Lackluster clustering

Flying smelly clusters, originally uploaded by fabbio

One of the articles in the series mentioned yesterday, “The fading lustre of clusters,” stood out for its analysis of the challenges of entrepreneurship, innovation and specifically its criticism of the role governments have played. It focusses on the government’s enthusiastic adoption of Michael Porter’s strategy of “Industry Clusters.”

Clusters are supposed to improve competition in three ways:

• by increasing the productivity of the companies in the cluster
• by driving innovation in the field
• by stimulating new businesses in the field

Now, anyone who’s read Friedman’s “The World is Flat” may be asking why clustering is needed in such a highly connected and globalized world. Aren’t we suppose to be able to compete with anyone, from anywhere? Our own Richard Florida provides a great rebuttal which states that, far from flat, our world is actually very spikey when it comes to innovation. (Roger Martin and Gordon Nixon provide a great discussion on the matter and Canada’s role and a well linked and short debate can be found at e-Clippings.)

Basically, those able to leverage the creative outputs from their surrounding area stand a much greater chance at success.

That said, the article mentioned above sees some problems:

…EU officials, like government bureaucrats everywhere, are obsessed with creating geographic clusters like Silicon Valley. The French have poured billions into pôles de compétitivité; and Singapore, Dubai and others are doing much the same. There are dozens of aspiring clusters worldwide, nicknamed Silicon Fen, Silicon Fjord, Silicon Alley and Silicon Bog. Typically governments pick a promising part of their country, ideally one that has a big university nearby, and provide a pot of money that is meant to kick-start entrepreneurship under the guiding hand of benevolent bureaucrats.

The authors don’t mince words, stating these projects have been “an abysmal failure.” Insead concluded that Germany’s efforts to create a biotech cluster has essentially wasted $20 billion. Ditto for Singapore’s Biopolis, which the World Bank gave a 50-50 chance of success. Not exactly a ringing endorsement for this form of economic development.

The reason they cite is role of government. These regions often have a very active government role, hence the construction of the clusters in the first place. However, its this same active hand that is seen as interfering. Research funds are spread too thinly. Big bets are sacrificed for safe bets. Bureaucrats are seen trying to create businesses, instead of supporting them. Billions are spent on research clusters, while red tape and market barriers remain, hobbling those same entrepreneurs they are trying to support.

It isn’t all bleak, however, with Finland being an excellent exception. By supporting businesses through R&D funding and avoiding protectionism, the post-WW2 government simultaneously challenged their companies (i.e. Nokia) to think globally, while supporting them to do just that. Their success after the demise of their largest trading partner (USSR) might be something to consider, given our own trading partner’s current financial difficulties.

Meanwhile, Silicon Valley faces its own challenges in post-9/11 America. Paul Graham of Y Combinator, a Silicon Valley early-stage VC firm, recently tried to defend his statements that startups would do better if they moved to Silicon Valley. Certainly of the “Porter” camp, he states; “Most people could see how it might be helpful to be in a place where there was infrastructure for startups, accumulated knowledge about how to make them work, and other people trying to do it.” But while defending the benefits, he does admit that it has some challenges.

Immigration difficulties might be another reason to stay put. Dealing with immigration problems is like raising money: for some reason it seems to consume all your attention. A startup can’t afford much of that. One Canadian startup we funded spent about six months working on moving to the US. Eventually they just gave up, because they couldn’t afford to take so much time away from working on their software. (If another country wanted to establish a rival to Silicon Valley, the single best thing they could do might be to create a special visa for startup founders. US immigration policy is one of Silicon Valley’s biggest weaknesses.)

Now I don’t believe that clusters as a strategy are the problem. Far from it. Specialization offers significant economic benefit. However, when ill-conceived and poorly planned, clusters can be a very costly endeavour. Spending money to build “The Next Silicon Valley” instead of supporting companies and industries that are complimentary to the area is needlessly competitive and detrimental to the financial viability of a region. The focus of government should be to make doing business easier. Support R&D, infrastructure, knowledge transfer, patent protection, investment incentives, etc. Canada is already doing a lot of things very well. Our support for R&D, low corporate taxes and company formation time are some of the best in the G8.

So what else can we be doing? Check out another VC’s thoughts on the subject : Guy Kawasaki’s “How to Kick Silicon Valley’s Butt”. And remember: “Aim higher than merely trying to re-create Silicon Valley. You should try to kick our butt instead. That’s true entrepreneurship.”