Industry clusters: The modern-day snake oil


The New York City skyline is seen across from the Hudson River from the Harborside Financial Center in Jersey City, June 15, 2011. (Emile Wamsteker/BLOOMBERG)
Vivek Wadhwa
Contributor, Innovations July 14, 2011

A recent study provides one more argument against government officials who tout “industry clusters” as the Holy Grail of regional growth and innovation.

The formula for creating these clusters is always the same: Pick a hot industry, build a technology park next to a research university, provide incentives for businesses to relocate, add some venture capital and then watch the magic happen. But, as I have noted before, the magic never happens. Most of the top-down cluster-development projects in the United States and around the world have died a slow death in relative obscurity. Politicians who held the press conferences to claim credit for advancing science and technology are long gone. Management consultants have cashed in their big checks. Real estate barons have reaped fortunes, and taxpayers are left holding the bag.

Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University. His past appointments include Harvard Law School, University of California Berkeley, and Emory University. View Archive

Regional planners eager to replicate the job growth of areas such as Silicon Valley or North Carolina’s Research Triangle Park use them as examples of government-sponsored clusters that worked. While it’s true that World War II investments in defense-related research at Stanford planted the seeds for Silicon Valley’s semiconductor industry, that forest burned down long ago. The Valley has reinvented itself many times since then. Meanwhile, Research Triangle Park achieved its success decades ago but, in my opinion, has lost momentum in the Internet era.

Harvard Professor Michael Porter’s outdated cluster theory lies at the heart of what is wrong with these common prescriptions. He observed that geographic concentrations of interconnected companies, specialized suppliers, and service providers gave certain industries a productivity and cost advantage. His legions of followers postulated that by bringing these ingredients together into a “cluster,” regions could artificially ferment innovation. They just needed to build the right infrastructure and bring together chosen industries.

A recent analysis of 1,604 companies in the five largest Norwegian cities underscores what’s missing from this prescription for a knowledge economy: people. The prerequisite for a regional innovation system is knowledgeable people who have the motivation and ability to start ventures. To succeed, these people need to be connected to one another by information-sharing networks. Basic infrastructure is always needed, but fancy science parks and big industry are just nice to have.

The study, conducted by Rune Dahl Fitjar, of Norway’s Centre for Innovation Research at the International Research Institute of Stavanger, and Andres Rodriguez-Pose of the London School of Economics and Political Science, found that the key drivers of innovation in Norway are the communication channels that local entrepreneurs maintain to the outside world and their open-mindedness toward foreign cultures, change and new ideas. Companies that are “regionally minded” — that maintain ties only with players within the same cluster — are four times less likely to innovate than the globally connected. The study found that regional and national clusters are “irrelevant for innovation.”

Norway is a well-suited test bed for the success of cluster theory because it has a high-quality education system, well-developed infrastructure and a uniform distribution of highly skilled workers with access to quality research centers and universities in all parts of the country. The same dynamics at play in Norway give Silicon Valley its advantage: It is a giant, globally connected network in which sharing information and risk-taking are the norm. So, rather than obsess over clusters, we need to start obsessing over people. We need to remove the obstacles to entre­pre­neur­ship — such as knowledge of how to start companies, fear of failure, lack of mentors and networks, government regulations and financing. And we need to repair our university research commercialization system so that research breakthroughs translate into invention. That’s the correct formula for nurturing regional growth.

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