? Transactions costs are lower in clusters -Reduced costs of coordinating inputs with company requirements -Reduced costs of communication with suppliers -Reduced risk of opportunistic behaviour If transactions costs are low it makes sense to outsource to specialist supplier who enjoys economies of scale Companies that specialise enjoy economies of scale Therefore: companies tend to specialise in part of the vertical chain and outsource the rest

Why are companies in clusters more specialised? “The Division of Labour is limited by the Extent of the Market” (Adam Smith) As we move from dispersed production serving a small area to clustered production serving a large area, the extent of the market is increased And thus a greater division of labour emerges

How Do Clusters Facilitate Innovation? Division of labour Networking Ease of entry and exit Resource mobility

How Do Clusters Facilitate Innovation? 2. Networking Innovation does not happen in isolation but draws on other firms for ideas, knowledge and services- innovation is a multiplayer game, not a solo act. Tight-knit groups of people working in the same field but within a number of different firms located in close proximity can facilitate networking within the cluster- a knowledge community Cluster firms know a lot about what their competitors are doing

Exploiting networks in a cluster Networks are about linkages and connections bringing together suppliers, customers, collaborators, research centres to produce innovations Networks consists of firms with complementary capabilities and resources Networks come with their own challenges: How to manage beyond firm boundaries? Self interest vs. system interests? Trust? Free riders?

Vertical Integration (1960s) in Computer Industry In early 1960s, IBM dominated the computer industry IBM had a high degree of vertical integration, and made almost all the components of its computers “in house” This included the semiconductor components, peripherals (disk drives, tapes etc.), software, operating systems, and assembly

Network Firms (1980s onwards) in Computer Industry Contrast this with the history of Apple, one of the pioneers in the PC market Apple, founded in Silicon Valley, was at that time just a design company - designing computers Apple produced no components and did almost no assembly - all that was outsourced to other companies, many of which were also in Silicon Valley Apple was once described as the ultimate network firm

How Do Clusters Facilitate Innovation? Division of labour Networking Ease of entry and exit Resource mobility

How Do Clusters Facilitate Innovation? 3. Ease of Entry and Exit A tradition of start-ups: small and young companies Lower sunk costs for entrepreneur scientists ‘OK to fail’ culture

How Do Clusters Facilitate Innovation? 4. Resource Mobility (especially labour) If people move between companies, so do ideas. Movement encourages an active market for ‘skills’. Firms well aware of what other cluster firms are doing.

Case Study Procter and Gamble is a multinational company well known for its wide range of consumer products, covering everything from snacks to hygiene products and detergents. Employs 7500 scientists and spends $5 million on Research and Development annually. Until the year 2000, they operated with the ‘invented here’ model doing their innovations in house. In 2000, they moved to a new strategy ‘connect and develop’ to exploit the ideas and innovations of external partners such as universities and other companies. Every year P&G produces a ‘top 10 needs’ based on consumer research and reach out to their broad network with the ‘problem’ and search for technology providers. Once a technology provider is identified, they negotiate the terms of licensing the technology and often undertake product development in-house.

Questions What are the advantages and disadvantages of the ‘connect and develop’ model over the ‘invented here’ model from P&G’s perspective? What is the role of P&G in this network? What capabilities are required to perform this role well? Why are technology providers (these may be universities or companies) willing to take part in such a network? P&G does not only work with a local network but a global one that includes firms all around the world. What are the advantages and disadvantages of global networks?

Lecture 6: Clusters, Innovation & the Division of Labour Summary Clusters Division of Labour Thanks for your attention! Any Questions?