1. Innovation in Clusters Professor Scott Stern MIT Sloan School and NBER Microeconomics of Competitiveness Faculty Workshop Harvard Institute for Strategy and Competitiveness December 2010

2. Innovation and Economic Performance

3. Global Innovation is Concentrated in a Small Number of Nations Around the World U.S. Israel Germany Taiwan Japan Finland Netherlands Korea France U.K. Singapore Portugal Denmark Sweden Switzerland Australia Spain Canada Data are Patents Per Million Population, 2002. Source: United States PTO

4. Innovative OutputSelected Countries, 1998 to 2008 Average U.S. patents per 1 million population, 2006-2008 United States Taiwan Japan Finland Switzerland Israel Sweden Germany South Korea Canada Singapore Denmark Netherlands UK Austria Belgium Australia Norway France Hong Kong Italy Spain India China South Africa CAGR of US-registered patents, 1998 to 2008 10,000 patents = Source: USPTO (2008), EIU (2008)

5. Even with similar initial innovation rates, regions can diverge dramatically in producing world-class technology…

6. Within the US, states differ by a factor of 4-5 in terms of patents per capita…

7. With even more striking variation at the regional level…

8. US Issued Patents by Sri Lanka Inventors Sri Lankan Population = 20 million people

9. M.I.T. Issued U.S. Patents by Fiscal Year, 1999-2008 7/17/2008

10. Bob Langer has published more than 1100 articles and been granted more than 760 patents…

11. Why is innovation so closely related to globally competitive clusters? Why does location matter for innovation? What is the role for policy and management?

12. Outline Innovation: Location Matters The Drivers of Innovative Capacity (Australia Case Study) Benchmarking Innovative Capacity Innovative Capacity as a Diagnostic Tool The Drivers of Regional Innovation-Based Entrepreneurship Clusters and Economic Performance

14. In advanced regions, productivity depends less on cost than on whether and how a region’s companies compete on the basis of innovation

15. Creating high value products and services

16. Developing unique products, features, and processes

17. Staying ahead of technology diffusion, through cumulative innovation

18. Rather than focusing on small differences in factor costs or taxes, regional development policy must increasingly emphasize the environment for technology development, entrepreneurship and innovation

19. Innovation-oriented competition is less a game of winners and losers but a mechanism to improve the standard of living for all citizens

20. Innovation is more than just science & technology

21. No “low-tech” industries, just firms not taking advantage of innovative opportunities

22. Service sector innovation is becoming increasingly important

24. Cluster-Specific Environment Common Innovation Cluster-Specific for Innovation Infrastructure Conditions Common Innovation Infrastructure Innovation Resources National “Knowledge” Stock Quality of Linkages Quality of Linkages Context for Firm Innovation Policy Strategy and Rivalry Factor (Input) Demand Conditions Conditions Related & Supporting Industries The Drivers of Innovative Capacity

26. Access to Higher and Postgraduate Education

27. Availability of Risk Capital

28. High Quality of Information Infrastructure

29. Subsidy and Grant Programs

30. R&D Tax Policy

31. Education Policy & Funding

32. Intellectual Property Protection Policy

34. Cumulative Innovation Record

37. Strong basic research infrastructure

38. An ample supply of risk capital

39. High quality information infrastructure

40. Sophisticated and demandinglocal customers

42. Clusters of related and supporting industries and institutions to harness linkages

43. A critical mass of capable local suppliers

44. Presence of Clusters instead of industries

46. Venture CapitalQuality of Linkages Context for Firm Innovation Policy Strategy and Rivalry Factor (Input) Demand Conditions Conditions Related & Supporting Industries

48. Innovation leadership within a region results from integrating external resources with internal capabilities

49. R&D productivity depends on the locations at which a company’s business units are based

51. Over the 1990s, growth in Australian exports was driven by improvement in Australia’s wine cluster Share of Australian Exports, 2000 Materials/Metals Food/Beverages* Transportation Equipment Oil/Chemicals Textiles/Apparel Multiple Business Health Care Change in Share of Australian Exports, 1995-2000 Note: Wine export growth accounts for >45% of the increase in the export share of food/beveragesSource: UN Trade Statistics

52. The Australian Wine ClusterTrade Performance Australian Wine Exports in million US Dollars Australian Wine World Export Market Share Source: UN Trade Statistics

53. The Australian Wine ClusterLocations Northern Territory Queensland Western Australia South Australia New South Wales Victoria Tasmania Note: Colored areas indicate wine growing regionsSource: Australian Wine & Brandy Corporation

54. The Australian Wine ClusterHistory 1991 to 1998 New organizations created for education, research, market information, and export promotion 1980 Australian Wine and Brandy Corporation established 1965 Australian Wine Bureau established 1930 First oenology course at Roseworthy Agricultural College 1970 Winemaking school at Charles Sturt University founded 1990 Winemaker’s Federation of Australia established 1955 Australian Wine Research Institute founded 1950s Import of European winery technology 1960s Recruiting of experienced foreign investors, e.g. Wolf Bass 1990s Surge in exports and international acquisitions 1980s Creation of large number of new wineries 1970s Continued inflow of foreign capital and management Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002

56. Focus: Coordination, integration, and standard maintenance for vocational training and education

57. Funding: Government; other cluster organizations

58. Established in 1991

59. Focus: Coordination of research and education policy in viticulture

61. Focus: Wine export promotion through international offices in London and San Francisco

62. Funding: Government; cluster organizations

63. Established in 1990

64. Focus: Public policy representation of companies in the wine cluster

66. Focus: Funding of research and development activities

67. Funding: Government; statutory levy

68. Established in 1998

69. Focus: Information collection, organization, and dissemination

70. Funding: Cluster organizationsThe Australian Wine ClusterRecently founded Institutions for Collaboration Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002

71. Wine Industry Healty Rivalry Based on Quality and Execution Natural Resources & Deployment of Best Global Technology Increasingly Sophist. Local Market Growing (but not intl. Leader)

72. Assessing National Innovative Capacity An objective, quantitative international benchmark of the national capacity for innovation Methodology Measures of NationalInnovative Capacity InnovationOutput National Innovative Capacity Rankings and Sub-Rankings

73. The National Innovative Capacity Framework facilitates assessment of global innovation drivers across countries and over time The Evolution of Innovation Capacity Over Time The historical basis of innovation leadership and changes over time in national positioning Key Reports Porter and Stern, Council on Competitiveness, 1999 Furman, Porter and Stern, Research Policy, 2002 Gans and Stern, 2002; Gans, et al, 2005 onwards The World Economic Forum Global Competitiveness Report “Snapshots” of relative innovative capacity at a Point in Time Detailed and nuanced measures available for recent years Comprehensive national coverage, including over 70 countries Findings in the annual Global Competitiveness Report (“GCR”) Global Competitiveness Report (“GCR”), 2001, 2002, 2004

74. The Evolution of Innovation Capacity Over Time Looking across the OECD for nearly 30 years, key Innovative Capacity measures are highly significant in explaining international patenting output Infrastructure Investments and Policies have a significant influence R&D spending & Employment Intellectual Property and Openness to Intl. Trade Higher Education & Overall Technological Sophistication R&D composition has an additional impact R&D spending by business more productive than Govt. R&D Innovation productivity is higher for countries specialized in (broad) technology areas Universities play a key role in translating funding into innovation performance

75. Historical Innovation Index (“Gans and Stern”)Selected Countries, 1975-2000 * From 1973 to 1989, the Index is based on data for West Germany only.

76. “Historical” Innovation Index Findings Over time, convergence has occurred. Prior to mid-1980s, the U.S. and Switzerland stood apart. Japan’s dramatic improvement in international patenting is well explained by national innovative capacity measures. After rising through the 1980s, Germany has struggled to maintain its innovative capacity after reunification Denmark and Finland have made major gains in innovative capacity, especially since the mid-1980s, while France and Italy have treaded water Between 1973 and the late 1990s, Australia transformed itself from a “classical” imitator economy countries to a low “second-tier innovator” economy

78. Intellectual Propriety Protection

79. Government R&D Tax Credits

80. Government Subsidies for R&D

81. Company Spending on R&D

82. Environmental Regulation

83. Regulatory Standards

84. Effectiveness of Antitrust Policy

85. Procurement of Advanced Technology Products

86. State of Cluster Development

87. Production Process Sophistication

88. Extent of Product and Process Collaboration

90. Firm’s Capacity for Innovation

91. Company R&D Spending Priority

92. International market orientation

94. University/Industry Collaboration

97. Australian Innovative Capacity is just behind its position in terms of GDP per capita

98. The innovative capacity of Austrlalia has been driven by improvements in innovation policy and resources, and through the recent emergence of key clusters

99. The R&D spending boom of the late 1990s outpaced international competitors R&D Spending as Share of GDP, 1998 Sweden Japan Finland South Korea USA Germany Israel France Denmark AUSTRALIA Singapore UK Netherlands Ireland Belgium Canada Italy New Zealand Spain Portugal R&D Expenditures, CAGR, 1985 - 1998 Source: OECD Science, Technology and Industry Scoreboard 2001.

100. However, after strong growth in the 1980s, Australia science and engineering laborforce intensity has slowed relative to similar countries Researchers per 10’000 Employed, 1998 Finland Japan Sweden US AUSTRALIA Germany UK France Canada New Zealand Netherlands Spain Italy Growth Rate of Researchers, CAGR 1991 - 1999 Note: Finnish Growth Rate for 1991-98Source: OECD, 2001

101. Australia’s position among “second-tier” innovator nations is limited by ineffective company operations & strategy … Australia ranks only 22nd in Company Operations and Strategy.

102. And stagnation in the development of effective institutions linking the innovation infrastructure to local cluster requirements

103. Dynamic Australian clusters have begun to evolve building upon historical strengths… Gold Mining and Natural Resources Travel and Tourism Iron / Aluminum Bauxite Logistics / Trade Wine Beef Wool Produce Abundant Productive Land Information Technology Grains Ag Research Centers Education and Knowledge Creation Medical Devices Bioscience Research Centers Biotech / Pharmaceuticals 1980 1990 2002 +

104. …and an internationally competitive scientific personnel base in life and agricultural sciences…

105. However, to date, leading clusters are driven by public rather than private research expenditures…

106. Nurturing Australian Innovative Capacity:An Innovation Policy Agenda Current Assessment Macroeconomic Stability Improved Cost / Quality Competitiveness Diversifying away from traditional industrial sectors Some Examples of Globally Relevant Cluster Development (e.g. Wine and Biotechnology) How to Build Capacity for World-Class Innovation?

107. The Australian Innovation Policy Agenda

108. Outline Innovation: Location Matters The Drivers of Innovative Capacity (Australia Case Study) Benchmarking Innovative Capacity Innovative Capacity as a Diagnostic Tool The Drivers of Innovation-Based Entrepreneurship Clusters and Economic Performance

112. They are enhanced by the strength and number of connections among them.Regional Entrepreneurship Capacity Regional Innovation Capacity

113. Regional Innovation Capacity The capacity of a region to generate “new to the world” ideas, products and services supported by:. Regional Innovation Capacity

114. Regional Entrepreneurship Capacity The capacity of a region to generate new start-up companies supported by: Regional Entrepreneurship Capacity

115. Innovative Capacity and Entrepreneurial Capacity Are Different and Have Distinct Drivers

116. Potential for benchmarking entrepreneurial capacity … World Bank, Doing Business Project 2010

117. Effective coupling of innovative and entrepreneurial capacity is realized through a strong cluster environment In what clusters does the region have a clear comparative advantage? How are these potential clusters related to each other? Addressing these questions provides a useful lens for focusing actions and making choices about how to deploy scarce resources Regional Cluster Strength

118. Innovation Capacity & Entrepreneurial Capacity building can be focused on the needs of the most competitive clusters Regional Entrepreneurship Capacity Regional Innovation Capacity

119. Cluster-specific coupling mechanisms can enhance innovation-based entrepreneurship Regional Entrepreneurship Capacity Regional Innovation Capacity Cluster-focused Coupling CLUSTER-SPECIFIC COUPLING MECHANISMS PEOPLE: Cluster-based entrepreneurial education bridging universities, start-up companies and large cluster “anchor” firms Leadership council for the cluster to promote integration, common goals, networking etc. FUNDING & INFRASTRUCTURE Cluster-focused investment strategie Cluster-focused infrastructure for demonstration projects & proof of concept REWARDS: Cluster-oriented celebrations of innovators and entrepreneurs e.g. MIT Clean Energy Prize

120. Bayh-Dole Act:Arguably the single most important single shift in the environment for regional innovation-driven entrepreneurship

121. Significant increase in patent filings About 10,000 patents granted per year to US universities on about US$30billion per year research funding ~ $3M/patent!

122. Executed through the establishment of technology transfer offices

123. Hausman, 2010

124. The Challenge of Regional Strategy Regional economies and their individual clusters develop slowly in an evolutionary, path-dependent process Some of the factors that drive this process areinherited or externally given (physical location, natural endowments, chance events) However, while these factors are important, they do not determine the evolutionary path of a regional economy or cluster Choices, such as the investment in specific assets or the decision for a particular regulation or policy, are important Institutions for collaboration are an important factor enabling regions to make and execute choices So are entrepreneurial decisions

127. Strong basic research infrastructure

128. An ample supply of risk capital

129. High quality information infrastructure

130. Sophisticated and demandinglocal customers

132. Clusters of related and supporting industries and institutions to harness linkages

133. A critical mass of capable local suppliers

134. Presence of Clusters instead of industries

136. Key Lessons In a global economy, innovation-based competitiveness provides a more stable foundation for productivity growth than low-cost production Current economic and security challenges have placed pressure on regional strategies from the “boom years.” Rather than a “extra” during good times, coherent regional strategy is critical for overcoming current challenges to our fiscal health, economic growth, and national security. Effective regional policy must be grounded on a clear understanding of the drivers of regional innovative and entrepreneurial capacity and the central role of clusters Regions must leverage and expand the scope of the innovation system that supports regional competitiveness in advanced economies. The strategy for long-term growth relies less on bidding wars and high-profile investments than on creating conditions for firm development and cluster formation. Beyond simple analysis, though, regional strategy only matters in the presence of an effective implementation plan