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ISBN 978-92-64-04442-5
84 2009 06 1 P
Clusters, Innovation and Entrepreneurship
Edited by Jonathan Potter and Gabriela Miranda
This publication explores the success of major innovation and entrepreneurship clusters
in OECD countries, the challenges they now face in sustaining their positions and the
lessons for other places seeking to build successful clusters. What are the key factors for
cluster success? What problems are emerging on the horizon? Which is the appropriate
role of the public sector in supporting the expansion of clusters and overcoming the
obstacles?
The book addresses these and other issues, analysing seven internationally reputed
clusters in depth: Grenoble in France, Vienna in Austria, Waterloo in Canada, Dunedin
in New Zealand, Medicon Valley in Scandinavia, Oxfordshire in the United Kingdom,
and Madison, Wisconsin, in the United States. For each cluster, it looks at the factors
that have contributed to its growth, the impact of the cluster on local entrepreneurship
performance, and the challenges faced for further expansion. It also puts forward a set of
policy recommendations geared to the broader context of cluster development.
This publication is essential reading for policy makers, practitioners and academics
wishing to obtain good practices in cluster development and guidance on how to
enhance the economic impact of clusters.
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Clusters, Innovation
and Entrepreneurship
Edited by Jonathan Potter
and Gabriela Miranda
842009061cov.indd 1 22-Jul-2009 12:30:57 PM
Local Economic and Employment Development (LEED)
Clusters, Innovation
and Entrepreneurship
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where the governments of 30 democracies work
together to address the economic, social and environmental challenges of globalisation.
The OECD is also at the forefront of efforts to understand and to help governments
respond to new developments and concerns, such as corporate governance, the
information economy and the challenges of an ageing population. The Organisation
provides a setting where governments can compare policy experiences, seek answers to
common problems, identify good practice and work to co-ordinate domestic and
international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand,
Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey,
the United Kingdom and the United States. The Commission of the European
Communities takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisations statistics
gathering and research on economic, social and environmental issues, as well as the
conventions, guidelines and standards agreed by its members.
Also available in French under the title:
Dveloppement conomique et cration demplois locaux (LEED)
Ples de comptitivit, innovation et entrepreneuriat
Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.
OECD 2009
You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications,
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(CCC) at [email protected] or the Centre franais d'exploitation du droit de copie (CFC) at [email protected].
This work is published on the responsibility of the Secretary-General of
the OECD. The opinions expressed and arguments employed herein do not
necessarily reflect the official views of the Organisation or of the governments
of its member countries.
FOREWORD
CLUSTERS, INNOVATION AND ENTREPRENEURSHIP ISBN 978-92-64-04442-5 OECD 2009
3
Foreword
Provision of policy guidance on the development of local clusters of entrepreneurship
and innovation is one of the key work areas of the OECD Centre for Entrepreneurship,
SMEs and Local Development. Clusters are one of the most remarkable features of local
economic development and small and medium-sized firm competitive advantage.
Localised groupings of suppliers, customers, competitors and support institutions, all
specialised in related activities, are present in all economies. They are particularly
productive locations for the economic activities they host. They are sites of strong
entrepreneurship and innovation vitality. And, because of this, they drive economic
and employment growth. But what makes clusters grow? What threats do they face?
How should policy intervene? Answering these questions is the key motivation of
this book.
The governments the OECD works with at national and local levels, and the
development agencies they support, are all aware of the concept of clusters and the
potential that clusters hold for stimulating economic development and many have put
in place their own policy initiatives for clusters. This has led to strong demands on the
OECD for information on how policies can strengthen clusters based on an
international assessment of recent experiences.
Here we share information from this work on success factors, problems and policy
approaches in major clusters. The book shows the importance to cluster growth of co-
operation, research commercialisation, human capital and skills enhancement, public
sector commitment, partnerships and leadership, quality of life and social capital. It
also shows the challenges that even strong clusters face. Policy is already doing much
to support cluster development in the places reviewed in this book. A number of
recommendations are presented for other areas based on the assessment of this
experience. Key messages include the importance of encouraging new firm creation,
stimulating innovation, co-ordinating polices, ensuring human capital, facilitating
access to finance and addressing congestion and social divisions.
The clusters examined in this book all experienced a long period of growth in the
decade to 2008, but since the past few months are confronted with the major challenge
of responding to a global economic crisis. The crisis has turned attention towards
survival, restructuring and downsizing in the face of shrinking markets and restricted
finance. In this new context, the favourable environments that clusters provide to the
enterprises they host remain extremely important as fundamental sources of
FOREWORD
CLUSTERS, INNOVATION AND ENTREPRENEURSHIP ISBN 978-92-64-04442-5 OECD 2009
4
competitiveness. Indeed, the productivity and cost advantages that clusters offer
should help their firms to weather the crisis better than firms that stand alone. But
decisions and investments made in clusters now also affect their prospects for growth
and employment creation in the upturn. This is therefore a time for smart policy, which
identifies the critical investments and actions that need to be taken to reinforce cluster
strengths and position them as sources of future entrepreneurship, innovation and
growth. The ideas in this book show the directions that need to be taken.
It is the result of work undertaken by the Local Economic and Employment
Development Committee of the OECD in collaboration with the French Assembly of
Chambers of Commerce and Industry, the Caisse des Dpts et des Consignations, and
the French Ministry of Economy, Industry and Employment, who wished to compare the
experience of Grenoble with that of clusters in other countries. I hope it will stimulate the
development of effective cluster policies and practices in a wide range of settings.
Sergio Arzeni
Director, OECD Centre for Entrepreneurship,
SMEs and Local Development
TABLE OF CONTENTS
CLUSTERS, INNOVATION AND ENTREPRENEURSHIP ISBN 978-92-64-04442-5 OECD 2009
5
Table of Contents
Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Chapter 1. Policy Issues in Clusters, Innovation
and Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
What are clusters? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Why focus on clusters? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
How do clusters function? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
What is the role of policy in clusters? . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Chapter 2. The Micro-nanotechnology Cluster of Grenoble, France . . . . . 43
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Impact of the cluster on entrepreneurship and employment . . . . . . . 58
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Policy adaptations over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Chapter 3. The High-tech Cluster of Oxfordshire, United Kingdom. . . . . 73
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Impact of the cluster on entrepreneurship and employment . . . . . . . 82
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
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Policy adaptations over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Chapter 4. The Biotechnology Cluster of Vienna, Austria . . . . . . . . . . . . . 103
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Impact of the cluster on entrepreneurship and employment . . . . . . . 113
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Policy adaptations over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Chapter 5. The Life Science Cluster of Medicon Valley, Scandinavia . . . . 131
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Impact of the cluster on entrepreneurship and employment . . . . . . . 144
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
List of abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Chapter 6. The Engineering Cluster of Dunedin, New Zealand. . . . . . . . . 155
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Role of SMEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Impact of the cluster on entrepreneurship and employment . . . . . . 161
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
TABLE OF CONTENTS
CLUSTERS, INNOVATION AND ENTREPRENEURSHIP ISBN 978-92-64-04442-5 OECD 2009
7
Policy adaptations over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Chapter 7. The University-centric High-tech Cluster of Madison,
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Chapter 8. The ICT Cluster of Waterloo, Canada . . . . . . . . . . . . . . . . . . . . . 193
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Nature and evolution of the cluster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Role of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Impact of the cluster on entrepreneurship and employment . . . . . . . 205
Barriers to cluster development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Role of policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Policy adaptations over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Future policy challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Lessons for other clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
Chapter 9. Conclusions and Recommendations. . . . . . . . . . . . . . . . . . . . . . 217
Clusters in the global knowledge economy . . . . . . . . . . . . . . . . . . . . . . 218
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
International models of good practice . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Box
9.1. Summary of recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
TABLE OF CONTENTS
CLUSTERS, INNOVATION AND ENTREPRENEURSHIP ISBN 978-92-64-04442-5 OECD 2009
8
Tables
2.1. Number of establishments and workers in belonging
to the Minalogic clusters five sectors of activity, 2006 . . . . . . . . . . 48
2.2. Breakdown of Minalogic employees in Isre
by socio-professional category and by sector . . . . . . . . . . . . . . . . . . 49
2.3. Long-term trends in the Grenoble cluster . . . . . . . . . . . . . . . . . . . . . 53
2.4. Minalogic governance structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.5. Human capital in the clusters leading fields of innovation, 2006. . . . 56
2.6. Share of SMEs in Minalogic projects which received
public funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.7. Public initiatives to promote the Grenoble cluster . . . . . . . . . . . . . . 62
3.1. Number of high-tech companies in Oxfordshire,
analysed by sector, end of 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.2. Sectoral breakdown of high-tech employment
in Oxfordshire, end of 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.3. Date of incorporation of high-tech companies in Oxfordshire,
end of 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3.4. Rate of employment growth in high-tech sectors, 1991-2000,
top 10 English counties (using Butchart definition) . . . . . . . . . . . . . 80
3.5. Educational attainment in Oxfordshire . . . . . . . . . . . . . . . . . . . . . . . 83
3.6. Locational advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.7. Locational challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4.1. Biotechnology related companies in Austrian provinces . . . . . . . . 105
4.2. Classification of biotechnology related firms in Vienna . . . . . . . . . 107
4.3. Publications in biotechnology per year . . . . . . . . . . . . . . . . . . . . . . . 110
4.4. Characterisation of spin-offs in the sample . . . . . . . . . . . . . . . . . . . 113
4.5. Types of knowledge links and their geography in the Vienna
biotechnology cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
4.6. Regional and national policy programmes for promoting
high-technology activities in general and biotechnology
in particular (selection). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
5.1. Comparative global performance indicators for bioregions. . . . . . 133
5.2. Ten largest firms in Medicon Valley . . . . . . . . . . . . . . . . . . . . . . . . . . 136
5.3. SWOT analysis of Medicon Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
5.4. Two-dimensional classification of main innovation
policy instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
7.1. Dane County employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
7.2. Relationship to UWM of the start-up founders. . . . . . . . . . . . . . . . . 171
7.3. Venture capital firms operating in Wisconsin. . . . . . . . . . . . . . . . . . 174
7.4. Madison start-ups and venture capital funding . . . . . . . . . . . . . . . . 174
7.5. R&D expenditures by year (USD 000) . . . . . . . . . . . . . . . . . . . . . . . . . 178
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7.6. R&D expenditures by discipline, University
of Wisconsin, Madison, 2004 (USD 000) . . . . . . . . . . . . . . . . . . . . . . . 179
7.7. State of Wisconsin SBIR grants by county in 2005 . . . . . . . . . . . . . . 181
7.8. Angel investment groups in Wisconsin . . . . . . . . . . . . . . . . . . . . . . . 186
8.1. ICT manufacturing and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
9.1. Synthesis of good practices identified in the clusters analysed. . . 231
Figures
2.1. Employment trends in the Grenoble arrondissement . . . . . . . . . . . 52
2.2. Technologies and industries in the Grenoble cluster today . . . . . . 53
3.1. The Oxfordshire virtuous circle of activity . . . . . . . . . . . . . . . . . . . . 77
3.2. Comparison of numbers of ICT and Biotech spin-offs. . . . . . . . . . . 82
3.3. Employment data. Comparison between ICT
and biomedical group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.1. New firm formation in the Vienna biotechnology cluster. . . . . . . . 108
4.2. New firm formation in different fields of activity . . . . . . . . . . . . . . 108
4.3. Research nuclei in the Vienna biotechnology cluster . . . . . . . . . . . 111
4.4. Overview of the different policy systems governing
Vienna biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
4.5. Policy challenges for the further development of the Vienna
biotechnology cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.1. Map of Medicon Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
5.2. Distribution venture capital Medicon Valley . . . . . . . . . . . . . . . . . . . 141
5.3. Number of medico/health enterprises (private sector) . . . . . . . . . . 143
5.4. Size structure of local medico/health units in resund . . . . . . . . . 143
5.5. Turnover medico/health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
5.6. Value-added medico/health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
5.7. Medico/health employment (private sector) . . . . . . . . . . . . . . . . . . . 145
6.1. Full time equivalent employment trend . . . . . . . . . . . . . . . . . . . . . . 162
7.1. Dane County employment, 1993-2004 . . . . . . . . . . . . . . . . . . . . . . . . 169
7.2. New firm formation in Madison, Wisconsin by year . . . . . . . . . . . . 171
7.3. VC backed firms Dane County Wisconsin. . . . . . . . . . . . . . . . . . . . 175
ACKNOWLEDGEMENTS
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Acknowledgements
The OECD Local Economic and Employment Development (LEED)
Programme would like to acknowledge the financial contributions of the
French Ministry of Economy, Industry and Employment (Directorate for
Commerce, Handcrafts, Services and Professionals and Directorate General for
Enterprises [DCASPL]), the French public investment bank (the Caisse des
Dpts et des Consignations) and the French national assembly of chambers
of commerce and industry to this publication.
In addition, the chapter on the Grenoble cluster benefitted from advice and
substantive contributions from the DCASPL and the National Statistics
Department (INSEE). Various French institutions were actively involved in the
steering group, which met twice to discuss the draft and conclusions of a report
on the Grenoble cluster in comparison with other experiences which forms the
basis for this publication. Representatives of the Dlgation interministrielle
lamnagement et la comptitivit des territoires (DIACT), the Dlgation
gnrale du ple Minalogic, the Prfecture de la rgion Rhne-Alpes, the Conseil
rgional Rhne-Alpes, and the Conseil gnral dIsre provided useful
comments.
The policy recommendations contained in this publication have been
endorsed by the LEED Directing Committee at its 51st session held in Paris.
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Executive Summary
Contrary to popular belief, the globalised knowledge economy relies more
and more on the local dimension. In order to boost economic development and
respond efficiently to ever keener international competition, OECD member
countries need to pursue entrepreneurship and innovation policies that reflect
their own distinctive local characteristics. Throughout the OECD area,
innovation is increasingly concentrated within clusters of enterprises and
research/training institutions that work on complementary activities. Indeed, it
has been demonstrated that clusters are an important source of innovation and
competitiveness driven at the local level. Clusters create an environment
conducive to productivity gains, which are a factor of growth, and so form a
structure that helps enterprises meet the challenges of international
competition. This local dimension of innovation and entrepreneurship
nonetheless poses challenges to policy makers because clusters require policies
and support schemes that are tailored to local needs.
According to Porter, clusters are geographic concentrations of
interconnected companies, specialised suppliers, service providers, firms in
related industries, and associated institutions in particular fields that compete
but also co-operate. This book examines policy approaches and policy
recommendations for cluster development based on the in-depth analysis of
seven internationally reputed clusters in the OECD area, namely Grenoble in
France, Vienna in Austria, Waterloo in Canada, Dunedin in New Zealand,
Medicon Valley in Scandinavia, Oxfordshire in the United Kingdom, and
Madison, Wisconsin, in the United States.
What are the key factors for cluster success? What is the appropriate level
and type of public intervention for cluster development? The book addresses
these and other issues based on the analysis of the seven cluster studies. It
looks at the factors that have contributed to the successful development of each
cluster and at the barriers that hinder their expansion. Following this analysis,
the review puts forward a set of policy recommendations that are geared to the
context of clusters.
Main findings
The analysis shows how clusters contribute to the dynamic for enterprise
creation, notably by stimulating the creation of highly innovative spin-outs in
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core cluster sectors. Moreover, business creation in the economy in general
seems also to be positively influenced by clusters through increased demand for
indirect services (i.e. induced activities). For instance, in 2007, 40 per cent of the
firms in the heart of the Grenoble cluster had started up since the labelling of
the ple de comptitivit by the government in 2005. Furthermore, among the
SMEs of this grouping, more than one in three had started up in 2006.
The book also shows how clusters can have a positive impact on
employment, both directly, in the high-tech enterprises that form the heart of
the clusters, and indirectly, through their ripple effect in the economy. In
Oxfordshire, for instance, from a base of 190 enterprises with 2 000 employees
in 1989, the region counted approximately 3 500 high-technology enterprises
with 45 000 employees by 2004. In the Madison cluster, in the United States,
employment increased by 75 per cent between 1993 and 2004 in the core
sectors of the cluster, life sciences and information technologies.
Key factors for success
Strong co-operation. In all of the clusters examined, there was a strong fabric of
enterprises, reputed universities and top level research centres that join forces
to coproduce innovation. Strong co-operation is a key factor in successful
innovation and, more specifically, collaborations between research
organisations, universities and enterprises in the form of start-ups and SMEs.
Such co-operation has often been fostered by agencies or networks outside the
cluster acting as brokers. The interaction between players in a cluster may
grow with the development of a policy to promote local networks and supply
chain development. The importance of such an approach is clear in Medicon
Valley, where government policy has sought to build up the networking
capacity of players in the triple helix (government, industry and research).
Research commercialisation. It is crucial for successful spin-off activity to identify
the market for an innovation. However, this is not always simple and its
importance is often underestimated. Very few efforts have been made to teach
students or advise researchers on how to commercialise their innovative
product to make a profit. Furthermore, the identification of the market is a key
step in attracting private investors in high-tech sectors and ensuring the
investment to build clusters, notably venture capital. The WAVE programme in
the Wisconsin cluster is an initiative that has proven to be successful in
teaching students and assisting academics commercialise their innovations.
Critical human capital mass. A pool of talents is the base for the emergence and
development of clusters. Hence, the education supply and cluster demands
should be matched in order to avoid a shortage of skilled labour and therefore
a flight of financial capital and know-how. The availability of qualified people
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at various levels needs to be forecasted and guaranteed so that the cluster can
evolve at the same pace as innovations. A special effort is needed to attract
highly qualified labour. Some initiatives to attract talents from abroad have
worked successfully in the Vienna cluster (targeting expatriates) and in the
Dunedin cluster (targeting foreigners).
Skills enhancement. The adaptability of clusters to technological and competitive
change must not be undermined. Local players are engaged in international
competition and must know how and be able to react to developments in their
markets. High skill levels help cluster enterprises to adapt to changing
conditions. Furthermore, it is important to adapt training provision to new areas
of demand in clusters. One particular aspiration is the provision of training for
emerging activities not only in engineering but also in supporting technical
professions. Many international clusters have set-up training programmes to
cover emerging fields, as is the case of Waterloo and its Co-op programme.
Strong commitment of the public sector. Public actors have played an important role
in the emergence and development of the clusters examined in this book,
regardless of the clusters nature. For instance, the public sector has apparently
played a limited role in the development of the Madison cluster (United States).
Yet in Madison there is a comprehensive strategy and in the US there is
substantial public funding at the national level for academic research and
numerous government funding programmes for technology spin-outs that the
cluster has benefited from. If clusters are to remain competitive in the long-
term, the public authorities should help promote a comprehensive strategy and
agree on investments in infrastructure and public services such as transport,
housing, schools and personal services to meet new cluster requirements.
Strong partnerships and leadership. For all of the clusters analysed, strong
partnerships and clear leadership have been essential factors for success.
Public-public partnerships are the key to ensuring a co-ordinated overall policy
strategy for the development of the cluster. Public-private partnerships are
crucial in making sure that policies are adequate and that needs are met in the
cluster. For instance, in the case of Grenoble, the involvement of local
authorities in the governance of the Minalogic cluster management
organisation has helped to forge relationships based on trust with its members.
From the outset, strong partnerships and the leading role played by the clusters
delegate-general has contributed to the success of Minalogic. Moreover,
partnerships among firms and between research and industry are critical for
supporting collaborative research and training initiatives and knowledge
transfers within clusters.
High quality of life. A high quality of life has also proved to be an important factor
in retaining, renewing and growing the critical mass of talents in the clusters
reviewed here. Social networks, people-oriented services, low bureaucratic
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procedures and good infrastructure are just some of the factors that have an
impact in the attraction and retention of highly skilled population into a given
place. The Grow Wisconsin Initiative in the Madison cluster is one of the
approaches recently adopted by the regional government to guarantee a high
quality of life and an environment attractive not only to talents but also to new
enterprises. Other similar initiatives such as the Smart Growth initiative in the
Oxfordshire cluster are important efforts made to ensure a good quality of life.
Social capital. Finally, it is important to stress that social capital is a major
intangible asset for all of the clusters reviewed that has certainly contributed to
their success. Innovation cannot take place in a hostile environment, and it is
therefore important to encourage the creation and strengthening of networks of
trust and exchange. For instance, in Grenoble, the co-ompetition among the
members of the cluster, as well as the ongoing dialogue between public and
private players, make the city a particularly attractive place for innovation.
Grenoble is an illustration of how a society based on trust and co-operation can
help to develop human potential. In Grenoble, innovation goes hand in hand
with trust.
Barriers hindering cluster development
Weak entrepreneurial cultures and incentives in research. Although there is
significant spin-off activity in the reviewed clusters, their development could be
stronger if barriers were overcome to business creation from research centres
and universities and in the impact of often rigid regulations on intellectual
property rights. Prevalent research and academic cultures are not good at
stimulating researchers to set-up firms. Furthermore, those ready to make the
move are often hindered by the legal frameworks of university systems.
Intellectual property bureaus at universities could play a role in changing this
problem. Initiatives such as the Best of Biotech contest in the Vienna cluster
which seeks to encourage academics to start their own business could also have
a positive impact in business creation.
Weak involvement of small firms in cluster projects. Clusters do not usually
integrate small enterprises and firms in traditional sectors into their core
research, development and innovation activities. In some cases, these
enterprises are seen to lie outside the sphere of policy support and
collaborative projects. However, innovation in these firms could be boosted by
closer participation in cluster activities. Initiatives such as the Metis project in
Grenoble, involving closer co-operation between textile companies and high-
tech firms, can be beneficial.
Lack of seed capital. A common barrier to entrepreneurship development is lack
of seed capital for the start-up and growth phases of firm development.
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Although this problem may be attenuated in clusters compared with other
locations, there is a need for public support to help overcome these problems
even in the reviewed clusters.
Shortages of qualified labour. Skill shortages were present in some of the clusters
extending from the very highly skilled to medium and high skill support
workers. The growth of clusters and the rapid evolution of their skills needs
present education and training providers with difficulties in delivering the
right skilled graduates to cluster enterprises. It is often useful for education
and training providers to work with existing firms in upgrading and adapting
their workforces to new needs.
Problems of congestion and social divisions. The development of clusters may create
or aggravate problems of social cohesion as it increases the demand for highly
skilled labour but has only a small direct impact on unskilled or low-skilled
workers. Clusters are also experiencing congestion in housing, land and
transport, creating problems for existing residents. Furthermore, there are
examples of resistance to research activities undertaken in areas where ethical
concerns are important. As a consequence, it is common to find lobbies
opposed to clusters and cluster growth. This issue should not be viewed as
trivial, but should be taken seriously and dealt with rapidly to prevent such
movements from spreading and undermining the clusters expansion. Good
communication helps to address this problem. The Oxfordshire cluster, for
instance, produces regularly a newsletter on the activities of the cluster to
inform the non-scientific community on ongoing and future projects.
Poor co-ordination of policies. There is usually a large body of local actors
involved in various aspects of cluster support, and often they are not well co-
ordinated. In addition to these local actors there are often national actors from
various ministries with various programmes and agendas. If these actors
could be pulled together more effectively, policy could better target and
respond to the key needs of the clusters. The development of local cluster
strategies would help to respond to this problem.
Policy recommendations
The analysis of the reviewed clusters provides a basis for a set of
recommendations on the emergence and development of clusters and
entrepreneurship elsewhere. These recommendations are listed below.
1. Encouraging entrepreneurship
For clusters to survive in the long-term, it is crucial to actively foster
entrepreneurship in order to promote the creation and growth of start-ups
that can contribute to the clusters development as suppliers, partners or
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clients. The enterprise fabric of clusters needs to be supplied and renewed
with highly innovative enterprises issued from the universities, research
centres or other large companies. This can be achieved by:
G Supporting spin-outs and small firm collaborations: by encouraging spin-outs
and collaborations among large enterprises, research institutions and SMEs,
especially through relations with suppliers and subcontractors.
G Leading a transition to the entrepreneurial university: by promoting
entrepreneurship at all levels of education and in all fields, emphasising
issues related to the capacity to create and market innovations.
G Supporting the launch and growth of start-ups: by promoting a culture of
entrepreneurship in the clusters, implementing specific programmes to
finance enterprising projects, and fostering the emergence of skills pools to
support and work with these new enterprises.
2. Stimulating innovation and collaboration
It is crucial to consolidate dialogue between universities, industry and
laboratories to provide better chances of collaboration and therefore enhance
innovation. Also, the promotion of firm networks can contribute to the creation
of a climate of trust between the members of the cluster and strengthening
supply chains. Innovation and collaboration can be stimulated by:
G Fostering industry research collaboration: by promoting the development and
transfer of technologies within clusters through technology transfer centres,
neutral agencies or networks serving as brokers, and encouraging mobility
among professionals between industry and the academic world.
G Encouraging enterprise networks: by introducing SMEs into formal networks or
by providing regular platforms for social meetings to generate a cafeteria
effect.
G Stimulating spin-offs: by creating policies to increase the ownership by
creators in the university of intellectual property rights over the results of
research.
G Better marketing of products: by the establishment of marketing centres for
products resulting from academic research located in universities.
3. Co-ordinating public polices and local initiatives
Co-ordination at all levels of government is essential to ensure the relevance
of policy design, the integration of policies into an overall strategy and the
achievement of efficiency in policy delivery. From the creation to the
development of clusters, partnerships have a major role to play as facilitators
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of policy coordination. The co-ordination of public policies and regional
initiatives can be supported by:
G Strengthening public-public and public-private partnerships: by bringing together
key enterprises, local and national government authorities, university
institutions and the business community to work together on the definition
of common initiatives.
G Encouraging evolution in cluster activities: by identifying activities in
complementary knowledge sectors to the existing base of the cluster and
providing new infrastructure, new networks and the development of new
enterprise formation.
4. Ensuring quality human capital
Clusters ought to attract human capital in order to attract, retain and embed
financial capital (private investors, foreign direct investment, etc.) and produce
innovation. The best place to live has become the best place to invest and work.
It is therefore crucial to maintain a high quality of life in order to guarantee the
availability of highly skilled talents in clusters. This can be achieved by:
G Updating education and training to meet the requirements of the cluster: by
establishing a continual dialogue between industry and universities so as
better to understand those needs, and by creating trend databases and
forecasts of skills needs to avoid skills shortages.
G Ensuring availability of talent locally: by attracting talents from abroad to come
to work in the cluster through the implementation of programmes which
target foreigners or expatriates.
G Ensuring the appeal of the area and a good quality of life: by tackling problems
affecting the quality of life in a region, such as road traffic, high housing
prices, scarcity of international schools, poor quality public services, etc.
5. Facilitating access to financing
Clusters face global competition and any delays in access to finance can be
critical to the development of the cluster and its position in the global market.
As most of the innovations in high-tech sectors require important amounts of
funds with long periods of incubation, private investors often lack incentives
to invest in a cluster. It is therefore necessary to facilitate a rapid access to
public funds and to encourage private investment. This can be achieved by:
G Encouraging private investment: through a technology transfer bureau, or with
specific tax incentives for funds placed in an innovation project in the cluster.
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G Facilitating access to public funding: by reducing bureaucratic procedures and by
creating and publicising a one stop shop for SMEs.
G Creating forums to seek financing: by organising recurrent well-known events
which serve as platforms for investors and entrepreneurs to meet.
6. Reducing congestion and social divisions
Clusters need to operate transparently and have an inclusive approach to the
community in order to avoid social divisions. Many tensions can emerge in the
region from the establishment of a cluster, which should be dealt with as soon
as they are perceived in order to remove barriers to the development of the
cluster. This can be achieved by:
G Tackling congestion and social inequalities resulting from the emergence of the
cluster: by offering training programmes on the new skills required in the
cluster to the unemployed and by investing in housing, infrastructure and
public transport following a strategic plan.
G Creating mechanisms to inform about the activities of the cluster: by issuing
periodical newsletters addressed not only to the scientific community but
also to the population and other enterprises not directly involved in the core
activities. This could facilitate the identification of new business
opportunities in the community (induced activities) and give a positive image
of the cluster.
ISBN 978-92-64-04442-5
Clusters, Innovation and Entrepreneurship
OECD 2009
21
Chapter 1
Policy Issues in Clusters,
Innovation and Entrepreneurship
by
Jonathan Potter, Centre for Entrepreneurship,
SMEs and Local Development, OECD
This chapter sets out the key policy issues examined in the book on
supporting entrepreneurship and innovation through clusters. It
discusses the nature and importance of clusters, how clusters
function, and the role of policy. Clusters stimulate entrepreneurship
and innovation because they are sites of localised positive
externalities in labour market pooling, input-output linkages and
knowledge spillovers. Policy has a role to play in facilitating the
emergence and growth of clusters and addressing some potential
problems of clustering.
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Introduction
Major localised clusters of firms and research and training institutions in
closely related activities play an important role in increasing innovation,
entrepreneurship and growth in the local economies that host them,
generating both local and national economic benefits. This book looks at how
selected successful clusters operate, how they are supported by policy and the
lessons for other areas. We use a local lens to understand these clusters and
cluster policies because each cluster is situated in particular local conditions
and the relevant policy interventions must therefore be tailored to their
distinct needs.
Clusters support economic growth by providing an environment conducive
to innovation and entrepreneurship in given activities, which enables
productivity growth through increases in efficiency and the quality and
differentiation of goods and services. Many of the benefits occur naturally,
without any need for public intervention: knowledge spillovers happen when
workers change firms and entrepreneurs spin-off ideas from large firms or
research institutes; labour search and training costs are reduced when there are
large local pools of specialised labour; and firms capture internal economies of
scale when selling specialised inputs to large local markets. But public policy
can also play an important role in the emergence and development of
successful clusters, for example by supporting pre-competitive research
collaborations, providing basic and specialised infrastructure, brokering
network creation, funding generic education and training and helping to co-
ordinate and mobilise key stakeholders behind a vision for the development of
the cluster.
This book provides seven case studies of the recent evolution of major,
successful clusters in OECD member countries, the challenges they face and the
role that policy is playing there. Each cluster is crucial to its local economy and
of real significance to its national economy. Their development is complex and
context specific, but examining their stories raises important issues for cluster
development elsewhere. The story of the Grenoble cluster in France is
illustrative.
The economy of the Grenoble city-region has grown strongly in recent
years, driven by an internationally competitive cluster of activities in research,
development and product design for microelectronics, nanotechnologies and
related software. It counted in 2007 some 40 000 direct jobs in 300 enterprises,
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of which the majority were less than 10 years old, and included many spin-off
enterprises. Cluster output and employment has grown strongly in the last
few years, especially within SMEs, and its firms undertake a high level of
innovation, with over 80 per cent bringing new products to market in a 3-year
period. In 2005, the cluster was recognised by the French government as one of
seven global competitiveness clusters in France, or ples de comptitivit
mondial, bringing considerable financial support for research and
development activities and a cluster management organisation, Minalogic,
with the job of brokering research and other collaborations between research,
education and industry.
The development of the Grenoble cluster has nonetheless unfolded over
a long period of time. The development of electronics and microelectronics
activities in the area can be traced back for at least 50 years to the
development of hydroelectric power in the surrounding Alps and the location
of a branch of the governments atomic energy agency undertaking
industrially relevant research in the city. Following these largely informal and
fortuitous origins, it is interesting how the cluster then gathered strength and
grew over time, successfully updating its technologies by combining and
recombining a number of technology staples, from the era of hydro-electric
power, electrochemistry and electrometallurgy in the 1950s to the present era
of nanotechnology.
What has been behind this success? Views differ on the details and precise
order of importance, but certain elements stick out. Grenoble has built on a very
strong education sector, comprising four universities and a management school
delivering a large inflow of high-skilled labour in relevant fields. It has eight
major national or international research institutes in related fields. Strong local
social capital at leader level and an entrepreneurial and pro-cluster local public
sector has helped to drive research-industry co-operation and public-private
investment projects. Some major firms have located their research and
development facilities locally, which despite subsequent changes of ownership
have remained locally embedded and strong sources of spin-off enterprises.
And there have been some important flagship projects in the last ten years,
including the Alliance Crolles 2 initiative, an agreement amongst three major
firms to pool some of their pre-competitive research efforts, the Minatec
project, a centre for joint education, training and research for the cluster, and
the recent ple de comptitivit initiative, each driving the cluster forward. So
in a strong sense the growth of the Grenoble cluster has been supported and
accompanied by cluster-oriented public sector activity and investment and
strong local leadership.
But there are new challenges for the cluster, which potentially threaten
its continued growth. One major issue is the need to respond to intense and
increased international competition. Major investments in platform
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technologies were made in the past, but a new scale of investment is now
implied for a new generation of microelectronics products, and the cluster is
seeking to compete with others abroad that are benefiting from substantial
public investments. A second challenge is to reverse a worrying, if small,
recent decline in the number of researchers in the cluster and a shortage of
technicians. And there is a continued invisible barrier between industry and
public research and education institutions that constrains the labour mobility
that promotes knowledge transfer and collaborations. SMEs have also been
kept too far away from formal cluster governance arrangements, limiting their
potential role in contributing to and disseminating innovations and spreading
job creation benefits through subcontracting. Then there is a major question
concerning the future trajectory of the cluster, with the key industry, research
and government players needing to strike the right balance between
specialisation and diversity in the cluster, seeking on the one hand to
minimise the risk of becoming a single specialisation cluster vulnerable to
shocks and on the other to avoid a fragmentation of research and training
efforts that would reduce critical mass. This challenge is epitomised by a
recent local debate about whether public research funding for the cluster
should move into new areas such as sophisticated textiles that share a common
competence and skills base with the traditional cluster specialisation but are
not strictly in the fields for which the cluster is best known. Furthermore,
success itself has generated new challenges and threats in terms of managing
congestion in transport and housing, limiting the risk of social divide by
ensuring that growth benefits are spread widely in the city and not limited to
an elite group of high-tech employees and responding to ethical objections to
nanotechnology research in the cluster, for example by sharing information
and developing ethics policies.
There are clearly some potentially important lessons from this story for
other clusters. The case of Grenoble demonstrates the potential of a local
cluster to drive growth through generating and supporting innovative
enterprises able to compete on a world stage. It underlines the critical role that
public policy often plays in supporting the development of clusters. It shows
the role that leadership, social capital, public investment and collaborations
have played in supporting development. It also shows that clusters need to
evolve over time through adaptation to changes in technologies and markets.
And it suggests that clusters should not be seen as assured successes, able to
look after themselves and spread benefits more widely, but that their growth
and evolution are likely to bring with them new challenges often requiring
further co-ordination amongst stakeholders and targeted policy support.
Cluster policies are still relatively new in many places and substantial policy
experimentation is taking place. There is much to learn from these experiments
about the role of policy and its methods and approaches. This book takes up this
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learning challenge by seeking answers to the following questions for each of
seven internationally important clusters (Grenoble, France; Vienna, Austria;
Waterloo, Canada; Madison, Wisconsin, United States; Dunedin, NewZealand;
Oxfordshire, United Kingdom; Medicon Valley, Sweden/Denmark):
G What is the nature of the cluster and how has it evolved over the last ten
years?
G What are the key drivers of competitiveness of the cluster and the factors
behind its success?
G What is the impact of the cluster on entrepreneurship and new and small
firm development?
G What are the obstacles to further development of the cluster?
G What is the role of public policy at national, regional and local levels in
supporting the cluster?
G What are the future policy challenges for the cluster?
G What are the lessons of the experience for clusters elsewhere?
By reviewing these experiences, the book aims to point to the most
promising directions for policy development in other clusters.
But first this introduction addresses some key preliminary issues that
should be understood before deciding on policies for clusters, namely: What
are clusters? Why focus on clusters? What are the limits to cluster
approaches? How do clusters function? What is the role of policy in clusters?
What are clusters?
Clusters are geographic concentrations of firms and organisations
working in related activities. They have been defined by Porter (1998) as
geographic concentrations of interconnected companies, specialised
suppliers, service providers, firms in related industries and associated
institutions in particular fields that compete but also co-operate. They are
often rooted in a single locality, but their boundaries will not always
correspond to local administrative areas, as illustrated by the Medicon Valley
case in this book. They exist across the full array of tradable sectors although
they often do not correspond to a single manufacturing or service sector as
recorded by standard industrial classifications.
The feature of tradability of cluster output across local and national
boundaries is an important one. First, it highlights the fact that clusters of
locally-concentrated activity can only emerge when it is possible to trade their
output, since otherwise the scale of the activity is limited by the local
population which it serves. Second it highlights how the size and specialisation
of clusters have been able to grow given globalisation and increased
international market integration. The potential impacts of clusters are therefore
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much greater now than in an era of stronger national trade barriers and higher
transport costs. Third, because they are tradable and grow into international
markets clusters are of course subject to strong competition from other places.
From a national or international perspective, the economic benefit of
clusters comes from the specialisation of places in activities within which firms
can gain higher productivity through accessing external economies of scale or
other comparative advantages and the trading of this higher quality and lower
cost output with other places. From the perspective of local governments, the
benefit comes from the strong competitiveness of the clusters they host, their
generation of higher wages and profits, their attraction of new investment and
the spread of benefits to the rest of the local economy.
Clusters may be supported by a specific cluster initiative or programme,
for example a network broker or manager, but this is not always the case.
Indeed, a frequent mistake made by policy makers and analysts is to think
that clusters are synonymous with deliberate policies or deliberate co-
operations in formal networks. Although this type of action is common and
can be important, clusters may also arise and sustain themselves simply
through market processes as new actors move into a cluster to gain the
benefits of greater productivity and existing actors grow through their greater
competitiveness. Thus the role of policy has to be carefully assessed.
It is also important to recognise that there are different types of clusters with
different methods of functioning. Iammarino and McCann (2009) identify three
types of clusters: pure agglomerations such as a competitive urban economy
with fragmented and hard-to-identify relations among firms, industrial
complexes such as steel dominated clusters with strong vertical linkages in local
supply chains, and social networks such as new industrial districts with strong
social capital based relationships. A classic article by Markusen (1996)
distinguished between new industrial districts, hub and spoke districts,
satellite industrial platforms, and state-centered districts. Panniccia (2006)
provides another useful typology. The point is that the nature of clusters and the
processes that make them competitive differ, and these differences must be
understood if appropriate policy responses are to be developed.
Why focus on clusters?
Economic benefits
For those involved in policy development, the fundamental motivation to
understand clusters is to explore what policy might do to facilitate their
emergence and growth and hence realise the potential economic benefits
associated with them. The picture is clearest when the lens is placed on those
places that host clusters. Within these places cluster development may be
associated with productivity increases resulting from a range of localised
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external economic benefits discussed further below. These productivity
increases allow increases in the wages and profits or price competitiveness of
local enterprises. Furthermore, they can create a virtuous circle of growth as the
higher productivity environment generates new firm entrants and firm
expansions, increasing the size of the cluster and strengthening the
productivity benefits. Local growth may therefore be expected in terms of
income per head increases and job creation.
From the national perspective, the picture is more complex because the
external economic benefits in the locations where clustering occurs may be
accompanied by external economic costs from losses of activity in other
locations. If the productivity gains within the cluster outweigh the productivity
losses in other places, then national rather than just local gains can be
expected. Whether such net national gains exist is a difficult empirical question
to answer. Nonetheless, theory suggests that if a range of cluster specialisations
emerge across a country then national benefits might be expected from the
increased division of labour. In addition, major clusters compete internationally
and as such may generate benefits without necessarily displacing other
national companies from their product markets. But critically, because of
increasing returns more innovation may be generated from location in clusters,
thus stimulating growth. Furthermore, the growth of major clusters may also
spread more widely within a country through mechanisms including
purchasing from suppliers outside of the cluster, transfer of knowledge to other
areas, and redistribution of tax revenues.
Political interest
Growing understanding of the potential for realising these types of
economic benefits has also raised political interest in clusters in recent years.
The French competitiveness clusters (ples de comptitivit) programme
has already been highlighted in the case of the Grenoble cluster. It is an
initiative that aims to promote innovation, exports and growth in French
strategic industry sectors by building critical mass in 71 clusters, with a
greater weight of spending going towards the 7 global competitiveness
clusters. Important national cluster initiatives can also be found in other
OECD countries, such as the Technology Cluster Initiatives in Canada, the
Czech Clusters Programme and the Japanese Industrial Cluster Programme
(OECD, 2005; OECD, 2007). Regional and local governments and agencies are
also frequently involved in cluster development (Slvell et al., 2003;
Observatory of European SMEs, 2002). The sum of these national and local
initiatives represents a significant overall policy effort and it is important to
respond to and guide this political interest and the initiatives it is spawning.
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Potential threats to cluster performance
Despite the success of many clusters, their continued contribution to
economic growth cannot be taken for granted. There are many examples of
previously strong clusters that have been unable to reposition themselves and
have declined severely in the face of strong international competition or
technological and market change, such as the shipbuilding industry in Glasgow,
UK, or the New England golf equipment cluster in the USA (OECD, 2001;
Porter, 1998).
The market and competitive threats are intense today with the economic
crisis. A number of authors refer to a cluster life cycle, with clusters being born,
growing, moving to maturity and declining (Bergman, 2008; Maggioni and Riggi,
2008; Huggins, 2008). As with the product life cycle, it is nonetheless possible for
clusters to escape this destiny with appropriate renewal strategies and
adaptation to change. Rabelloti et al. (2009) show how many of the famous
Italian industrial districts are adapting to changes in competitive pressures by
evolving in their sectoral specialisations, developing new internationalisation
and innovation strategies and developing new forms of enterprise organisation.
Nonetheless other case study evidence and the experience of clusters that
declined or collapsed in the past suggest that clusters can sometimes become
locked into their core technologies, reinforced by infrastructures such as social
capital and research and training activities that fit those core technologies,
leading to decline as outside technologies and markets change over time. Policy
makers should therefore be aware of the potential competitive weaknesses of
clusters and have some understanding of how lock-in may occur and what
facilitates diversification. The speed of reaction to such problems needs to
accelerate in current conditions.
Costs of clusters
The economic benefits of clusters are commonly highlighted. However,
there are also potential economic and social costs that should be taken into
account in considering whether and how to support clusters. One of the most
obvious costs is increasing congestion as clusters grow, in the form of busy roads,
queuing and rationing of public services and infrastructure such as schools,
hospitals and leisure facilities, rising house prices and encroachment of buildings
on green spaces. This has led some local government authorities, such as those
involved in the planning of the Oxford and Cambridge clusters, to constrain
growth or disperse activities to other areas. Another potential cost is that cluster
growth may increase social inequalities in host localities as a core group of
workers emerges with high pay whilst another segment of society is excluded
from core jobs. Whilst all residents suffer from the increased congestion,
residents benefit to different degrees from the increased incomes generated by
cluster growth. Policy makers are therefore called on to find ways of managing
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congestion and spreading benefits. Some very interesting local initiatives have
emerged to help manage these problems. For example, the OECD identified a
series of social innovations in the Silicon Valley and San Francisco Bay area that
have emerged in response to rapid growth pressures, including PolicyLinks
Equitable Development Zone in the City of Richmond and California Futures
Networks promotion of planning policies focused on developing existing,
underutilised urban centres rather than encouraging urban sprawl (OECD, 2004).
Learning from policy experimentation
In recent years, the number of cluster promotion initiatives has
increased, leading to a situation today where many types of policy approach
coexist, varying in their precise goals, activities and intensities. Approaches
range from leaving the clustering process to the market, building critical mass
through inward investment and infrastructure initiatives, supporting science-
industry linkages and creating formal networks among cluster enterprises for
joint sales and purchasing and other types of co-operation. The co-existence
of many approaches presents an opportunity for the policy maker to learn
about policy options.
At the same time, the fact that cluster policies have often arisen in a
bottom-up way from local initiatives suggests scope for identifying and
spreading the most effective approaches. At present, robust evaluations of the
economic impact of cluster initiatives are rare, reflecting the complexity and
multifaceted nature of cluster policies relative to single policy instruments,
and this evaluation gap needs to be addressed. The scope to learn from other
places nonetheless exists in a more qualitative way, with the proviso that the
initiatives implemented as a result of such exchange of good practices should
be properly evaluated and adjusted in line with the results.
One of the most important lessons from cluster experience to date is that
policy should not seek to build clusters in places where the necessary critical
mass and conditions do not exist, corresponding to the wishful thinking
clusters of Enright (2003) (policy driven clusters that lack not only a critical
mass, but also any particular source of advantage that might promote organic
development). This is much less likely to be a problem in the case of major
clusters with significant history but caution should be applied when seeking
to apply the lessons to very small clusters.
A framework for policy co-ordination
A further reason for focusing on clusters is because they offer potentially
useful frameworks for co-ordinating the range of different actors involved in
delivering economic policies relevant to cluster development on the ground and
better fitting them to real local needs. Taking a cluster perspective allows the
policy maker to consider together and at the same time all the aspects of the local
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environment and firm capacities that influence the competitiveness of key export
sectors. This lends itself very well to the development of integrated strategies that
bring together a range of approaches and measures such as inward investment,
entrepreneurship, training, innovation and infrastructure around key local
goals, hence increasing the potential for achieving synergies, reaching real
priorities and mobilising local stakeholders. Within clusters, the potential is very
strong for bringing together policy activities more productively by analysing
systemic needs and developing collaborations between stakeholders.
Clusters and the economic crisis
Recent years provided very favourable conditions for cluster development,
reflecting strong global economic growth. From 2008, however, a global
economic crisis has provided radically different conditions. The crisis is
destroying firms and jobs, making finance difficult to obtain for investment and
stifling appetites for risk. As concentrations of entrepreneurship and
innovation, clusters are likely to be hard hit. At the same time, however, the cost
and productivity advantages that clusters have built up over time are likely to
provide firms in clusters with an important advantage in surviving the crisis
relative to isolated firms. Thus clusters and cluster policies can be seen to be
important in both times of growth and recession. Furthermore, if policy makers
can make the right decisions about investments to be made now, those that will
improve the competitive environment in clusters rather than simply seeking to
subsidise everyday firm operations, they are likely to lay the foundations for
future economic and employment growth.
How do clusters function?
It is critical to understand how clusters function in order to assess the
appropriate role for policy. In one sense, this is not straightforward because
there are several competing explanations of the cluster phenomenon
(Asheim, Cooke and Martin, 2006) whilst it has already been highlighted that
the specific nature and functioning of clusters varies. At the same time,
however, there is considerable overlap between explanations and fairly wide
agreement about the fundamental foundations of cluster performance.
The core argument goes back to Marshalls assertion that there is a triad
of external economies in operation within clusters, namely thick labour
markets, specialised input suppliers and knowledge spillovers (Marshall, 1920;
Belussi and Caldari, 2009). Following Marshall, clusters are widely seen to
generate innovation and productivity benefits because they facilitate:
G A division of labour in the labour market, enabling firms to obtain specialised
labour with lower search and training costs and higher productivity and
workers to obtain higher wages and increased opportunities to specialise and
move firms.
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G A division of labour in intermediate supplier industries, providing customer
firms with local access to specialised suppliers of materials and components,
finance, marketing and business services and so on, enabling specialised
input providers to exploit greater internal economies of scale, reducing
search and monitoring costs for both parties, and reducing transport costs.
G Knowledge spillovers, such as transfers of knowledge of market opportunities
and technologies among agents in the various firms and research
organisations located within clusters through a range of formal and informal
links.
Duranton and Puga (2004) give a more differentiated account of the types
of externalities that are likely to explain the locational advantages of clusters.
However, the key feature of both accounts is that the important externalities are
favoured by geographical proximity, thus explaining the phenomen on of
clustering. There is certainly evidence of a significant localisation of knowledge
spillovers, reflecting the tacit nature of some parts of knowledge (Jaffe et al.,
1993; Audretsch and Feldman, 1996; Anselin et al., 1997) and the greater division
of labour in the product and labour markets of clusters is also clear to see.
These externalities drive productivity growth, permitting profit and wage
growth on the one hand or price reductions and output and employment
growth on the other. This may set into motion a positive cumulative causation
process. Thus the higher rewards to firms, entrepreneurs and workers that the
higher productivity of the cluster offers may attract new factors and activities in
terms of new firm starts, growth of existing firms, inward investment, in-
migration of labour, growth of research and training centres and so on, thus
increasing cluster mass and productivity in a cycle of growth that is likely to
come to an end only when increased cluster productivity advantages are
matched by greater cluster costs as wages, land prices and other factor costs
rise and congestion arises.
Clearly, the case for clusters rests on the idea that they offer favourable
environments for high innovation and productivity and there is significant
empirical evidence pointing to the existence of such benefits. Aharonson et al.
(2004), for example, show how clustering affects biotechnology firms
innovativeness, taking firms with similar characteristics and contrasting the
performance of those located in clusters with those not located in clusters.
They found that clustered firms are eight times more innovative than
geographically remote firms, with the largest effects for firms located in
clusters that are strong in their own specialisation. Biotechnology may be a
sector for which clustering has particular benefits because it relies heavily on
the transfer of tacit knowledge. Nonetheless, other studies taking a range of
technology specialisations show that cluster firms tend to be more productive
in innovation than other firms (Audretsch and Feldman, 1996; Baptista and
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Swann, 1998; Breschi, 2008; Lublinski, 2003; Porter, 2003; Wallsten, 2001;
Weterings and Boschma, 2006). There is also empirical evidence linking
clusters to other economic benefits including increased firm productivity
(Madsen et al., 2003; Szforzi, 1990), entrepreneurship (Feldman, 2001; Guiso
and Schivardi, 2007; Rocha and Sternberg, 2005; Rosenthal and Strange, 2005),
local employment growth (Audretsch and Dohse, 2004; Fingleton et al., 2008;
Wennberg and Lindqvist, 2008) and local wages (Brenner and Gildner, 2006;
Porter, 2003; Wheaton and Lewis, 2002).
A debate that has not yet been fully resolved, however, concerns whether
the important externalities in a cluster occur within particular industries, and
are therefore favoured by sector specialisation (i.e. localisation economies or
Marshall-Arrow-Romer externalities) or whether they occur across industries
and are favoured by sector diversity (i.e. urbanisation economies or Jacobsien
externalities). If they are the latter then it is simply city size that matters. If
they are the former then it is the concentration of firms in the same sector
that counts, corresponding better to the conception of clusters usually applied
in the policy world. There may also be a middle road, in the form of related
variety, referring to externalities among activities in different industries but
whi ch share competence and knowl edge-bases ( Boschma, 2009;
Asheim, 2008). Empirically, the relative importance of localisation as
compared with urbanisation economies has not yet been pinned down
(Glaeser, 2000; de Groot et al., 2008), but clearly an important element of
localisation economies is required for traditional cluster thinking to hold.
There are other views of cluster functioning and how economic benefits
are generated that go beyond the Marshallian externality view outlined above.
Particularly influential is the work of Porter (1998) on the competitive advantage
of nations, regions and cities. Porters analysis focuses on four inter-related
cluster advantages in his famous diamond, namely: specialised factor inputs
(such as human resources, capital resources, physical infrastructure and
university research institutes), related and supporting industries (such as
capable suppliers and related industries), sophisticated and demanding
customers (that press firms to improve and provide insights on future market
needs) and a favourable investment climate and vigorous local rivalry. This
represents a broader view of the driving forces of cluster competitiveness than
the Marshall story, in particular in its emphasis on the benefits of a competitive
spur to productivity. Others have focused on notions of innovative milieu (Ratti
et al., 1997; Camagni, 1991), local innovation systems (Asheim and Gertler, 2005;
Cooke, 2001, Cooke et al., 2004) and other sources of localised increasing returns.
Nonetheless, externalities are usually at the centre of theoretical explanations
of cluster performance.
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A difficult issue within all this, and one with important potential policy
implications, is whether formal networks and collaborations are required to
achieve the anticipated benefits of clusters, or whether the benefits can be
achieved simply through co-location and normal business transactions. For
example, studies of high-technology European clusters found that knowledge
transfer largely occurs through labour mobility amongst enterprises, company
spin-offs and acquisitions of enterprises by others in the cluster rather than by
formal exchanges (Keeble and Wilkinson, 2000). This might suggest that
cluster policy should focus mainly on building cluster size rather than
interactions. Others place much stronger emphasis on the role of social capital
in clusters and suggest that governments may be able to create environments
that favour the emergence of social capital and co-operations among firms
and other agents in clusters (Storper, 1997; Putnam, 2000).
Furthermore, entrepreneurship is clearly a critical, if under studied,
process in cluster development and one that is tightly linked to innovation. A
large part of cluster success is usually attributed to relatively strong
innovation performance. However, innovation requires entrepreneurs to carry
new ideas into exploitation. Thus successful innovation in clusters is likely to
be accompanied by new firm formation, spin-outs and small firm growth. To
favour this, clusters need to provide appropriate conditions for successful new
business development, such as an entrepreneurial culture, access to clients,
access to capital, and access to exploitable knowledge in existing firms and
research organisations (Mills et al., 2008).
What is the role of policy in clusters?
The fundamental rationale for policy intervention in clusters is to
facilitate the exploitation by firms and workers of potential local external
economic benefits from input-output linkages and knowledge spillovers and
hence increase productivity and generate growth.
One mechanism through which policy may facilitate exploitation of
positive externalities in clusters is by stimulating growth in cluster mass, for
example by providing information to potentially mobile firms and workers on
cluster locations and specialisations, offering incentives for investment
in clusters and supporting the provision of housing, business premises and
other infrastructure in clusters. This approach creates the conditions for
the potential realisation of positive externalities by increasing the co-location
of agents. If firms and workers are encouraged to locate in clusters then
productivity within the cluster may be expected to increase. There is a
national benefit if that increase outweighs reductions in productivity in the
places that agents relocate from.
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A second mechanism is intervention to encourage collaborations among
agents in clusters, for example through incentives for joint research projects,
commercialisation of public research, creation of spin-off companies,
development of science and innovation parks, creation of local knowledge
exchange networks and upgrading of suppliers to assist them in gaining
contracts with larger firms. This type of approach assumes that co-location on
its own is not enough and that explicit local collaborations are required to
realise the potential benefits of clusters. In principle it does not reduce
productivity outside the cluster. In fact increased innovation would be
expected to spill over to other places.
If the market itself were to generate optimal clustering and cluster
interactions then such policy intervention would be counterproductive.
However, there are a number of reasons for thinking that the market will
produce suboptimal outcomes.
1. Non-appropriability of externalities. Clusters are argued to be the sites of
positive externalities. However, whilst firms and workers may be attracted
to clusters to gain from externalities generated by others, they are not
compensated for the positive externalities they generate themselves. For
example, if a firm trains skilled labour which then moves on to another
cluster firm or imparts tacit knowledge about market opportunities to other
firms, it is not directly compensated. It may therefore be expected that
firms and workers will engage in too little clustering without some form of
public intervention to help clusters emerge and grow.
2. Lack of location information. Firms and workers may lack information on
existing or potential cluster locations in which their productivity could be
enhanced. If this is the case then agents may choose suboptimal locations
unless policy makers can find a way to transmit information on the location
and specialisation of high productivity local clusters.
3. Lack of co-ordination of agents. Although firms benefit from co-location in a
cluster, market mechanisms may not be sufficient to co-ordinate the co-
location process. Even if agents are aware of the potential benefits of
locating near to others, it may not be clear where they should locate to
realise these benefits since the eventual outcome depends on a set of
decentralised decisions. Thus eventually perhaps no cluster will emerge, or
a cluster may emerge in one place and not another. Since the outcome is
difficult to predict and agents face costs in relocating there can therefore be
a blockage on cluster emergence. A lack of trust among agents may also act
as a barrier to the development of potentially beneficial collaborations
within clusters such as research and development collaborations and joint
purchasing or marketing initiatives. The general difficulty is that no
individual agent is likely to be sufficiently recompensed for the costs of co-
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ordinating the establishment of a cluster and the interactions within it. If an
agent undertakes promotion work to enhance the visibility of a cluster and
attract new agents, all present and future players in the cluster are likely to
benefit, whether or not they contribute to the promotion work and there is
usually no private sector mechanism available to ensure that all
beneficiaries contribute to the costs. This suggests that the public sector
can have an important role to play in seeding the emergence of clusters
and as an honest broker of collaborations.
4. Restrictions on mobility. Barriers to the geographical mobility of firms and
workers are also likely to impede the emergence of clusters. It might be
expected that firms and workers will be drawn to locate in clusters because
of the greater profitability and real wages expected, at least up to a size
where the effects of an increasing number of competitors or congestion
start to force firms to disperse (Krugman, 1991, Baldwin et al., 2003).
However, barriers to the mobility of agents, for example in housing, land
and labour markets, may prevent the optimum level of clustering from
emerging without public action to address mobility problems.
5. Generic market failures. A number of well-known market failures affect
entrepreneurship and innovation in general and are also likely to affect
clusters. Typical problems include financing for new and growing firms,
development of science and technology infrastructure, research and training.
As with any market failures, appropriate public intervention is called for as
long as the public sector can achieve better outcomes than the market. In the
case of cluster policy, the key point is that there are likely to be certain
failures that are specific to particular clusters in their scale or nature, and
hinder the emergence of potential cluster specialisations. For example,
finance, skills, research and infrastructure might be required for a particular
activity such as biotechnology or information technologies, suggesting the
need for policy solutions that are adapted to the needs of each cluster.
6. Negative externalities and distributional problems. Another type of policy
problem that may occur in clusters is the possibility that cluster growth may
lead to significant congestion costs because agents do not take into account
the negative externalities of their activities for others. Policy should therefore
price the congestion or take second-best measures to disperse activity or
improve infrastructure in the cluster to remove the congestion. Furthermore,
the market is not good at addressing potential distributional problems in
clusters in the form of the inequalities that may emerge between rich and
poor residents. Policy intervention of some kind may be needed to address
these distributional questions, whether at national or local level.
There has been strong debate about the role of policy in clusters (Asheim,
Cooke and Martin, 2006; Caniels and Romijn, 2005; Cooke, 2002; Hospers et al.,
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2008; Peck and Lloyd, 2008). However, arguments based on the need for policy
intervention to address the types of market failures identified above have strong
theoretical and empirical foundations. It could be argued that once clusters are
operating successfully the public sector should withdraw since firms should then
have internalised the location advantages started through the policy stimulus to
co-location and collaboration. In practice, however, continued public sector
support may be required for activities that are subject to continued market
failures such as the provision of education, training, seed and venture finance
and pre-commercial research appropriate to the needs of the cluster.
There is also an emerging school of thought that focuses on evolutionary
aspects of cluster development and the adaptability of clusters and their firms
to technological, competitive and market demand shocks (Bathelt et al., 2004;
Bergman, 2008; Boschma, 2009; Cooke, 2009; Hassink, 2005; Martin and
Sunley, 2006; Zucchella, 2006). A key message from this thinking is that
clusters must avoid over-specialisation and lock-in by branching from time to
time into new directions involving the reorientation of existing activities to
new technologies and markets, creating new combinations of activities and
exploiting related variety opportunities. It is often argued that policy also has
a role to play here in facilitating access to new knowledge via global
knowledge pipelines, or alliances with global technology and market
partners, the attraction of foreign direct investment and highly skilled labour
and the promotion of innovation and entrepreneurship to support the
emergence of more variety within clusters.
However, the potential problems with cluster policies should also be
recognised and taken into account in decisions about whether and how to
support clusters. Firstly, new theory from spatial economics suggests that
policy assessments need to look wider than clusters themselves if they are to
establish the full economic impacts of cluster policies, since whilst there may
be positive impacts on the competitiveness of the clusters receiving policy
support, they may be accompani ed by negati ve i mpacts on the
competitiveness of other areas (Potter, 2009). Indeed, cumulative causation
processes are likely to be involved in which the strongest clusters grow at the
expense of others. Therefore, whilst local governments and development
agencies will wish to capture the maximum cluster activity to their area, at
national level it must be recognised that there can be only a small number of
major clusters. This suggests an important governance issue requiring co-
ordination between national and local policies.
Secondly, cluster policies are essentially a type of picking winner
approach. In addition to market distortion concerns, they are therefore
associated with the usual problem of lack of information on current and future
conditions to support governments in the choice of sectors that will grow
successfully. There are a number of examples of past cluster policy
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interventions that have failed because of changes in markets, technologies or
competition or because the nature of the intervention was not appropriate.
Hospers et al. (2008) refer to this problem as one of backing losers rather than
picking winners. A related problem is the potential for institutional capture,
whereby public authorities become too close to cluster stakeholders and start to
follow their agenda too closely risking high policy deadweight and distortion.
Thirdly, supporting clusters increases the degree to which host
economies are specialised in cluster activities. If those clusters then decline,
and if it takes time for other industries to grow up locally and for workers to
shift to the new industries, then the host locality will suffer from out-
migration and reduced incomes and increased unemployment for those who
remain.
Finally, clustering clearly should not be seen as the sole economic
development solution for innovation and growth. There is a wide range of
evidence pointing to the major importance of many other factors such as
research and development, human capital formation, entrepreneurship,
public infrastructure and so on (OECD, 2003, 2009). The major priority is to
strengthen these factors nationally and not solely in a few concentrations,
notwithstanding the national importance of certain clusters.
There are therefore some important reasons for policy intervention but
also some potential pitfalls. The best policy advice then is to ensure that
cluster policies meet real needs on the ground. The following chapters
examine cluster development processes in selected major clusters, the policy
challenges they face and how policy is responding. The case studies provide
important insights for all those involved in developing clusters.
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ISBN 978-92-64-04442-5
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Chapter 2
The Micro-nanotechnology Cluster
of Grenoble, France
by
Jonathan Potter*
Centre for Entrepreneurship, SMEs and Local Development, OECD
* The author would like to thank Gabriela Miranda (OECD), Jrme Domens (DCASPL)
and Erwan Pouliquen (DCASPL) for their support in preparing this chapter together
with the authors who contributed papers that provided material for the chapter,
namely Bernard Pecqueur (Institut de Gographie and Universit Joseph-Fourier de
Grenoble), Alain Dupr and Eric Fricotteau (Institut national de la statistique et des
tudes conomiques, Direction rgional, Rhne-Alpes), Jrme Domens and Erwan
Pouliquen (DCASPL), Jean-Marie Rousseau (Consultant, Brussels), Pier Paolo Saviotti
(Universit Pierre Mends-France, Grenoble) and David Catherine (Grenoble cole de
Management).
This chapter analyses the emergence and establishment of the
micro-nanotechnology cluster in Grenoble, which has been recently
labelled the Minalogic ple de comptitivit by the French
government. Grenoble is a particularly good example of a cluster
that emerged endogenously from a critical mass of human and
social capital but with strong support from targeted initiatives by
the public sector. The chapter demonstrates the role that public
authorities can play in supporting a cluster and the importance of
establishing strong private-public and public-public partnerships.
It shows how innovation has occurred in a collaborative but highly
competitive environment. It highlights the importance of human
and social capital and the need for co-ompetition as key
ingredients of an internationally successful cluster.
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Introduction
In 2005, the French Government adopted an industrial strategy based on
the introduction of competitiveness clusters (ples de comptitivit). For the
purpose of this policy, clusters have been defined as the combination, within a
given geographic area, of businesses, training centres and public or private
research facilities working in partnership to generate synergies in connection
with innovative joint projects having the requisite critical mass for
international visibility.
1
To this end, the Inter-ministerial Committee on Territorial Planning
and Development (CIADT) conferred the label cluster on 67 geographically
circumscribed areas and earmarked EUR 1 500 million over the years 2006-08 to
underwrite collaborative research and development projects (EUR 1 400 million),
finance other kinds of projects such as innovation platforms (EUR 100 million)
and support cluster management and leadership groups (EUR 36 million). A
second tranche of EUR 1 500 has been allocated for a new phase of the ples de
comptitivit programme for the period 2009-11. Businesses belonging to a
cluster also qualify for tax exemptions on their research and development (R&D)
activities, up to the ceilings authorised by the European Union, and for reduced
social security contributions on the wages of their R&D staff.
The Minalogic cluster of Grenoble-Isre has been designated as one of
seven global clusters in France because of their strong international renown.
The title Minalogic is short for MIcro NAnotechnologies et LOgiciel Grenoble-Isre
Comptitivit, and, as its name in French suggests, it is a cluster specialising in
research, development and product design in the sectors of micro- and
nanotechnologies and embedded software. Collaborative research projects
among firms and research organisations in the cluster are financed under the
ples de comptitivit programme by the Business Competitiveness Fund
(FCE) of the central governments Directorate-General for Enterprise. This
budget is drawn from a pool of finance provided by the governments Single
Inter-ministerial Fund, a number of public agencies (the National Research
Agency, the Industrial Innovation Agency and OSEO, the French innovation
and SME agency) and the Caisse des Dpts et Consignations, the
governments investment bank, and is supported by tax exemptions and
reductions in social security contributions for R&D activities. In parallel, a
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cluster management group brings together actors in the cluster in order to
stimulate collaborative research projects, disseminate the results of research
and promote the cluster internationally.
Nature and evolution of the cluster
In 2007, the core of the cluster comprised approximately 40 000 jobs in
microelectronics and computer science, including 35 000 in businesses and
5 000 in public-sector research, within a metropolitan area with a population
of approximately 600 000. However, the Grenoble area has long been a centre
for microelectronics related activity. To understand how the cluster developed,
one must look not only at events surrounding the recent award of its ple de
comptitivit label, but also at the history of the Grenoble ecosystem an
ecosystem that to a large extent sprang up informally and spontaneously and
then gradually gathered strength and became more formalised.
This section begins by introducing the Grenoble sites leading players,
then focuses more closely on the activities of firms belonging to the formal
structures of the Minalogic ple de comptitivit and then sets out a
summary of major recent developments at the Grenoble site.
Leading players
The leading players in the cluster, aside from government, come from the
realms of industry, training and research.
Industry
How the Grenoble clusters activities are catalogued depends largely on the
chosen perimeter in terms of sectors of activity and geography. Focusing on
metropolitan Grenoble and the computer science, software, microelectronics
and nanotechnologies industries yields a total of 280 businesses in 2007, most
(94 per cent) of which had fewer than 200 employees. The main characteristics
of these firms are as follows:
G They were created recently (most being fewer than ten years old), suggesting
thorough renewal of the cluster over the past decade.
G A large proportion results from spin-offs or incubation involving a research
laboratory.
G Activities are heavily complementary and revolve around a small number of
core technologies with extensive potential applications.
Among the largest enterprises were five firms in the computer
technology industry, each employing over 500 people, the biggest being
Hewlett Packard, Bull and Sun Microsystems. In microelectronics and
nanotechnologies, three firms employed more than 500 people, the largest of
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which was STMicroelectronics, with a payroll of 6 000 in Grenoble. In the other
main specialism of the cluster, embedded systems-on-a-chip software, no
firm had more than 500 employees.
Education
Higher education in Grenoble enjoys a good reputation internationally.
One out of every six students is a foreigner, and the proportion rises to 25 per
cent in doctoral programmes. There are four universities in Grenoble: the
Institut National Polytechnique Grenoble (a technological university
for engineers and researchers with 5 200 students); the Universit Joseph-
Fourier (a science and technology school with 17 500 students); the Universit
Pierre-Mends France (a humanities and social studies university with
19 000 students); and the Universit Stendhal (for the study of humanities,
languages and communication with 7 500 students). A relatively pioneering
policy initiative, Grenoble Universits, that is now underway at the site
should ultimately lead to the creation of a single university consolidating the
activities of todays four institutions. In addition, the Grenoble cole de
Management, which is run by the Chamber of Commerce and Industry, has a
yearly enrolment of 2 500 students.
Research
There are four national research institutes in areas related to the core
activities of the cluster:
G CEA-Grenoble: The French atomic energy agency (CEA) has an important
operation in Grenoble that is strongly involved in transfers of knowledge
and know-how to industry. With a staff of 3 600, including 2 700 CEA
employees, it encompasses 115 laboratories, including personnel from Leti.
G Leti: Leti is a laboratory of the CEA and is one of Europes largest centres of
applied research in electronics employing around 1 000 people. Leti works
very closely with firms and research and education actors in the cluster,
and is a major player in the clusters flagship projects such as Alliance
Crolles 2 and Minatec.
G CNRS Alps delegation: The CNRS Alps delegation is an operation of the
national centre for scientific research comprising over 1 600 officials in
9 research institutes. Since 2001 its laboratories in Grenoble have registered
90 patents, signed 46 licences and produced some 25 start-up companies.
G INRIA Rhne-Alpes: Established in December 1992, the Rhne-Alps unit
of the French National Institute for Research in Computer Science and
Control (INRIA) is one of the Institutes six research facilities in France. It
employs some 500 people focused on software and systems-on-a-chip
technologies.
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In addition, there are four major international research institutions in the
cluster: the Institut Lae-Langevin, the European Synchrotron Radiation
Facility, the European Molecular Biology Laboratory and the Grenoble High
Magnetic Field Laboratory.
There are also some important private research activities and public-
private research partnerships in the cluster, as illustrated by the following:
G Alliance Crolles 2: This project represents an important partnership agreement
among three major companies in the cluster Freescale, NXP Semiconductors
and STMicroelectronics. Its aim is to pool research projects and set up a
customised research centre in the town of Crolles. It has involved a joint capital
investment of roughly EUR 2 billion and research and development outlays of
EUR 1.5 billion. It is the largest industrial investment in France in over ten years
and has received substantial government support.
G NanoSmart Center: In 2006, a company called Soitec joined forces with the Leti
research laboratory to launch the NanoSmart Center a world class centre of
excellence in advanced materials. The centre, which is expected to employ
some 200 researchers at the Bernin site (near Crolles) by 2010, is focusing on
research into new applications for Soitecs Smartcut technology.
G bioMrieux: The Mrieux Corporation is a major multinational company in
in vitro diagnostics present in some 130 countries. It inaugurated its
worldwide research centre in molecular biology and microsystems in
Grenoble in April 2006.
G Schneider Electric: The Schneider Electric company has based one of its major
research laboratories in Grenoble, employing 1 400 R&D staff and accounting
for 20 per cent of its global research budget. The company chairs the
governance structure of the Minalogic ple de comptitivit.
A portrait of the enterprises in the Minalogic ple de comptitivit
A concentration of technological activities
In 2006, the enterprises formally included in the Minalogic ple
de comptitivit structure, i.e. those receiving support from the national
ples de comptitivit programme, comprised 46 establishments and
approximately 10 000 employees. Some of the member establishments
belonged to groups that operate other facilities in Grenoble, representing at
the same date 82 establishments in the Grenoble arrondissement that belonged
to cluster enterprises, with 13 800 employees.
Over its 46-establishment perimeter, the Minalogic cluster is highly
concentrated geographically. Apart from one establishment based in the Rhne-
Alpes region and another in Haute-Savoie, the remaining 44 establishments were
all located in the dpartement of Isre, 42 of which were in the arrondissement of
Grenoble.
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The establishments can be grouped into five sectors. Three of the sectors,
accounting for 61 per cent of the establishments and 56 per cent of the
employees, may be considered to form the core of the clusters activity:
component manufacturing (4 000 employees), software development
(920 employees) and engineering and technical inspection (380 employees).
The cluster also has a downstream sector (areas of application), whose very
broad spectrum of activities covers 16 establishments and 4 500 employees,
and a support sector (administrative logistics) provided by two of the
clusters establishments.
Table 2.1 breaks down the number of establishments and jobs for each of
the clusters five sectors of activity in 2006, at various geographical levels.
Taking just the activities in which the cluster establishments were specialised,
just over one-in-five employees in Isre work for a cluster establishment, as do
one-in-fifteen Rhne-Alpes employees and just under one-in-one hundred in
France as a whole. In the component manufacturing sector in particular,
Minalogic accounts for a consequential share of the total, since its
establishments employ one-half of Isres workers in the sector, one-third of
the regions and one-in-twelve nationwide.
Over the decade 1996-2006, the number of people working in the
Grenoble cluster in establishments engaged in these activities has increased
by 13 per cent. For the Minalogic groupings core activities alone, job growth
was a good deal greater, rising by 163 per cent in component manufacturing,
by 68 per cent in software development and by 44 per cent in engineering and
technical inspection.
As indicated in Table 2.2, the Minalogic establishments have a substantial
proportion (44 per cent) of managers and higher intellectual occupations.
Engineering and technical inspection in particular, along with software
development, are sectors that employ many managers, and proportionally
Table 2.1. Number of establishments and workers belonging to the Minalogic
clusters five sectors of activity, 2006
Minalogic Isre Region France
Ests Workers Ests Workers Ests Workers Ests Workers
Component manufacturing 12 4 437 61 8 667 165 11 826 1 200 55 125
Software development 9 919 891 6 133 4 118 19 681 42 887 185 630
Engineering and technical inspection 7 377 1 152 5 410 5 462 24 522 47 550 212 042
Administrative logistics 2 47 1 171 2 269 6 407 18 813 56 423 189 437
Fields of application 16 4 467 875 22 439 4 613 78 680 39 043 546 058
Total 46 10 247 4 150 44 918 20 765 153 522 187 103 1 188 292
Source: INSEE Rhne-Alpes.
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more so within the cluster (respectively 91 per cent and 88 per cent) than in
the dpartement as a whole (respectively 43 per cent and 70 per cent).
A special survey was conducted by INSEE, the French national statistical
and economi c st udi es agency, f or t he OECD i n 2007 among t he
46 establishments in the Minalogic grouping to supplement the statistics
available in this area. The following paragraphs set out the main findings of
this survey.
Sharp growth
Two-thirds of the clusters aggregate turnover is derived from its core
activities in the five sectors cited above, the growth of which has been extremely
sharp since 2002 (rising by 64 per cent), especially within SMEs (up by 90 per
cent). Activity related directly to these activities became predominant
between 2002 and 2005, rising over the period from 50 per cent to 63 per cent of
the total, possibly because of greater profitability, increased capital investment,
the clusters greater visibility or heightened co-operation.
At the same time, other activities are carried out by Minalogic
establishments, generating turnover which on the whole has declined
since 2002 (by 5 per cent). In SMEs, these activities are still a source of brisk
growth (up by 66 per cent).
Highly skilled employees
Three-quarters of the clusters jobs are in establishments that belong to a
group. Because of the strong R&D positioning of the cluster establishments
within their groups, four out of ten jobs are filled by researchers and design
engineers, while only 1.5 out of 10 relate directly to production. While the
employment structure has remained stable since 2002 in multi-establishment
Table 2.2. Breakdown of Minalogic employees in Isre
by socio-professional category and by sector
Percentage, 2004
SC
Managers
and higher
intellectual
occupations
Intermediate
occupations
Office
workers
Manual
labourers
Total
Component manufacturing 39.0 20.2 3.6 37.2 100.0
Software development 88.0 8.5 3.2 0.3 100.0
Engineering and technical inspection 91.4 7.4 1.2 0.0 100.0
Administrative logistics 24.4 46.3 24.4 4.9 100.0
Fields of application 42.8 36.9 10.5 9.9 100.0
Minalogic 44.1 25.2 6.0 24.6 100.0
Source: INSEE Rhne-Alpes (Clap, using 8 170 posts).
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firms, independent establishments seem to have substituted production jobs
for some of their research and design engineering positions. This would seem
to suggest that some of their R&D projects have been completed and that
production is now on-stream. For the cluster as a whole, dependent
employment has risen by an aggregate 6.4 per cent since 2002, with the
sharpest gains benefiting production engineers (+35 per cent), administrative
staff (+10 per cent) and researchers and design engineers (+8 per cent).
Widespread and outward-reaching subcontracting
Three-in-four establishments say they are party to subcontracting
contacts, involving an average of 40 partners. A large majority of these
dealings are with firms outside the cluster, dispelling the idea of a self-
sufficient cluster focused exclusively on internal ties, especially since a
majority of the subcontracting involves the clusters core specialisms rather
than support services. The most common pattern is that of a buyer within the
cluster and a supplier outside it.
Nevertheless, the pattern seems to differ between SMEs and establishments
belonging to groups. Group establishments are usually buyers, assuming the role
of supplier in only 10 per cent of cases. Indeed, some groups devote all of their
activity to R&D and engage in no production at all. For their part, however, 45 per
cent of SMEs are suppliers, most commonly to purchasers outside the cluster.
A concentration of collaborative R&D
More than three out of four establishments report at least one co-operative
link within the cluster, with either another establishment in the Minalogic
grouping, a research laboratory or a university. In all, establishments have
forged an average of six co-operative links, which in over 90 per cent of cases
involve innovation and R&D, and which rarely extend to other functions in the
corporate value chain. In comparison, for industry as a whole (Haag, Raulin and
Souquet, 2004), ties are formed most frequently around the manufacturing
activity, in procurement and production. This finding highlights the clusters
originality, as regards both R&D and co-operation.
For the most part, the most strategic co-operative ties forged with other
businesses in the cluster tend to be fairly recent and concentrated in the realm
of product design (accounting for 80 per cent of co-operation situations). One-
third of the time, the co-operation leads to product production. The main
purpose of co-operation seems to be to remedy a lack of in-house labour and
capital and in most cases does not appear to have required any further
allocation of resources or of staffing in particular. Co-operative ties within the
cluster involve relatively few contracts, only one-in-three establishments
having signed a bilateral contract with its partner.
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Ties with laboratories and universities seem to have been in place for
longer than ties with other businesses. A large majority involve product
design or, to a lesser extent, production. Co-operation with laboratories or
universities most commonly involves the supply of human resources. From a
contractual standpoint, the preference for relatively informal relationships
remains strong, even if subcontracting contracts are used in most cases.
Businesses may consider co-operation with laboratories as a way of
outsourcing a portion of their R&D. Achieving greater flexibility would seem
a more common motivation for co-operation with a laboratory than
for dealings with another business. But in most cases establishments look to
laboratories or universities for the same reasons they co-operate with other
cluster establishments because they lack the requisite in-house skills
or equipment.
A high level of innovation
Establishments in the cluster are extremely innovative: over 80 per
cent of them are currently developing new products or processes and the
same proportion of establishments had brought new products to market
since 2002. Nonetheless, SMEs in the cluster showed something of an
innovation deficit as compared with groups. Slightly more groups marketed
new products or processes; moreover, a larger share of SMEs had registered
no patents or licences since 2002 (30 per cent, versus only 18 per cent for
group subsidiaries). On the other hand, if projects currently being developed
are taken into account, the gap seems narrower, with SMEs and groups
reporting comparable levels of innovation. A learning curve for SMEs having
embarked upon such activities more recently may explain the shrinking
differential.
Impediments to innovation
The greatest impediments to further innovation would appear to be a
lack of financing, uncertainty over demand, the cost of innovation and the
difficulty finding partners for such projects. Furthermore, while the level of
innovation seems thoroughly comparable between SMEs and groups, the
perceived difficulties involved may differ. Contrary to all expectations, lack of
funding and the costs of innovation are more often seen as impediments by
groups than by SMEs, while one might assume that it would be less difficult
for an establishment belonging to a group to line up funding than for an SME.
This might be explained by a higher average cost of innovation projects in
larger groups. On the other hand, the difficulty in finding collaboration
partners for innovation is perceived much more as an impediment to
innovation by SMEs than by establishments backed by groups.
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Grenobles changing circumstances
Analysis of INSEE statistics confirms a decade of job growth in the sectors
of activity of the cluster. As shown in Figure 2.1, in the arrondissement of
Grenoble, employment has increased over the past ten years by 163 per cent in
component manufacturing, 68 per cent in software development and 44 per
cent in engineering and technical inspection. Over the same period, aggregate
job growth in all sectors combined was 13 per cent. These figures show a
positive employment trend in the recent evolution of the Grenoble cluster, led
by the core cluster sectors.
Over a longer period, an important feature of the Grenoble cluster is the
continuous evolution of its activities in line with broader technological
change, which has enabled the cluster to adapt and grow. Table 2.3, taken from
Pecqueur (2007), shows how the Grenoble cluster has updated its markets, its
form of organisation and its policy strategy over time. This has involved
combining and recombining a number of basic technological staples
(materials, particle physics, computer science, microchips etc.) in various
configurations, from the era of hydro-electric power, electrochemistry and
electrometallurgy in the 1950s to the present era of nanotechnology. As in
other global clusters, this capacity to evolve along with technical progress may
be considered one of the keys to Grenobles success.
The sites current activity revolves around micro- and nanotechnologies and
is supported by four technological pillars: nanotechnologies, biotechnologies,
software and new energy technologies. These pillars benefit from a stream of
Figure 2.1. Employment trends in the Grenoble arrondissement
Source: INSEE Rhne-Alpes (Sirene).
220 000
200 000
180 000
160 000
140 000
120 000
100 000
80 000
60 000
40 000
20 000
9 000
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Scale for 3 sectors Scale for all sectors combined
Engineering and technical inspection
Component manufacturing
All sectors combined
Software development
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innovations resulting from a solid base of basic research undertaken locally or
translated locally from research undertaken elsewhere. As shown in Figure 2.2,
nanotechnologies appear as innovative and specific meta-technologies
combining the sites accumulated knowledge and know-how.
Table 2.3. Long-term trends in the Grenoble cluster
Period Market Organisation Strategy
1950-60s G Development of hydroelectric
power, electrochemistry
and electrometallurgy.
G Large Fordist enterprises. G Adapt traditional industry
to available new technologies.
1970s G Investment in research
and innovation gradually
transforms production.
Traditional products lose share.
G Arrival of multinational firms
and government investment in
research. Emergence
of specialised SMEs.
G Intensification of the structural
adaptation process.
1980s G Traditional products on the decline.
G Branching out towards emerging
products: computers
and electronics.
G Externalisation and intense
specialisation of SMEs.
G Higher-skilled labour. Higher
average wages.
G New capabilities and reinforced
initiatives by local authorities
(with the decentralisation
of 1982-83).
1990s G Reduced production of material
goods.
G Grenoble recognised as
a technology cluster.
G Large firms and networks of SMEs
turn to exports.
G Denuclearisation and emergence
of bio- and nanotechnologies.
G Installation of a core and ring
system, with efficient,
research-oriented SMEs gravitating
around multinationals.
G Declining government investment
(national policy) forces the site
to seek new solutions for
maintaining its leadership
(Minatec).
2000s
G Nanotechnological orientation as
a generic theme, with flourishing
of technological hybrids
(Jean Thermes three-leaf clover).
G Multi-party governance with three
types of competition: academia
(INPG/UJF), research
(CEA/CNRS/INRIA), industry
(ST/ Schneider, etc.).
G Site policy revolving around
co-operation mechanisms:
alliances, clusters, etc.
Source: Pecqueur (2007).
Figure 2.2. Technologies and industries in the Grenoble cluster today
Source: AEPI 2006.
NANOSCIENCES
Condensed physical matter,
chemistry, biology
Biochips
Labs on chips
BIOLOGY FOR
HEALTH
Biotechnologies
Communicating
Objects
SOFTWARE
Technologies
services, uses
ENERGY
New technologies
Microbatteries
Microstorage
Micro and
nanotechnologies
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Success factors
It is possible to identify five key factors behind the success of the
Grenoble cluster in the form of some influential structural projects, the close
involvement of local public authorities in the development of the cluster, and
the availability of strong human capital, social capital and public research.
Each key factor is discussed in turn below.
Structural projects
A number of major structural projects have been undertaken in recent
years with large scale investments by the public sector and local partners in
business, research and education. These appear to have contributed
significantly to the clusters development. Three of the most important of
these recent flagship projects are Minatec, Alliance Crolles 2 and Minalogic.
Minatec
Minatec is a major European centre of expertise in micro- and
nanotechnologies. It comprises:
G An education and training platform in a purpose-developed building
housing 1 000 engineering students, 120 instructors, a number of doctoral
schools and 500 trainees in an ongoing-training centre.
G A research platform comprising some 40 laboratories and 1 200 researchers
equipped with clean rooms.
G A commercialisation platform, in a building that houses growth phase
start-ups and joint research teams from public-sector laboratories and large
private sector corporate R&D operations.
The project was initiated by one of the major research institutions in the
cluster, the CEA-Grenoble, and one of the major education and research
institutions, the technical university of the Institut National Polytechnique
Grenoble. It also had strong backing from local and territorial authorities. The
total investment amounts to roughly EUR 1 billion over a five-year time frame.
Alliance Crolles 2
This project is a collaborative industrial development programme in
nano-electronics that started up in 2002 between STMicroelectronics, Philips-
NXP and Freescale. The three companies have pooled their financial and
human resources in order to co-operate on R&D issues while continuing to
compete in the downstream part of the value chain. The project is an
outgrowth of longer-standing collaboration between STMicroelectronics and
Philips-NXP involving teams of engineers, which by 2006 had come to involve
thousands of people working together on targets for 2010.
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The co-operation has not taken the form of a joint venture insofar as each
partner remains independent in managing human resources and marketing
products. The three Alliance Crolles 2 partners have opted jointly for simple
processes: a core unit for processing and integrating new staff, to which each
firm can add its own particular requirements. The project also enjoys
substantial collaboration with other cluster stakeholders, including research
institutions, university laboratories in the region and, above all, CEA-LETI. The
national and local governments have also contributed to investment in the
projects infrastructure and research.
Minalogic
Minalogic is the name of the cluster support initiative supported by the
French government in Grenoble through its ples de comptitivit
programme. Minalogic supports research and development activities in the
creation, development and production of products and solutions in the realm
of intelligent miniaturised services for industry. The Minalogic clusters
principal role is essentially that of a facilitator of the creation and financing of
common research and development projects. It is co-managed by a grouping
of the key enterprises, research and education institutions and public
authorities in the cluster. These organisations had already worked co-
operatively before the cluster label was awarded, but the Minalogic initiative
aims to promote this collaboration further.
Minalogic had 78 members as of January 2007, including 48 businesses
(33 SMEs), 10 research centres and universities, 14 territorial authorities, six
economic development organisations and one associated private investor. At
the core of Minalogics governance structure is its tripartite general meeting
and board of directors (see Table 2.4). All members of the cluster are
represented in these bodies. In addition, a leadership group made up of four
standing members implements decisions taken by the board of directors in
respect of Minalogics daily operations.
Table 2.4. Minalogic governance structure
Tripartite general meeting
G Large groups G Research G Territorial authorities
G SMEs G Education
Board of directors
G Chairperson G Members (2) G Secretary
G Treasurer
G Member (1)
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The Minalogic initiative can obtain labels for projects that permits them
to be submitted for calls for projects potentially leading to funding. As of
January 2007, Minalogic had obtained labels for 79 projects. Following the first
two calls for projects, in February 2006 and May 2006, seven Minalogic projects
were selected, attracting aggregate subsidies of EUR 36.4 million, financed by
the State (EUR 23.1 million), the Rhne-Alpes region (EUR 4.5 million), the
dpartement of Isre (EUR 4.5 million) and Isre municipalities and municipal
communities (EUR 4.3 million).
Involvement of local authorities
Local authorities, and specifically the Rhne-Alpes region and the Isre
General Council, have provided consistent and long-term support for the
clusters development in order to support local economic development. This
support can be seen in a number of ways: land-use planning, involvement in
the Minalogic board of directors, financial aid for R&D projects and investment
in the clusters major structural projects (Crolles 1, Minatec, Alliance
Crolles 2 and Minalogic).
Human capital
Another factor conducive to the clusters growth is the availability, for
businesses and research organisations, of skilled labour in its fields of
research and innovation. The clusters human capital is enhanced by the
presence of a number of institutions of higher education, including four
universities with aggregate enrolment of 60 000 students in 2006, 10 per cent
of whom were foreigners. These institutions are a major source of skilled
labour for cluster businesses and research organisations. Universities and
research centres, including the CEA and Leti, are also major sources of
knowledge which contribute to the clusters innovations in a variety of fields.
Table 2.5 shows the number of employees, researchers and graduates in the
clusters two leading fields of innovation: computer technology/software; and
micro-/nanotechnologies and electronics.
Table 2.5. Human capital in the clusters leading fields of innovation,
2006
Businesses
(jobs)
Public research
(jobs)
Higher education
Computers and software 12 000 1 500 2 200 graduates per year
Micro-/nanotechnologies and electronics 21 700 3 000 1 200 graduates per year
Total 33 700 4 500 6 800 students
3 000 graduates (without double
counting)
Source: AEPI, 2006.
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Another factor behind the positive development of the Grenoble cluster
lies in its ability to attract internationally renowned scientists (including the
arrival of Professor Louis Nel, winner of the Nobel Prize for Physics in 1970,
followed by that of Louis Weil and Paul Louis Merlin), as well as highly skilled
workers and enthusiastic entrepreneurs. These people, and their ideas and
projects, have been successfully incorporated into the clusters dynamic.
Social capital
The cluster benefits from a collaborative culture in which actors from
different institutional sectors work together relatively easily, indicating the
existence of strong social capital. There are thus frequent contacts between the
research sector and industry and between public and private stakeholders.
These collaborations are aided and encouraged by geographical and
institutional proximity. A large share of applied research within the cluster is
conducted in partnership between public research and firms, thereby
encouraging exchanges of important information between researchers and
entrepreneurs as projects, which in some cases may be interdisciplinary, are
implemented.
Stakeholders from the public sector are closely involved in both the
research projects pursued within the cluster and the creation of infrastructure
to meet the clusters needs. One of the factors in the clusters success is the large
number of collaborative projects involving actors from different backgrounds
(public institutions, industry, research sector) as well as the mobility of
individuals between these different areas. Many public decision-makers, for
example, have previously held posts in industry, academia or the research
sector, which undoubtedly allows them to find a better match between public
aid and actors needs.
Public research
One of the strongest drivers of competitiveness of the cluster is the high
concentration of public research resources in universities and research
centres. This represents a critical mass of public research which can often
provide a basis for private sector projects seeking to develop practical
applications. Grenoble has a population of 15 000 researchers working in
universities and research centres (11 000 in public research and 4 000 in
private research), including the CEA, LETI, CNRS and INRIA.
Role of SMEs
The extent to which small and medium-sized enterprises (SMEs) help to
drive the development of the Grenoble cluster, particularly in terms of new
knowledge and technology, is not easy to evaluate. A survey of establishments
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in the Minalogic cluster grouping undertaken for the OECD showed that the
clusters SMEs were as innovative as the large firm establishments. However,
their role in subcontracting arrangements differed from that of group
subsidiaries in that they devoted more time (45 per cent) to performing work
for contractors, in most cases from outside the cluster, than subsidiaries did
(10 per cent). Furthermore, SMEs participated in both the governance of
Minalogic (General Assembly and Board of Governors) and labelled research
projects. Table 2.6 indicates the number of Minalogic projects funded by the
Business Competitiveness Fund of the Directorate-General for Enterprises in
its first three calls. The share of SMEs receiving such funding is rising and has
increased from 1.4 per cent for the first two calls for proposals to 21.9 per cent
at the third call for proposals.
Impact of the cluster on entrepreneurship and employment
The Grenoble cluster appears to have had a positive impact on enterprise
creation. According to the survey of establishments in the Minalogic grouping
in 2006, 40 per cent had started up since 2002. Furthermore, among the clusters
SMEs, more than one in three had started up in 2006, which would suggest that
there is a strong dynamic for enterprise creation within the cluster.
To date the Minalogic activities unit has provided assistance in the creation
of three companies and start-ups. In addition, a private investor (a venture
capitalist) joined Minalogic as an associate member at the end of 2006, which
should help to finance start-ups in the future. However, while Minalogic has
acquired cross-holdings in the project committees of the GRAIN business
incubator and the GRAVIT research consortium
2
in order to provide support for
and increase the pace of enterprise creation, no formal mechanism has been set
up in Minalogic to directly encourage the creation of enterprises. In particular,
there is no specific mechanism to finance or provide seed capital for start-ups.
The creation within Minalogic of an activity dedicated to developing enterprise
creation would go a long way towards ensuring the closer integration of SMEs.
The Minalogic initiative also seems to have had a positive impact on the
growth of SMEs already in place. The SMEs within the cluster openly
acknowledge that the cluster aids their development in a variety of ways.
Table 2.6. Share of SMEs in Minalogic projects which received public funding
Calls for proposals
Number
of projects
selected
Total number
of partners
Total aid funding
(EUR million)
%
of SMEs
(< 250 employees)
%
of major
groups
%
of public
laboratories
1st (Feb. 2006) and
2nd (May 2006)
7 29 36.4 1.4 53.2 45.4
3nd (Dec. 2006) 7 28 21.5 21.9 36.6 41.4
Source: Directorate-General for Enterprise/*provisional figures.
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Firstly, the labelling of a project by Minalogic enhances their credibility and
increases their chances of receiving funding from other organisations (ANVAR,
FCE, venture capital companies, etc.). Moreover, the systematic inclusion of
SMEs in co-operative projects, as well as their participation in the governance
of Minalogic, offers them the possibility of joining new networks in the
Grenoble ecosystem.
Assessing the impact on job creation of public aid to the cluster would
require a detailed study. Some useful information can nonetheless be gleaned
from an analysis of the impact of the Alliance Crolles projects 1 and 2 on
employment in the Isre dpartement (a study conducted by the Universit
Pierre-Mends-France and the Reverdy Associs consultancy). This study
estimated the number of jobs created indirectly (i.e. in the rest of the value
chain for various types of production) and induced (i.e. induced by the income
redistributed within the territory by such direct or indirect activities) by the
Alliance Crolles projects 1 and 2 as well as the jobs created directly on the site
(in the companies STMicroelectronics, NXP and Freescale).
In 2004, the number of jobs created directly by the Crolles site was
estimated to amount to 2 500 for Crolles 1 and almost 1 100 for Crolles 2. Some
660 jobs were estimated to have been indirectly created by Crolles 1 and
2 among service suppliers, 90 among materials suppliers and 740 among
equipment suppliers. A further 470 jobs were indirectly created in research
centres, primarily the Leti. Complementing these job creations, there were a
further 1 300 jobs at the STMicroelectronics unit in Grenoble relating to
projects upstream and downstream of Crolles 1 and 2. The number of induced
jobs over this period would seem to be around 4 000 in all areas of activity
related to household consumption (education, health, trade, administration)
and construction. Overall, the estimate reveals that the presence of three
partners of the alliance in Crolles accounts for approximately 10 900 jobs in
the Isre dpartement. This survey estimates ratio of jobs created indirectly or
induced to those created directly at the Crolles site to be around 3:1.
SMEs sometimes find it difficult to enter into co-operative relations with
groups or research institutes in the cluster, which may well act as a dampener
on growth in activity and employment within the cluster. The difficulty of
finding partners was one of the specific problems raised in SME replies to the
survey questionnaire. In addition, there exists a large asymmetry between
SMEs and group subsidiaries in their satisfaction with public policies aimed at
bringing actors closer together through co-operation, with very high
satisfaction in the case of large firm establishments but much lower
satisfaction reported by SMEs. Two main problems in this area were identified
in the course of the interviews. Firstly, some of the most negative SMEs
see Minalogic as a means of redistributing public research funding to major
groups, as a result of which SMEs are apparently less inclined to participate
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fully in such research projects. Moreover, even though the collaborative
projects labelled by Minalogic each include at least one SME, some SMEs felt
that the projects proposed were designed more with the interests of major
groups in mind.
Barriers to cluster development
The Grenoble cluster is the key driver of growth of the Grenoble economy.
Nevertheless, there are certain barriers that could constrain the future
development of the cluster, which should be taken into account in future
policy decisions.
One obstacle signalled by local stakeholders concerns a reduction in the
number of researchers and technicians. One-fifth of the clusters employment
is dedicated to research. However, because of relatively low salaries in the
public sector, young graduates from engineering schools seem to be
increasingly targeting employment in large enterprises rather than research
laboratories and universities. In addition, a gap in the number of technicians
with respect to engineers has been reported, suggesting that there may be a
lack of appropriate technical or vocational training. For example, there is no
training of technicians for clean rooms. Although firms themselves could
provide the appropriate technical training more might be done by universities
and other public actors.
The scale and quality of public infrastructure has also been signalled by
local stakeholders as a constraint to the development of the cluster. The
Grenoble agglomeration has seen a rapid increase in population in recent years,
including the inflow of a significant number of professionals from other parts of
France and overseas. This has increased the demand for schools, transport,
housing and other infrastructure. Furthermore, a complication in the case of
Grenoble is that the city is surrounded by mountains, which represent a natural
frontier limiting its size and growth. In these circumstances, in-migration has a
strong impact on housing and property prices and road congestion. Although
the local authorities are investing in public transport, and notably the tram, the
necessary investment is very large and will not resolve the problems on its own.
Another problem felt locally is that of delocalisation or relocation of
establishments to competitor regions, particularly in the east of Europe where
there is qualified labour at lower cost. Investment in innovation is the major
response to this challenge. At the same time, however, it is argued locally that
public administration in some countries is able to finance research in Grenobles
core research activities more rapidly and at a greater scale than is the case in
France, thus threatening the technological lead of the Grenoble cluster.
Some local actors have also raised concerns about the limits on the
flexibility of public research funding under the ples de comptitivit
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programme. The ples de comptitivit legislation aims to concentrate
funding on activities in specific geographic locations in order to maximise the
efficiency of spending. However, recipients do not have access to financing
to develop activities in fields outside of the nominated specialisation of
the cluster they belong to, as defined by the programme. Thus the Grenoble
cluster is encouraged to dedicate its research to the fields of micro- and
nanotechnologies and embedded software without the possibility of major
public support to branch into other fields. The risk therefore is that Grenoble
could become a single sector cluster without the necessary capacity to react
to new market needs.
There are also some barriers to entrepreneurship in the cluster. One aspect
of this is an insufficient supply of risk capital to support the creation and
development of innovative SMEs, which is a problem in France in general and
that also appears to affect the Grenoble cluster. Another aspect appears to be a
lack of a generalised entrepreneurial culture in the local scientific community
and the existence of invisible barriers to movement between research and
industry.
Finally, some groups are opposed to the development of the cluster for
two main reasons. Firstly there is some opposition from local enterprises due
to the limited representation of SMEs in the core governance and research and
development activities of the Minalogic ple de comptitivit structure
which is dominated by large firms and research institutions. Secondly, there is
a minority expressing strong ethical objections to some aspects of
nanotechnology research undertaken by the core cluster actors. Both groups
raise objections that potentially could lead to local opposition to investments
in the cluster if they are not addressed appropriately.
Role of policy
As highlighted above, the public authorities have played an important
role in promotion of the Grenoble cluster, even though the contribution to the
activities of large firms appears to have been greater than the direct
contribution to the creation and growth of SMEs. Of course the largest
contribution by the public authorities to development of the cluster consists in
providing ongoing and capital funding for the four universities and the
research laboratories and in the development of public infrastructure in the
cluster rather than through initiatives solely designed with the objective of
supporting the cluster in mind. However, many initiatives have been designed
more specifically to help the cluster evolve. Table 2.7 sets out the main
initiatives that enterprises (large firm subsidiaries and SMEs) in the Grenoble
cluster recognise as being important for the development of the cluster.
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Policy adaptations over time
The emergence of the Grenoble cluster has prompted the Grenoble public
authorities to shift their R&D and economic development policies towards an
approach based on partnerships with enterprises and training and research
institutions that is aimed at fostering innovation.
Table 2.7. Public initiatives to promote the Grenoble cluster
Programme Public organisations Type of contribution
Minalogic cluster Central government, territorial
authorities
Promotion, funding and management of research projects
in the micro- and nanotechnology sectors and embedded
software (EmSoC Embedded Systems on Chip).
Alliance Crolles Central government, territorial
authorities, public research
institutions
R&D collaboration project in nano-electronics between
three firms from the cluster at a site in Crolles.
Minatec Territorial authorities, public
research institutions
Teaching platform, research and applications development
of micro and nanotechnologies.
Metis Territorial authorities R&D projects aimed at disseminating micro-
nanotechnologies to SMEs in traditional sectors such as
textiles and paper.
Agence dtude et de
Promotion de lIsre (AEPI)
Territorial authorities Prospecting for new investors, partners and markets
abroad; assistance to investors.
Forum 4i Territorial authorities, Chamber
of Commerce and Industry
Raising venture capital for innovative enterprises in a forum
comprising venture capitalists and investors in the Grenoble
project.
Grenoble Angels Chamber of Commerce and
Industry
Association of entrepreneurs who share their experience
and network and offer financing for innovative start-ups.
Grenoble Alpes Incubation
(GRAIN)
Central government, Chamber
of Commerce and Industry,
research institutions
Business incubator which finds and provide facilities for
plans to create enterprises to exploit public research
Support for hiving off activities
from research laboratories
Central government Incentives to exploit innovations arising from basic
research conducted by public research organisations
such as the CEA and INRIA
OSEO Central government Assistance to SMEs through support for innovation,
funding of investments and provision of financial
guarantees.
1999 Act on innovation
and research
Central government Facilitating the mobility of research staff to industry;
promoting partnerships between public research
and enterprises; improving the tax regime for innovating
enterprises; improving the legal framework for innovating
enterprises.
Tax Credit for Research Central government Tax break for enterprises equal to half the R&D expenditure
during the fiscal year, less the average expenditure
of the same type during the previous two years.
Status of Young Innovating
Enterprise
Central government Tax breaks for qualifying SMEs less than 8 years old
and with R&D expenditure amounting to at least 15 per cent
of their charges.
National aid competition
for the creation of enterprises
and innovative technologies
Central government,
European Union
Development of plans to create enterprises to exploit
innovative technologies through grants and appropriate
support measures.
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Accordingly, the territorial authorities have worked collectively to co-
ordinate their actions at the levels of the region, dpartement and communes to
provide infrastructure and financing for research and innovation in
collaboration with private sector partners from the cluster. The level of
support provided by the territorial authorities in this respect is currently very
high and has increased substantially over the past few years, primarily in
response to the clusters growing need to invest in research. The Grenoble
Chamber of Commerce and Industry (CCIG) is another actor whose support for
innovative enterprises has increased and is now more active than Chambers
in many other cities in France. Even though the CCIGs actions in this respect
remain limited compared with those of public stakeholders, examples of new
innovation initiatives include Espace Entreprendre, to provide advice, training
and mentoring to entrepreneurs, and the Grenoble Angels association and
Forum 4i initiatives to increase access to seed capital.
At national level, the creation of the competitiveness clusters programme
also demonstrates a political will to adapt research and innovation policies to
the needs of major clusters.
Future policy challenges
Responding to increased international competition
Globalisation has been accompanied by increased competition in the
Grenoble clusters sectors of activities. There is very strong competition from
other OECD countries. The United States and Japanese governments in
particular are promoting the development of nanotechnologies and
information technology by providing funding for both R&D and the subsequent
development of applications for research findings. Firms and research institutes
in Grenoble are often obliged to make major investments to expand their
activities. They seek partnerships with the public sector to support these
investments. Public investment aid to meet the needs of the Grenoble cluster
must therefore be both timely and flexible as well as on a sufficient scale to keep
pace with the competition. In broader terms, it is important to continue to
maintain an environment favourable to innovation within the cluster.
Involving SMEs and start-ups in cluster initiatives
Start-ups and SMEs often play a vital role in disseminating innovation
within clusters. These small entities enter into the value chain by
commercialising the innovations developed by major enterprises and
laboratories, thereby allowing the latter to concentrate on their core activity.
However, the activities of the Grenoble cluster have been strongly weighted to
large enterprises to date.
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Promoting the creation and development of SMEs would make it possible
to disseminate innovation more widely and increase the critical mass of the
cluster, the key to raising its profile to global level. There are, however, a number
of factors that act as a brake on achieving this objective. Firstly, researchers are
not familiar enough with the process of spinning off activities and are not
motivated strongly enough to go and work for, or set up, an SME. In addition,
there are no ad hoc structures in place in Grenoble to promote the creation of
high-tech enterprises on the basis of work performed by universities and
research laboratories. The GRAIN business incubator, which is an effective tool
for spinning off start-ups from the public research sector, does not collaborate
directly with the cluster. Nor does the Grenoble Chamber of Commerce and
Industry have a unit specialised in creating new high-tech enterprises.
Moreover, more active collaboration between research bodies and existing
SMEs would benefit both sets of actors. It would allow public research bodies to
ensure they secure the best possible economic benefits, while at the same time
allowing SMEs to obtain the support they need to refine the technologies they
develop. However, again there are major barriers to the very principle of such
collaboration. Firstly, research institutes have neither the right culture nor
sufficient incentives to collaborate with SMEs. Secondly, SMEs are not familiar
enough with collaborative projects and exhibit a certain degree of reticence.
There would therefore seem to be a need to widely advertise the mutual
benefits of co-operation and, in addition, encourage the creation of systems and
procedures that will protect and reassure SMEs about issues such as intellectual
property. This was one of the issues revealed by the survey of cluster
enterprises, which showed that many SMEs had not yet filed a patent or
registered a licence.
Improving access of innovating SMEs to sources of financing
Access to financing is often one of the barriers that SMEs face when they
are first set up and when they later start to grow. Innovative SMEs in a cluster
need both substantial and long-term financing given that the revenues
expected in such high-tech sectors are earned much later than the initial
investments. Funding from private sources would seem to be essential in this
area. However, there is still not enough venture capital available in the
Grenoble cluster. This deprives innovative SMEs of additional sources of
capital for their creation and growth, leaving the burden to fall on public
funds. In France, the number of venture capitalists remains very limited, and
this is likely to cramp the development of start-ups and innovation within its
clusters. The public authorities have a role to play in ensuring growth in this
type of private financing, particularly in the high-tech sector. With regard to
the co-financing of projects by the Minalogic initiative, it is important that the
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public share of the funding is made available as soon as possible. Public
financial aid to SMEs should be capable of rapid mobilisation and should have
administrative procedures that are as streamlined as possible.
Increasing the use of SMEs as suppliers to the central hub of the cluster
Job creation also depends, more broadly, on local SMEs that are not
directly involved in the clusters activities. These enterprises can not only play
a role as subcontractors or suppliers for enterprises and research laboratories
in the cluster, they can also supply consumer services for cluster employees.
To maximise the ripple effect on the local economy as a whole, these
enterprises must be able to offer products and services that are tailored to the
needs of the cluster. It is therefore important that SMEs have reliable
information about the type of demand that they may receive from the cluster.
SMEs may also need support to introduce any internal process innovations
that may be required to meet this demand. In this respect, the survey of
cluster establishments stressed the amount of ground that SMEs at the cluster
had lost with regard to group subsidiaries in terms of process innovation. The
Grenoble Chamber of Arts and Crafts and the Chamber of Commerce and
Industry have a role to play in supporting SMEs in this regard and their work
would be facilitated by better communication between the cluster and
commercial networks.
Increasing co-ordination and visibility of entrepreneurship support
Several very effici ent publi c bodies already offer support for
entrepreneurship in the Grenoble cluster. However, entrepreneurs are
sometimes not sufficiently aware of the actions of such bodies and it can
sometimes be difficult for enterprises to participate in them. Co-ordination is
not always efficient and entrepreneurs in the cluster are sometimes faced
with a variety of different contact persons, dealing with the same issues, in
the various institutions tasked with aiding SMEs. It might therefore be helpful
to increase the visibility of the public systems put in place to aid SME creation
and development and make it easier to gain access to them.
Maintaining and increasing the number of researchers and technicians
The success of the Grenoble cluster is largely based on its large pool of
human capital in the fields of research and technology. However, over the past
few years, the number of researchers in Grenoble has been falling. The
introduction of more vigorous initiatives to attract more researchers to
laboratories and enterprises in the cluster would be helpful. Likewise, there
are not enough technicians to meet the clusters requirements, a shortage
that, in particular, is slowing down the creation of clean rooms.
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The universities lack room for manoeuvre to tailor their courses and
teaching programmes to the current and future skill needs of the cluster. The
public authorities could help to remedy this shortcoming by giving
universities greater room for manoeuvre, as well as earmarked funding for
such training courses.
Promoting labour mobility
The exchange of knowledge between industry and research is critical to
innovation in a cluster. In this respect, collaborative research projects
involving co-operation between actors from industry and researchers are a
very effective means of exchanging knowledge. This type of exchange appears
to be highly productive within the Grenoble cluster.
In contrast, the mobility of workers between industry and the research
sector is still not sufficiently developed in Grenoble. There are substantial
constraints on the mobility of workers, whether it be from large firms to SMEs
or between industry and the research sector. The public sector has a part to
play in encouraging such mobility, notably by providing support and
assistance for employees wishing to leave a major enterprise to either join or
create an SME. Universities and engineering schools could also help to
facilitate exchanges between researchers and entrepreneurs, as well as
mobility between industry and the research sector.
Striking the right balance between diversity and specialisation
in innovation
Clusters often struggle to strike the right balance between exploring new
avenues to capitalise on research, which can ensure the branching of the local
economy into new areas, and the exploitation of existing avenues of research,
which will ensure the excellence of current economic development. If too
much energy is devoted to exploring new avenues for development the
exploitation of current research may be hindered in the short-term, and the
cluster may well start to decline. On the other hand, if efforts are focused on
seeking short-term practical applications for research, the clusters
development may eventually be halted in the longer term.
Grenoble would appear, if anything, to be running the risk of over-
specialisation. The State ple de comptitivit programme only finances
research and development projects in sectors that are foreseen by the formal
regulations governing the activities of the Minalogic initiative, which limits
the scope of its projects. This is likely to encourage firms in the Minalogic
cluster to focus their activities to micro and nanotechnologies and embedded
chip software without adding to their expertise in other fields. The risk of
becoming a single speciality and single sector cluster could jeopardise its
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international competitiveness and reduce its reactivity to the new
requirements of international markets. Actors from the cluster are therefore
calling for its sectors of specialisation to be broadened.
On the other hand, greater diversity within Minalogic could well
undermine the strength of the fields that are of most importance to the cluster
by spreading skills too thinly. In this respect, it would be helpful to open the
debate on relaxing the system used to allocate financial aid within a cluster in
order to promote innovation in sectors whose expertise complements or
mirrors that in core cluster specialisms.
Improving national and international access in terms of transport
Grenoble has a relatively poor transport infrastructure in terms of
national and international connections: no express regional shuttle train
services between Grenoble and the other economic metropolitan centres such
as Lyon, Chambry and Geneva; lack of a direct high-speed train link from
Paris; congested motorways. Making good these weaknesses might enhance
the attractiveness of the cluster in the eyes of foreign direct investors and
encourage the mobility of engineers. On the other hand, the lack of an
international airport does not appear to detract from the citys attractiveness,
since Grenoble is located close to two international airports, namely Saint-
Exupry near to Lyon and Geneva.
Continuing and broadening support by national administrations
for cluster initiatives
The Grenoble cluster requires investment in research infrastructure, in
research and development projects and in infrastructure in the broad sense of
the term. Given that the cluster is of national importance and that the economic
benefits from growth in the cluster extend well beyond the boundaries of
territorial administrations, it is logical to involve national authorities in this
investment effort. The Minalogic cluster and the planning contracts between
central government and the regions are major expressions of the States
involvement. This effort needs to be maintained over the long-term.
Managing tensions in the real estate and transport sectors
The attractiveness of Grenoble is under threat from its relatively high
degree of congestion, the outcome of strong demographic and economic
growth in an area that is naturally constrained by the mountains and rivers
surrounding the city. This congestion is currently having an adverse effect on
transport, making it harder to travel to cluster establishments. Roads are
saturated during rush hours and, despite major investment in public
transport, difficulties still remain. The tramways in Grenoble only run as far as
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the municipal boundaries and do not provide access to the major industrial
complexes in peripheral areas. The citys physical expansion appears to have
reached its limits, which has led to rising property prices fuelled by the arrival
of high-earning managers. The creation of new enterprises and the growth of
those already in place are therefore subject to the constraints posed by the
scarcity of land for industrial development and the difficult task of attracting
employees, who have to contend with the high price of accommodation.
Overall, the prices of land and property in Grenoble and surrounding areas are
starting to hold back growth in the cluster and the saturation of the transport
networks risks damaging its attractiveness. New solutions are required to
these problems.
Avoiding the risk of social divide
There is a risk that growth in the cluster only favours the income and
employment of researchers, engineers and technicians working in the cluster
and does nothing for those who live in the city but have no contact with the
cluster and none of the qualifications required to find work in the cluster. If
the growth and high earnings of the high-tech enterprises in the cluster were
to have no positive impact on employment and salaries in the rest of the city,
this could be viewed as a failure in terms of economic and social development.
Furthermore, the resulting social divide might well encourage both the
inhabitants of the city and local authorities to resist the future development of
the cluster.
To avoid this, wealth-redistributing mechanisms need to be designed.
Improving the technological level of SMEs, promoting subcontracting and co-
operation with enterprises in the cluster might be potential solutions. It is also
important to encourage the training of the local population, particularly in
activities with insufficient manpower, in order to improve their employability
in the enterprises within the cluster. In addition, it would be helpful to raise
the general awareness of the population of the science and technologies
developed in the cluster in order to encourage people to pursue careers in the
relevant fields. The local tax revenues generated by the clusters activities
should allow the territorial authorities to put in place better facilities to
promote the social integration of those members of the population who are
furthest removed from the high-earning activities of the cluster.
This risk of social divide in Grenoble is linked to the clusters
concentration on R&D. The region has few component manufacturers, for
example, in the automobile, avionics, telecoms or biotechnology sectors in
which the clusters technologies are nonetheless present which would be
capable of providing mass employment. Attracting and anchoring such
enterprises in Grenoble would create jobs commensurate with the
qualifications of the local population.
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Meeting ethical objections to research
The contents and objectives of projects supported by Minalogic are not
always very well known to the general public, which can fuel suspicion and
concern. The research and development carried out in the cluster relate to
advanced fields of technology and may raise certain ethical questions which
need to be discussed and addressed. For example, concern may arise over the
health and safety of employees working on nanotechnologies, which may be
perceived as dangerous products to handle. Further, some applications of the
products produced by nanotechnologies for military use, espionage, etc.
might also be considered to have negative social impacts.
For such reasons, there is a small group of people who are opposed to the
activities at Minalogic and who project a negative image of the cluster to the
population of Grenoble, who, as taxpayers, are called upon to fund investment
in the cluster. The opacity of cluster structures, the difficulty in gaining access
to the central site and the lack of information on the objectives and contents
of projects undoubtedly help to fuel this trend. An effort needs to be made to
communicate and teach people about the clusters activities and innovations
in order to make it easier for the general population to understand the issues
at stake. It is also important to respond to the genuine concerns that are raised
by taking ethical considerations into account in the design of cluster activities.
A number of associations such as ACROR (the laboratory run by the INPG), and
ACONIT (Association pour un conservatoire de linformatique et de la tlmatique) are
pursuing interesting initiatives in this respect. Organising virtual visits to
laboratories, for example, helps to promote greater scientific awareness and
the trickle-down of technology to small traditional enterprises. Such activities
have tended to create bridges between the scientific and entrepreneurial
culture and the concerns of the general public.
Lessons for other clusters
The experience of Grenoble offers a number of key messages for other
clusters.
First, Grenoble demonstrates the potential clusters have to drive
economic development. In direct terms, the growth in turnover of core cluster
establishments was 64 per cent in the period from 2002 to 2006. The
employment growth of the cluster establishments over a ten year period was
13 per cent, rising to 163 per cent in component manufacturing, 68 per cent in
software development and 44 per cent in engineering and technical
inspection, namely in the three key core sectors of the cluster. In indirect
terms there is significant subcontracting, with cluster establishments working
with an average of 40 suppliers, mainly outside of the cluster, and induced
effects from the local spending of wages and salaries. An estimate of the
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induced and indirect effects of the Alliance Crolles project suggests a ratio of
around three local jobs created for each direct job in a cluster establishment.
It is these job and income effects that policy seeks to stimulate. Furthermore,
the fact that cluster firms put out significant non-local as well as local
subcontracting and that cluster establishments represent a significant
proportion of national employment in their specialisms suggests that the
cluster plays a national as well as local role in the competitiveness and growth
of its industries.
Second, the Grenoble case illustrates the importance of adopting a long-
term policy strategy for supporting a cluster and allowing this strategy to
adapt, because clusters take time to emerge and the environments they
operate in change. The origins of the Grenoble cluster can be traced back at
least 50 years to the development of hydro electric power in the Alps and to
the establishment of industry-relevant research establishments. Since then,
the cluster has exploited various different structural technologies, in line with
global technological changes. The capacity of policy, research, education and
industry to adapt to new technical and market conditions at each step, whilst
maintaining a consistently positive attitude to the development of the cluster,
seems to have been critical to Grenobles success.
Third, the Grenoble cluster has been supported by strong national public
investments in education and research. It benefits from a very strong
education sector, including four universities and a management school,
delivering a large inflow of skilled labour to the cluster. It also benefits from
eight national and international research institutes that are relevant to the
cluster and form the basis for collaborative research projects and spin-offs in
the cluster domains. The importance of this national research and education
activity to the development of the cluster implies that national decisions on
the location of research and education investments in general should not be
taken without regard to locality, but should, as one of the criteria used, take
into account the potential of different locations to support clustering.
Fourth, a number of publ i c i nvestments have been made i n
infrastructures and research and development collaborations in the Grenoble
cluster. In particular, national, regional and local government authorities have
all worked together to provide support to three flagship projects in
collaboration with research and education institutions and the private sector.
The Alliance Crolles 2 initiative provided a research facility for pooling the
pre-competitive research of three major cluster companies. The Minatec
centre provided education and training facilities for 1 000 students and
500 continuous education trainees, research facilities for 40 laboratories and
1 200 researchers and business incubation facilities for spin-off enterprises.
The Minalogic ple de comptitivit provides funding for R&D activities and
a cluster management organisation for brokerage of collaborative research
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projects. The clusters strong current international position should therefore
be seen not as simply private sector led, but in part the product of targeted
public investments in cluster-specific infrastructure, undertaken in public-
public and public-private partnerships. These types of structuring
investment are also likely to be important to the development of other
clusters.
Fifth, the greatest impediments to innovation reported by Grenoble
cluster establishments, large and small, are lack of financing, uncertainty over
demand, the cost of innovation and difficulty finding partners. Apart from
dealing with uncertainty over demand, these are all critical and well-
established areas of policy intervention in enterprise and innovation policy in
general. The location of enterprises in clusters, however, can give a boost to
policies seeking to address these problems by enabling them to concentrate
resources and call on synergies with the actions of a range of local partners.
Sixth, the success of the Grenoble cluster in large part reflects the outputs
of its pool of very highly skilled labour. An estimated 44 per cent of employees
of core cluster establishments are managers or in higher intellectual
occupations. Moreover, a key feature of the establishments belonging to large
firms in the Minalogic structure is that they serve mainly an R&D and design
role within their parent companies. They are therefore specialised within their
group in highly skilled work. It is the ability of the cluster to host this
specialised R&D and high skill work that would appear to count above all.
Public policy can be argued to have played an important role in facilitating
access of cluster enterprises and institutions to high-skilled labour through
delivering appropriate education and training as well as by providing an
attractive residential environment.
Finally, it is clear that there are a number of policy challenges still to meet
in Grenoble and it is very likely that a number of them are shared with other
clusters. Indeed the challenges still to meet in Grenoble might be thought of as
among those that are potentially more difficult to meet or that have been less
visible or popular with policy makers. Thus there appears to be an invisible
barrier between industry and public research and a lack of SME linkages into
core cluster activities that potentially constrains knowledge transfers. There is
also the issue of whether to support cluster specialisation or diversification in
the way that research and development funding and other policy support is
provided to the cluster. Policy makers need to take a view on whether the
future growth of the Grenoble cluster is likely to be found in hybrid activities
that combine existing cluster strengths with new activities, or whether
branching into new activities will disperse the effort too far and see a drop in
the core critical mass required for cluster success. It has recently become
evident that congestion associated with the growth of the cluster also needs to
be managed with appropriate transport, housing and land policies and
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investments, that an emerging social divide needs to be countered by finding
ways to spread the benefits and that ethical objections also need to be
addressed through greater transparency and dialogue with civil society. Public
authorities and their partners in Grenoble are looking to the experience of
other clusters in providing inspiration on the most effective approaches for
meeting these new challenges. The lesson for other clusters comes from this
very effort. An effective cluster policy is likely to be one that is open to
information on emerging challenges and how they may be addressed.
Notes
1. As defined in the call for projects by the Office for Territorial Development and
Regional Action (DATAR).
2. Grenoble Alpes Valorisation et Innovation Technologique (GRAVIT) is a consortium
made up of the CNRS, CEA, INP Grenoble, INRIA, UJF and UPMF as part of a
mutualisation programme sponsored by the Agence Nationale de la Recherche for
a period of three years (2006-2008). The INP Grenoble is the project co-ordinator
and manager.
References
Haag, O., E. Raulin and C. Souquet (2004), Inter-business Relations in Le 4 pages des
statistiques industrielles, SESSI, No. 195, November.
Pecqueur, B. (2007), Historique du Cluster Grenoblois, paper for the OECD LEED
Programme, OECD LEED Programme, Paris.
ISBN 978-92-64-04442-5
Clusters, Innovation and Entrepreneurship
OECD 2009
73
Chapter 3
The High-tech Cluster of Oxfordshire,
United Kingdom
by
Helen Lawton-Smith
Managing Director and Director of Research Oxfordshire Economic
Observatory and Reader in Management, Birkbeck, University of London
This chapter provides an overview of the transformation of the high-
tech cluster in Oxfordshire following industrial restructuring in the
UK. The case study illustrates the importance of the entrepreneurial
dynamic as a source of talent, spin-offs and critical mass. It
highlights the challenges faced by the Oxfordshire cluster in
networking among the actors of the virtuous circle for clusters, and
the ways in which these actors have been involved in order to fulfil
the unmet needs of the cluster. The success of the cluster has been
underpinned by the attractiveness and self-organisation of the
territory. This chapter also outlines the key role played by the core
actors of the cluster in tackling environmental challenges and social
inequalities.
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Introduction
Oxfordshire is a key growth area in the UK economy and is one of
Europes leading centres of enterprise and innovation. In 2002 it received its
second Award of Excellence as one of Europes most innovative regions. The
transformation from an old economy based on brewing, agriculture, blankets,
motor vehicles and education, to a new mixed economy, in which the cluster
of high-tech firms makes an important contribution to the countys prosperity,
has been remarkable. It is an example of a sub-region where the economy has
undergone a major shift from the commodity producing industries of the
twentieth century towards one based more on the potential of the knowledge
and information economy. By the start of the new millennium Oxfordshire,
and its surrounding region, the South-East, are among the top high-tech
locations in Europe. Highlighted in this account of the growth of the
Oxfordshire high-tech cluster are on the one hand, the positive impact of
national science and innovation policies and entrepreneurial activity and an
increasing concentration of talent (Florida, 2002) at the local level; and on the
other, the negative impacts of rapid growth. The paper explores the
consequences of both in planning policy and in future training provision. It
draws extensively on research conducted by the Oxfordshire Economic
Observatory, an independent research centre, based in Oxford University.
Nature and evolution of the cluster
From the mid 1980s to the mid 1990s, the Oxfordshire economy
underwent a transformation with: the decline of the car industry which had
employed 27 000 in the late 1960s but only around 5 000 by 1997; a rapid
increase in the formation rate of high-tech firms and the arrival of the R&D
departments of a small number of predominantly US and Japanese
multinational firms; and a clearly identifiable system of local governance that
was not based in the public policy domain. During the 1980s, the high-tech
cluster grew from 190 firms employing 2 000 people at the end of the decade
(Lawton-Smith, 1990) to some 543 firms employing 19 465 in 1997 (Garnsey
and Lawton-Smith, 1998). By 2002, the number of high-tech firms had risen
nearly threefold to 1 400 high-tech and employment slightly less than doubled
at 36 700, representing about 12 per cent of all employees working in the
county (Oxfordshire Economic Observatory, 2003). The most recent estimate is
of approximately 3 500 businesses employing around 45 000 in 2004 (Oxford
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Economic Observatory, 2007). The definition used in all three studies is based
on that developed by Butchart 1987 for the DTI (referred to as Butchart), with
the latest study using an extended version to reflect the growth of new high-
tech sectors. The Butchart definition uses the criteria of R&D expenditure (as
a percentage of turnover) and qualified scientists and engineers (as a
percentage of all full-time employees) to indicate whether or not a firm be
classified as high-tech.
While the early high-tech economy was dominated by manufacturing,
the Oxfordshire high-tech cluster has grown into being services dominated.
There are far more hi gh-tech servi ce compani es than hi gh-tech
manufacturing companies and service employment is higher than that in
manufacturing overall. The sector with most businesses is computer services,
with almost half of all the high-tech companies in the county (635 firms,
45 per cent of companies) which has twice as many companies as technical
consultancy and technical testing (22.5 per cent) which is also an important
high-tech services sector. The largest manufacturing sector is instruments,
medical and optical equipment, followed by biotech/pharmaceuticals. Certain
sectors, although important in employment terms, consist of only a small
number of companies. For example the motorsport and automotive
engineering/design sector accounts for less than 2 per cent of the countys
high-tech firms but 7 per cent of its high-tech jobs. The emerging biotech
sector has 73 firms but only comprises 5.2 per cent of the countys high-tech
firms (Table 3.1). Table 3.2 shows the distribution of employment within the
high-tech economy.
Success factors
The main drivers of this rapid growth are enterprising individuals drawn
from an increasingly highly skilled workforce, entrepreneurial universities
(Etzkowitz et al., 2000), and research laboratories and networks of supportive
organisations; all factors identified by Parkinson et al. (2004). They combine to
create a local entrepreneurial culture. The county also has good connectivity,
including excellent connections to international airports, it has an attractive
environment and a good quality of life, and the recent growth is based on
diversity rather than focus on a single sector. OEO encapsulates this as the
notion of a triple-helix of a small number of key elements which have
underpinned the virtuous circle of activity (Figure 3.1). Parkinson et al. (2004)
also highlight the strategic decision-making capacity of an area: the
significance of networks and relationships between key players in the public
and private sectors, the importance of crucial politicians in shaping strategies
or influencing key programmes, and the significance of allies in national
government. This report argues that the Oxfordshire cluster has not followed
this virtuous path exactly. This theme is discussed later in this chapter.
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Table 3.1. Number of high-tech companies in Oxfordshire,
analysed by sector, end of 2001
Sector
Number
of companies
As % of all high-tech
companies
Manufacturing
Publishing specialist electronic only 9 0.6
Biotech, pharmaceuticals and medical diagnostics 73 5.2
Computer equipment 23 1.6
Electrical equipment (Butchart categories) 14 1.0
Electronic and telecoms equipment 46 3.3
Instruments, medical and optical equipment 112 7.9
Motorsport and automotive engineering/design 24 1.7
Aerospace and related services 12 0.9
Other manufacturing 70 5.0
Services
Telecommunications 30 2.1
Software, web/Internet and other computer services 635 45.1
Other R&D activities (not included above) 44 3.1
Technical consultancy and technical testing 317 22.5
Other/not classified 8
Total: All sectors 1 417 100.0
Source: OEO 2003.
Table 3.2. Sectoral breakdown of high-tech employment in Oxfordshire,
end of 2001
Sector
Number of employees,
end of 2001
As % of all high-tech
companies
Manufacturing
Publishing specialist electronic only 93 0.3
Biotech, pharmaceuticals and medical diagnostics 3 257 8.9
Computer equipment 1 825 5.0
Electrical equipment (Butchart categories) 657 1.8
Electronic and telecoms equipment 1 550 4.2
Instruments, medical and optical equipment 5 026 13.7
Motorsport and automotive engineering/design 2 503 6.8
Aerospace and related services 840 2.3
Other manufacturing 1 498 4.1
Services
Telecommunications 2 335 6.4
Software, web/Internet and other computer services 7 899 21.6
Other R&D activities (not included above) 5 907 16.1
Technical consultancy and technical testing 3 257 8.9
Other/not classified 35
Total: All sectors 36 682 100.0
Note: Percentages rounded.
Source: OEO, 2003.
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Entrepreneurial individuals
At the centre of the virtuous circle are a set of entrepreneurial individuals
and their companies, which have provided the big firm building blocks of the
high-tech economy. Oxfordshire provides a contemporary example of what
Richard Florida (2002) calls the geography of talent a rich mix of
entrepreneurs, philanthropists, local policy makers and professional services
coming together to provide leadership, vision and examples of what can be
done. In Enterprising Oxford: the Growth of the Oxfordshire High-tech Economy (2003)
OEO drew on the information in a set of semi-structured biographies supplied
by each of 22 individuals identified as having initiated change and played a part
in developing Oxfordshires enterprise culture. In addition to giving information
on career highlights, and roles in national initiatives with impacts locally, each
was asked to outline their own particular initiatives at the county level which
had an impact on the Oxfordshire high-tech economy, and of their personal
involvement in the high-tech economy. The individuals were divided loosely
into town and gown. The former comprise the entrepreneurs who have been
responsible for leading the field in new technologies, plus those key individuals
in the public, private and voluntary sector who have provided support in various
ways. The gown group includes the star scientists, senior academics and
administrators who have generated and processed inventions and innovations
from the science-base. The distinction between the two groups is loose, and
there are some important overlaps. The biographies show that although it was
the 1980s when the high-tech economy first displayed rapid growth, and
Figure 3.1. The Oxfordshire virtuous circle of activity
Source: Glasson et al. 2006.
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the 1990s when there was a professionalisation of the activity and of the
HE-industry links, many of the entrepreneurial foundations had been laid
much earlier in the 1960s and 1970s.
The outstanding example of Oxfordshire entrepreneurialism is provided by
the work of Sir Martin and Lady Audrey Wood (Wood, 2001). The Woods
epitomised the can-do mentality, and have been major players in the
Oxfordshire high-tech economy since the 1950s. They were leaders in the field of
cryogenics using very low temperatures to develop high-tech superconducting
magnets, which led to the development of Magnetic Resonance Imaging (MRI)
and to medical instrumentation applications, most notably as body scanners.
Their company, Oxford Instruments, generated many spin-offs, including Oxford
Analytical Instruments, Oxford Magnetic Technology, and many others, giving
rise to the phenomenon of Cryogenics Valley (Lawton-Smith, 1991). By 1999
Oxford Instruments four divisions: superconductivity, analytical, medical
systems and magnet technology joint venture employed a total of 2 300. Other
key entrepreneurs include Mike ORegan, who along with Mike Fischer founded
Research Machines (RM plc), which is the UKs leading supplier of information
and communications technology to schools, universities and colleges; Paul
Drayson, co-founder of Powderject who went on to become Minister of State
for Defence in the House of Lords; Frank Williams, the driving force of the
Formula 1 Williams motor racing team based at Grove in Oxfordshire (Henry
et al., 1996), and Jan Hruska, co-founder of Sophos, which offers computer anti-
virus protection to university and business users.
The science-base
Underpinning such entrepreneurial activity is the science-base of
Oxfordshire its three universities, seven government laboratories and nine
hospitals. Oxford now has two major science parks: The Oxford Science Park
owned by Magdalen College and Oxford University Science Park at Begbroke.
Oxford Universitys technology transfer company, Isis Innovation, is spinning
out a company every two months and the University has over 30 millionaires.
The Oxford Science Park has over 50 companies, mainly in computing and
biotech. In 2001, Oxford University won a competition sponsored by US venture
capital firm Cross Atlantic Capital Partners, for the being most enterprising UK
University.
Oxford Brookes University also has a strong science-base, especially in
biotech and automotive engineering (linked to the motorsports industry), and
provides advanced training programmes in these areas. Oxfordshire also has
the additional advantage of some of the most important government
laboratories in the country, sitting astride the A34 the United Kingdom
Atomic Energy Authority (UKAEA) laboratories at Harwell and at Culham, the
Central Laboratory of the Research Councils (CCLRC), the Rutherford Appleton
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Laboratory (RAL), the Medical Research Council and several others. These
laboratories in total, employ over 6 000 people and, over a period of 50 years,
have provided an important home for science and invention. Audrey Wood
(2001) highlights several of the Oxford University RAL links, and the
development of the flagship company of Oxford Instruments. A recent key
boost to RAL is the government decision to site the Diamond Project, the next
generation Synchrotron light source, there. This GBP 500 m facility is one of
the largest research projects in the UK for 30 years. It becomes fully
operational in 2006. Oxford is also a major centre for teaching and research
hospitals (the John Radcliffe, Churchill, Nuffield), which play a vital role in the
rich medical, biotechnological and pharmaceutical activity in the area.
Role of SMEs
New small and medium-sized enterprises (SMEs) have played a major
role in driving the cluster. The cluster began to grow rapidly in the mid 1990s.
Table 3.3 shows that the take off period of growth began in the period 1991-95,
but accelerated from the middle of the 1990s. Table 3.4 shows that the rate of
growth in Oxfordshire was the fastest in the UK during the 1990s. This is
significantly faster than that of Berkshire, which has the highest absolute
number of high-tech jobs, many of which are in multinational companies such
as IT giant Microsoft and confectioner Mars.
More recent official statistics for 2004 (Office for National Statistics) show a
total of just over 3 500 businesses in Oxfordshire in high-tech and related sectors,
with about 600 businesses in high-tech and related manufacturing sectors
(mainly in publishing and instrument manufacture) and 2 900 businesses in
high-tech services (mainly in software and other computer related activities and
architecture, engineering and related technical consultancy). Overall
employment in these businesses was about 37 000 in 2004, although this figure is
Table 3.3. Date of incorporation of high-tech companies in Oxfordshire,
end of 2001
Year company was first registered at companies house Number of companies % of total
2001-2002 29 3.1
1996-2000 357 38.1
1991-1995 233 24.8
1986-1990 139 14.8
1981-1985 92 9.8
1980 and Earlier 88 9.4
Year not known or company not registered 479
Total 1 417 100.0
Source: OEO 2003.
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affected by the reclassification of about 8 000-9 000 employees from R&D to
higher education. If these employees are counted as part of the high-tech sector,
then total employment is higher, at an estimated 45-46 000.
An interesting feature of the Oxfordshire high-tech cluster is that the
overwhelming majority of the larger firms began as SMEs. These include Oxford
Instruments (which employs some 2 000 people worldwide, half of whom are in
Oxfordshire), Research Machines (1 000), and Bookham Technology (450).
In 2002, the ten largest firms in the county employed 3 568: around 10 per cent
of the total high-tech economy. Since then several of the high-tech SMEs have
been acquired by foreign companies. Examples include Powderject by Chiron
(later being acquired by Novartis) and Mirada by Siemens.
Spin-offs in Oxfordshire
A further role of SMEs in the Oxfordshire high-tech economy is that of
raising the countys activity and profile as a location for science-based
entrepreneurship, particularly in biotech and ICT. The county has a very high
rate of university spin-offs, especially from Oxford University. The Oxford
Economic Observatory (Lawton-Smith and Glasson, 2005) identified some
114 technology-based companies that have originated in the countys three
universities (Oxford University, Oxford Brookes and Cranfield DCMT at
Shrivenham) and seven research laboratories. These are firms which have
been formed by a member of staff or a student, or on the basis of science/
technology from the university. The study distinguishes between those spin-
off companies that were founded to exploit the institutions intellectual
property and those that were formed by staff or students in a technology field
but not necessarily exploiting the university/laboratorys intellectual property.
Table 3.4. Rate of employment growth in high-tech sectors, 1991-2000,
top 10 English counties (using Butchart definition)
County Growth % growth
1 Oxfordshire 17 450 141.0
2 Berkshire 37 400 105.5
3 Cleveland 4 300 94.0
4 South Yorkshire 8 350 78.9
5 Nottinghamshire 8 000 56.7
6 Wiltshire 7 950 55.3
7 Lancashire 14 300 52.9
8 Cambridgeshire 9 650 52.7
9 Buckinghamshire 10 550 51.5
10 Surrey 16 700 49.7
South East Counties 104 400 51.1
All English Counties 274 850 28.5
Source: ONS, 2000 Annual Business Inquiry and 1991 Annual Employment Survey (OEO 2003).
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The latter are termed founder affiliates. On this basis, by March 2005 there
were 64 spin-offs and 50 founder affiliates. The vast majority (c. 80 per cent) of
both spin-offs and founder affiliate firms have been formed by Oxford
University staff, and of those many have been established through Isis
Innovation in the period since 1997.
The spin-offs date back to the early 1950s, when many of the early firms
were instrument manufacturers. The two earliest, Littlemore Scientific
Engineering 1954 and Oxford Instruments 1959 are still thriving. The
late 1960s and 1970s saw greater diversity in the sectors in which the
companies were formed, including studio recording equipment Solid State
Logic (1969), computing Research Machines (1974) and lasers Oxford Lasers
(1977). The longevity of many of these firms is illustrated by the statistic that
by 1987, some 35 firms (including consultancy companies not included here)
already had their origins in Oxford University and nearly 40 per cent had been
established by 1993. Recently the rate of formation has accelerated. Just over a
third (40), were established between 1998 and 2004. Overall, nearly 90 per cent
are still in existence. Even companies which have been dissolved stayed
in business for many years. The survival rate is particularly high from Oxford
University. Among the non-Oxford University spin-offs with founder
affiliation are Psion and Oxford Applied Research, which were both formed
by former Culham scientists, while Harwell Scientifics is a spin-off from
Harwell.
Some the technology-based spin-offs have emerged as major UK
companies, with a fifth of the companies having gone public: 12 are PLCs.
After a gap of no IPOs for some years, three companies were launched on the
Stock Exchange in 2004: VastOX, Evolutec and Physiomics. These joined other
long established companies including Oxford Instruments and Research
Machines PLC, all of which originated in Oxford University. In 2002, total
turnover for the companies for which information is available was nearly
GBP 1bn.
The OEO survey also includes analysis of the firms identified the
connection between age of firm and employment generation, while other
surveys have often only focused on the number of spin-offs (for example in
annual surveys conducted by HEBI and UNICO in the UK and AUTM in North
America). By 2002, the available data showed that spin-offs accounted for over
3 per cent of Oxfordshires employment. The average firm size of 40 firms
founded before 1994 rose from 140 in 1994 to 354 in 2001, with the rate of
employment growth accelerating after firms had been established for ten
years. Of the spin-offs created by the regions universities, most have stayed
within Oxfordshire, so contributing to the extraordinary rate of growth in the
countys high-tech cluster.
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The OEO survey identified the greatest impact on employment to be
concentrated in a few sectors, of which ICT is the largest single sector and
biomedical is the largest composite sector accounting for 40 per cent of firms:
25 spin-offs are biotech and 16 are pharmaceuticals companies (Figure 3.2).
Until 2001, the ICT group had more employees than the biomedical group,
enjoying sharp employment growth between 1994 and 1996 when the growth
slowed. Conversely, the biomedical sector has experienced a strong increase
in the number of employees since 1997. This change is related to a
correspondence with the rapid increase in the number of biomedical companies
(Figure 3.3).
Impact of the cluster on entrepreneurship and employment
The growth of the cluster itself has had reinforcing effects on SME
development and entrepreneurship, has contributed to a demand for
governance systems, and has provided role models as above. The case study
supports Berry and Glaesers (2005), thesis that the tendency is for initially
skilled places to become more skilled over time. They find that if skilled
people are more likely to become entrepreneurs (who are relatively immobile)
innovate in ways that employ other skilled people, then this creates an
agglomeration economy where skilled people want to be around each other.
This has a reinforcing effect of high skill locations and also has a series of
spillover effects, including a demand for governance systems in the form of
Figure 3.2. Comparison of numbers of ICT and Biotech spin-offs
Source: Lawton-Smith and Glasson 2005.
1973 1981 1986 1989 1992 1996 1999 2002
60
50
40
30
20
10
0
ICT spinoffs Biotech spinoffs
Number of spinoffs
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training and financial systems etc., and through networks and coordination of
knowledge through stocks and flows of people. In particular the clusters
growth has raised the level of skills in the county. Table 3.5 shows Oxfordshire
is one of Britains richest sources of intellectual capital having the second
highest proportion of residents qualified to degree level of all 42 county areas
in England and Wales, ranking seventh for the quantity of people so qualified.
These skills provide the reservoir of talent from which future entrepreneurs
will be drawn plus other kinds of creative people who service the firms
managers, lawyers, leaders of business communities and so on, who also
represent the cluster in policy making circles at local, regional, national and
international levels.
Figure 3.3. Employment data comparison between ICT and biomedical group
Source: Lawton-Smith and Glasson 2005.
1994 1995 1996 1997 1998 1999 2000 2001 2002
4 000
3 500
3 000
2 500
2 000
1 000
500
1 500
0
ICT group Biomedical group
Number of employees
Table 3.5. Educational attainment in Oxfordshire
NVQ level 4/5
NVQ level 4/5 Rank
(of 376)
NVQ level 4/5
NVQ level 4/5 Rank
(of 376)
South East 21.8 2 (of 9) 1 253 917 2 (of 9)
Oxfordshire 27.7 2 (of 42) 123 323 14 (of 42)
Cherwell 20.0 139 19 169 128
Oxford 36.9 12 38 301 38
South Oxfordshire 28.3 39 26 261 76
Vale of White Horse 28.2 41 23 576 87
West Oxfordshire 23.3 79 16 016 169
England 19.9 7 072 052
England and Wales 19.8 7 432 962
Source: Census data in Lawton-Smith and Waters, 2006.
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Barriers to cluster development
Barriers to the development of the cluster have their history in lack of
support from public policy makers, science park late development, a lack of
co-ordination on labour market, weak regional development agencies, and the
clusters own success. In this section the focus is on the problems created by
the rapid growth of the cluster as illustrated by a recent survey of the
Oxfordshire biotech cluster.
The purpose of the Oxfordshire Bioscience Network (OBN) study was to
examine the reality of the national and local business environment in
Oxfordshire (see Lawton-Smith, 2005). Data presented here is from the
Oxfordshire Bioscience Network 2001-02 postal survey. Replies were received
from 75 firms out of an identified population of 100 firms employing
5 000 people.
1
The questionnaire was in three sections. The first was designed
to identify the size and profile of the Oxfordshire biotech industry, in terms of
growth rates, focus and funding cycles. This included address details, company
profiles, specialist skills and technologies, key products and services, R&D and
product focus, partnering opportunities sought and offered, year founded,
number of employees, number of R&D staff and primary and secondary
markets. The second, asked for further information about the firms including
basic financial and employment data and issues relating to growth and
sustainability of the biotech cluster in Oxfordshire challenges, locational
advantages, and education and training. The third asked for feedback regarding
the type of sector network activity which the company felt added most value to
the activity of the organisation. This included local networking events, the types
of collaboration the firms already have, where they would like to develop new
relationships, and sources of information and experience which are of most
value to business development. In each of the three questions, respondents
were asked to rate their answers on a 1-5 scale, where 1 is not significant and
5 is very significant). Scores were then added to give Table 3.6.
From this survey of the importance of the Oxfordshire biotech cluster
development it appeared that university-industry links were not the main
sources of information. Rather, local information sources were not the most
important, conferences scored the highest, reflecting research practices which
span both industry and academia. Other important sources were the Internet,
published sources and trade fairs. Universities were ranked 9th in importance
along with local sector networks, national trade associations, technology
transfer departments and independent research organisations. Moreover,
firms generally did not view proximity to Oxford University and the local
research base as an important factor in the development of interactions, other
than those of an informal nature. Networks including social interaction with
friends, the second most important source of information, as well as
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collaborators and ex-colleagues were also found to be significant. At the same
time, competitors ranked as highly as friends. This is consistent with an
earlier Oxford/Cambridge study which found that the majority of 50 firms
surveyed in each region rated clients or customers as the most important
external sources of innovation at the national and international scales
(Lawton-Smith et al., 2001).
The biggest drawback by far to an Oxfordshire location is the cost of housing
(Table 3.7). This is followed by costs of living and costs and availability of
laboratory space. High housing costs discourage people from moving to
Oxfordshire and may encourage firms and people to leave the county. Salary costs
are high as compensation for high living costs. Other elements of the physical
infrastructure were important locational advantages and disadvantages. While
Oxfordshire is a favourable location with regard to airports (ranked 5th) with
access to London (with its frequent bus and train services ranked 7th), traffic and
congestion costs were ranked as the 8th highest sector challenge, and therefore
seen as a significant problem for firms in this industry.
Role of policy
At the early stages of the growth of the Oxfordshire high-tech cluster,
national policy was delivered centrally. At the local level, there was a
statutory vacuum (Lawton-Smith, 2003). A system of local governance rather
than government appeared spontaneously during the 1980s which has been
the main delivery of support for the high-tech cluster. It began with the
formation of The Oxford Trust in 1985 when Dr. Martin Wood and his wife
Table 3.6. Locational advantages
Rank Advantage Survey score
1 Proximity of the universities 236
2 Quality of life 221
3 Availability of staff 220
4 Proximity to like-minded companies 215
5 Proximity to airports 213
6 Availability of premises 206
7 Proximity to London 197
8 Availability of funding 178
9 Availability of specialist professional services 171
10 Access to investor networks 166
11 Access to sector networks 156
12 Access to mentors 154
13 Proximity to partner organisations 147
14 Proximity to market 124
Source: Oxfordshire Biosciences Survey 2002.
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Audrey established The Oxford Trust. Its mission is to encourage the study
and application of science and technology (Wood, 2001). Since its formation,
in the absence of local policy frameworks, the Trust has taken responsibility
for engaging with firms in the high-tech cluster and with research, business
and public-sector organisations, speaking and acting on behalf of the high-
tech sector locally and nationally. At the outset, the Trust recognised the need
to network to provide innovation support. Its pioneering activities included
managing the STEP Centre (incubator units) and facilitating networking
through its innovation Forum, a series of seminars and workshops bringing
together individuals and organisations on topics relating to business skills,
developments in technology and future market opportunities, and running a
schools programme. At the time of its formation it was the only place to which
entrepreneurs could go for advice.
Oxford University was far from being entrepreneurial; the banks were
largely unhelpful (Lawton-Smith, 1990); local government agencies were
Table 3.7. Locational challenges
Rank Issue Survey score
1 Cost of housing 247
2 Cost of living 228
3 Availability of laboratory space 225
4 Cost of office and laboratory space 221
5 Availability of scientists 215
6 Availability of appropriately qualified staff 213
7 Salary costs 211
8 Traffic and congestion 206
9 Inadequate public transport 202
10 Availability of technicians 200
11 Availability of managers 198
12 Availability of venture capital 197
13 Patent costs 187
14 Availability of business angel finance 178
15 Availability of office space 173
16 A lack of high-speed Internet access 168
17 Cost of specialist business advance 164
18 Cost of specialist equipment 164
19 Complex local planning and regulatory procedures 161
20 Current economic downturn 161
21 Availability of admin. staff 157
22 Availability of pre-clinical facilities 155
23 Availability of manufacturing facilities 155
24 Availability of bio-informaticians 152
25 Availability of specialist business advice 150
26 Availability of clinical trials facilities 132
27 Availability of distribution facilities 127
Source: Lawton-Smith (2005).
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lacking in expertise; and contrary to Parkinson et al. (2004) local politicians
were (and still are) uninterested and local authorities were under-resourced
and unable to provide specialist advice. Oxfordshire County Councils low
level of resources allocated to support economic development per se is a
legacy of Conservative Party control. In line with national party policy of
minimum state interference in the economy, the Authoritys philosophy was
to spend as little as possible. As a result, the County Council is the second-
lowest spender behind Cornwall on many things including economic
development. Party politics is also behind the City Councils lack of
engagement with the high-tech sector and The Oxford Trust. The Labour
Party, which has always controlled the City Council, has had as its priorities
wel fare, the l ow-wage economy and unempl oyment ( Oxford Ci ty
Council, 1997), rather than the high-tech economy. In this period, Oxford
University and the government laboratories remained outside local
networks. In the 1980s, Oxford University lagged behind Cambridge in
the formation of institutions designed to support technology transfer.
Until 1989, it had only a part-time industrial liaison officer; there was no Isis
Innovation, Oxford Universitys technology transfer company, until 1988,
while the equivalent in Cambridge had been set up in 1964. There was no
science park until 1991 (1970 in Cambridge) because of greenbelt policies
rather than a lack of proposals. The government laboratories were still
effectively university-type research organisations, staffed by risk-averse
scientists and engineers (Lawton-Smith, 1990).
During the 1990s, The Oxford Trusts activities expanded. In 1994, it moved
to the Oxford Centre for Innovation, an incubator which it owns and manages;
it established the Oxfordshire Investment Opportunity Network (OION)
2
in 1995
and the Oxfordshire BiotechNet consortium, a DTI initiative in 1997; and,
through its subsidiary Oxford Innovation Ltd, it provided an increasing range of
commercial activities including interim management, mentoring, advice and
consultancy, services and premises. OION was one of the first business angel
networks to be set up in the UK and links prospective investors with
entrepreneurs seeking the early stage funding of between GBP 50 000 and
GBP 1 million, which is often needed prior to seeking more substantial venture
capital funding. OION has 80 investors and is now one of the most successful
networks in Europe. Oxford Innovation Ltd now manages 10 business
incubation centres in the county, with over 200 start-up companies.
In 2003, Gillian Pearson took over from Paul Bradstock, the founding Chief
Executive of the Trust and in 2005 the Trust moved to a new and larger home
in the centre of Oxford (Science Oxford). The Trust continues to assist the
growth of technology businesses in Oxfordshire by:
G Highlighting their successes through an active website and published case
studies.
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G Providing practical information about starting or growing a new venture.
G Encouraging relationships between business, academia and government.
G Communicating the views of technology businesses to local and regional
government.
G Analysing the growth of Oxfordshires technology economy.
G Pioneering practical support activities in response to technology business
needs.
All year round at Science Oxford there is a busy and varied Whats-On
programme with events, exhibitions and activities to engage business, schools
and the public in discussion about science. These include drama and dance
workshops and performances, sciart exhibitions, business networking
lunches, improvised comedy and a regular series of Meet the Scientists as well
as talks, debates and seminars on a wide range of science topics. It is also
home to the Trusts interactive science gallery, Hands-On for young children,
their teachers and parents.
Along with the continuing growth of the cluster, new networks have
developed. These include the Oxfordshire BioScience Network launched in 1999
to improve networking and support to Oxfordshire bioscience enterprise, and
Venturefest Oxfords International Fair for Entrepreneurs, held annually
since 1999.
3
Each year Venturefest attracts in the region of 1 500 attendees to
both the conference sessions and parallel exhibition. The profile of attendees
has not changed markedly in the history of the event. Entrepreneurs continue
to represent the highest number of attendees with the most common reason for
attending being seeking business partners. The second highest reason for
attending is seeking investment opportunities further illustrating that the
event achieves its aim of bringing ideas and funding together. Industries
represented at Venturefest have not changed markedly either, although their
percentage attendance might fluctuate slightly year on year. However, the top
five industries are usually: Biotechnology, Education, Financial Services,
Internet, Legal, Science/R&D and Software.
At the same time, in response to governmental priorities and the efforts
of its key scientists, important organisational and cultural changes occurred at
Oxford University and in Oxfordshires government laboratories. Oxford
University conducted a review of technology transfer arrangements in 1994.
It was highly critical of the universitys technology transfer policy and
practice, and led to a series of changes, the most significant of which was the
appointment of Dr. Tim Cook to head Isis Innovation in 1997. Dr. Cook had
previously worked for Oxford Instruments and later became a serial
entrepreneur, and thus brought much needed expertise to Oxford Universitys
commercialisation company.
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Changes were also taking place in the government laboratories. In 1996,
part of the UKAEA was privatised leading to the formation of AEA Technology.
The sites at Harwell in the Vale of White Horse and Culham in SODC remained
the property of the UKAEA and have since been developed as a Science Centre
(Culham) and a Technology Park (Harwell). The local consequences of the
national agenda of valorisation were, first, an increasing level of interest from
the government laboratories in local expertise in facilitating entrepreneurship
and innovation, particularly with regard to the development of incubators.
In 2006, it was announced in the Budget, by the Chancellor of the
Exchequer that there would be two science and innovation campuses one in
the South East and one in the North West. The South East one would be
around the Harwell/RAL site owned by the CCLRC. The plan for this site is
science + business and in middle, an interaction space. There are plans for
conference centre, hotel, education and training centre to take account of
activities which are on site and the Advanced Technology Regional Resource
Centre. The resource centre is a joint SEEDA and European Social Fund project.
CCLRC was given GBP 0.5 million in July 2006 to provide training under the
arm of instrumentation technology specifically to SMEs in the South East
Region. This includes electronics, advanced instrumentation and ICT.
Policy adaptations over time
In contrast to the Trust, the economic development activities of the
Oxfordshire local authorities until recently have been quite limited. There have
been few resources available, although since the late 1990s the County Council
has sought to promote knowledge-based industries, innovation and lifelong
learning as the underpinning of its emerging Economic Development Strategy
(Oxfordshire County Council, 1999). In addition, there has been what Waters
and Lawton-Smith (2002) refer to as a rescaling of organisational activity for
high-tech development. The Oxfordshire Economic Partnership (OEP) and South
East England Development Agency (SEEDA), established in 1998 and 1999
respectively, provide two new agencies of particular relevance for Oxfordshire.
OEP seeks to unite non-statutory bodies, such as the Oxford Trust, with
statutory bodies. It includes partners from local authorities, business, academia
and the Oxford Trust, and worked jointly with the County Council to roll
forward the Economic Development Strategy (OEP, 2001). One aspect of SEEDAs
business strategic priorities is to increase the rate of innovation and technology
transfer by exploiting the world class research and development resources
within the region (SEEDA, 1999, 2002). With respect to cluster policy its main
activities are Enterprise Hubs and regional networks (informal groupings of
managers in particular industry groups who meet to discuss common problems
and offer mutual support). Enterprise Hubs have a particular role in facilitating
the transfer of technology and know-how from the regions universities and
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research institutes with several of them being based on science campuses or
science parks. Oxfordshire has two such hubs to date for advanced materials
and automotive engineering in the north of the county on the Oxford University
Science Park at Begbroke, and for environmental, life and engineering sciences,
in the south on the Harwell site.
As a consequence of these changes, the governance of the Oxfordshire
high-tech economy is now more orchestrated as public policy at national,
regional and local levels have focused on innovation-led development. The role
of public policy in promoting clusters and overcoming barrier is a very recent
phenomenon. At the national level, national interest in regional/local economic
activity can be dated to the election of the Labour government in 1997. Key early
dates were the publication of the 1998 Department and Trade and Industry (DTI)
Our Competitive Future the agenda of which has the development of the
knowledge economy; the establishment of the Regional Development Agencies
(RDAs) in 1999 which have responsibilities for cluster development and are
increasingly given a greater role in stimulating and supporting innovation-led
growth; the 1999 H-M Treasury report Biotechnology Clusters: Report of a team led by
Lord Sainsbury (the Sainsbury Report); the 2001 DTI Clusters report (Business
Clusters in the UK a First Assessment). Since then there have been a number
of other White Papers and Reports which have continued the theme of
innovation, particularly the regional role of universities in stimulating
economic development (see for example the 2003 Lambert Review of
University-Business Interaction and the Innovation Report, Competing in the
global economy: the innovation challenge, which was published in
December 2003 and also highlights regional innovation in practice cluster
strategies. A report for the DTI and the English RDAs, The Practical Guide to Cluster
Development, was published in April 2004. Nationally, the governments flagship
policy is tax relief on R&D and the Grant for R&D, which replaced the SMART
programme but in a reduced form. This is now delivered by RDAs. Also new, and
reflecting the recognition of the need to increase the supply of start-up and seed
corn capital for SMEs, are the Enterprise Capital Funds (launched in July 2005)
and the Regional Venture Capital Funds launched in 2006.
The RDA which covers the Oxfordshire area, the South East England
Development Agency (SEEDA) The regional economic strategy for the South
East 2006-16 which like all previous regional economic strategies has the
vision that the South East will be a world class region achieving sustainable
prosperity by 2016. Oxfordshire, although not specifically mentioned forms
part of the Inner South East, thus a core part of the regions economy. By 2003,
SEEDAs GBP 1.2 mCluster Fund had seven cluster projects up and running
with a further ten projects under development. In Oxfordshire this included
funding for OXIT, a membership body which represents the IT industry in
Oxfordshire.
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However, one of the constant criticisms of SEEDAs initiatives is the low
level of funding for initiatives. An example comes from the Oxfordshire
Economic Partnership which represents key stakeholder in the Oxfordshire
economy (www.oep.org.uk).
4
It is essential that Enterprise Hubs reflect the economy that they were
developed out of, continually developing relationships with partners which
enable the delivery of support services. The Hubs are only modestly funded
and thus must work closely with a host of partners if they are to deliver
their outputs. FE, HE and research institutions all play an important role in
this, along with Business Links, local authorities, Learning and Skills
Councils and Economic Partnerships and so on. These relationships need
to be developed over time in the context of the local situation and will only
work where trust and understanding have been built, which may take
some time and clear evidence of delivery (OEP, 2004).
In 2006, SEEDA withdrew funding from The Oxfordshire BiotechNet
incubator, which then closed. Oxford Universitys Department of Continuing
Professional Development has approached SEEDA for funds to support local high-
tech firms attend in-house training courses, but this has not been forthcoming.
Within Oxfordshire, Oxfordshire County Council has responsibilities for
sustainable development that address the sometimes competing demands of
economic development, protecting the environment, promoting social
inclusion and reducing resource use. According to the Countys Strategic Policy
Manager, David Waller, while the issue of the green belt and making land
available for economic development captures the headlines, the biggest driver
of the economy is improving skills and providing effective business support.
The South East Plan (SEERA, 2006) prioritises [ldquoe]smart" high-value and
resource efficient growth, but that cannot be achieved without better skills
than there are now in the economy. This brings about a renewed focus on the
high-tech sector where the main barrier to growth is skills availability rather
than land availability. Recent changes in policy at the local/county level reflect
an increased commitment to growing the economy as fast as possible without
damaging the environment. Key initiatives include:
G Local Area Agreement a relatively new and increasingly important
structure initiated by Central Government that will increasingly provide a
common framework of governance for funding to the county. It is led by the
County Council and in the area of economic development and enterprise it
targets improved adult skills, improved teaching of enterprise in schools
and strengthening of the countys promotion of inward investment and
international links.
G Children and young peoples plan local actors focusing together on
improving outcomes for children and young people through the services
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they provide as inputs. The Economy and Enterprise block of the Local Area
Agreement has responsibilities for promoting a more enterprising culture in
schools.
G Oxfordshire Economic Partnership (OEP) an enhanced role for the OEP as the
Local Area Agreement has led to the need to improve the translation of
strategies developed by the partnership into effective delivery programmes.
OEP acts as a network of networks bringing together public and private sector
organisations involved in economic development to agree shared priorities and
provide leadership to bring about the changes necessary to address them.
A further development is the Oxfordshire Data Observatory. What is
missing in Oxfordshire is a publicly funded business database, as is maintained
by Cambridgeshire County Council. The Oxfordshire Data Observatory is a
database of databases. The intention is to provide access to information from a
variety of information sources rather than develop in-house databases, and to
commission research on specific topics.
Planning has been a key element in the way that the Oxfordshire high-tech
cluster has developed. The Oxfordshire planning framework from the early days
of structure planning was one of controlling rather than facilitating. Key
building blocks in this framework were: extensive coverage of landscape
designations, including the Oxford Green Belt; a country town strategy designed
to spread housing and jobs to smaller towns outside Oxford; and a transport
strategy designed to intercept commuting into the city particularly via the
Park and Ride policy. During the 1970s and 1980s, high-tech industry, with its
desire to locate near to Oxford University, was generally discouraged, being seen
as a threat to the Green Belt and the setting of Oxford. However, by the mid-
1980s there was increasing concern with the potential implications of this
policy. New companies in Central Oxfordshire, linked to research centres, had to
move out to grow; and there was some national concern about their possible
loss to the UK completely. Unemployment was also rising, and the County
Council decided to introduce more flexibility into its employment policies.
Two key planning decisions were particularly important in supporting
high-technology industry. The first was a 1987 Alteration to the Structure Plan,
which added the new policy: In Central Oxfordshire, provision will be made
and proposals will normally be permitted for science-based industries
concerned primarily with research and development which can show a special
need to be located close to Oxford University or to other research facilities in
Central Oxfordshire.
The Alteration also offered criteria against which further proposals for
science park developments should be considered (e.g. sites should not be in
the Green Belt, should be accessible by public transport and should be readily
accessible from University science departments). There was a flood of
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applications, but only the Magdalen Science Park was approved in 1991, but
this in itself was a major breakthrough for the County.
The second key planning decision relates to the 1987 revision of the
Planning Use Classes Order (UCO) to include a new class B1 Business Use
which allowed the combination of office space with light industrial operations
for R&D within one planning consent. In addition, the 1988 General
Development Order (GDO) allowed for B2, General Industry Developments, to
change to B1 without the need for planning permission. Together, these
changes greatly facilitated the rapid growth of the Milton Park Business Park
on the A34 near Didcot in the 1990s. By 1999, employment had increased to
over 5 000, on an extensively landscaped Park covering nearly 250 acres.
Amongst others, the Park is home to Research Machines, Evotec OAI Ltd.,
Psion Industrial, Oxford Semi-conductor and Bookham Technology. Other
significant developments include new Business Parks near Oxford Airport
(Elsevier Science HQ), and on the old Cowley motorworks sites.
Whilst these decisions were important catalysts in facilitating the high-
tech growth, they also fuelled development pressures on the County, and the
resultant (un)affordable housing, traffic congestion, and lack of technical skilled
labour issues. For the future, the County needs smarter planning if it is to
achieve sustainable development in all dimensions. Some encouraging features
currently include a determination by local authorities to seek high proportions
of affordable housing in new developments for example 50 per cent plus
10 per cent for key workers for Oxford City; to consider innovative transport
solutions for example the proposed guided busway system; and to reconsider
that most sacred of planning instruments, the Green Belt with perhaps the
introduction of green wedges, separating one or more public transport/green
corridor developments under the current Oxfordshire Structure Plan Review
(Oxfordshire County Council, 2004). More problematic is the current uncertainty
in the planning system and the possibility of a vacuum in strategic planning
between the SE Regional Spatial Strategy (RSS), and the District Local
Development Frameworks. The initial planning for the SE RSS is wrestling with
the coverage of sub-regional plans for the region, and Oxfordshire is presenting
a particular challenge, lying as it does at the corner of the region, and with links
across several regional boundaries. One of these, the Oxford-Cambridge Arc, is
seen as a potential new axis, with Milton Keynes/Bedford in between benefiting
from high-technology overspill. Unfortunately, the necessary investment in
rail infrastructure appears a long way off.
Future policy challenges
With respect to the involvement of the County and District councils in
cluster development, the main debates are conducted through the SE Planning
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Process and deal with issues that are Europe-wide. A particular issue is how
should the spatial planning of economic development be organised? This is a
green belt issue whether land use constrains economic development and
therefore should the strategy be to go flat out for economic growth? This raises
the question of who bears the cost of such development. At the national level,
the Chancellor of the Exchequer is interested in overall national GDP. Only three
regions: the East of England, London and the South East contribute net receipts
for the Treasury. For Oxfordshire, the cost of achieving national growth is borne
locally at the cost of the quality of the environment congestion, pollution, high
housing costs etc., while the local gains are low levels of unemployment and a
thriving economy. Most people are prosperous and have a good standard of
living. The policy issue is how to match local and national policies. While
nationally the aim is to ramp up economic development, local goals are
different. There is no local public support for such development. Elected
politicians have been voted in on policies which state that the green belt will be
protected. Thus the environment has an economic as well as a social
dimension. The autonomy of local planners in each of the districts further
complicates matters. While it might be argued that the science parks at the
public research laboratories at Culham and Chilton could be developed with
little environmental damage, local planning decisions have restricted their
development, especially in South Oxfordshire, the location of UKAEA Culham.
In recent years the Vale of White Horse district, where Chilton is located, has
been more supportive of science-led economic development. This made it
possible for the science and innovation centre, announced by the Chancellor of
the Exchequer, to be built on the RAL/Harwell site.
A more pervasive challenge is the potential threat from newly
industrialising countries such as and India as well as from within Europe, for
example from Germany which has better technician training than the UK. A
potential outcome of such threats are that companies, particularly the
increasing number of foreign-owned companies in the cluster, will relocate
their activities to regions where there are greater numbers of highly skilled
people, more beneficial taxation systems and better physical infrastructures.
Lessons for other clusters
The case of the Oxfordshire cluster highlights the significance of high-tech
activity for economic growth in the 21st century. Oxfordshire has been highly
successful in generating and exploiting knowledge, processes which according
to the UK governments 1998 Competitiveness White Paper, are the foundations
for a knowledge economy. While entrepreneurship is the cornerstone of cluster
development, for policy makers, the cluster approach has to be seen as being
about finding ways in which knowledge and innovation can be given a
supportive environment (Malmberg and Power, 2006).
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The Oxfordshire cluster experience and analysis by Asheim et al. (2006)
raise seven questions for the design of policies.
G How should entrepreneurship be encouraged?
G What can be done to solve the tensions between the needs of local firms and
of planners to address the problems of pressures on the environment?
G How can the future growth of a cluster be secured through developing local
capacity to accommodate change, especially within the labour market?
G Is there capacity in the building stock to meet the demand for incubators and
space for expansion?
G How can we address social inequality between different groups of workers
caused by the increasing demand for high level of skills and less demand for
lower skills?
G How can growth in a latent or potential cluster be supported and existing
clusters sustained?
G How can organisations established to support cluster development maintain
vertical linkages and avoid being bureaucratic? How can the many initiatives
be effectively co-ordinated and diverse interests appropriately balanced?
The implications for policy are first that mechanisms should be sought to
promote high-tech activity. This is not only by finding ways to encourage the
highly skilled to start new firms but also to help build a pool of talent that is
needed to grow those firms managers, financial advisors, patent agents and so
on. This also includes mechanisms to increase the supply of start-up and early
stage financing, vital in supporting entrepreneurship which is key to economic
development (Lipper and Sommer, 2002). One of Oxfordshires great strengths is
its considerable number of business angels but more needs to be done to solve
the equity gap in funding for start-up and early stage development phases.
Moreover, entrepreneurship could be encouraged by national government
which could do more to help small firms for example it could adopt the US
Small Business Innovation Research Program (SBIR). The SBIR is targeted at the
entrepreneurial sector. A specific percentage of federal R&D funds is reserved
for small business. Thus SBIR protects the small business and enables it to
compete on the same level as larger businesses. SBIR funds the critical start-up
and development stages and it encourages the commercialisation of the
technology, product, or service (www.sba.gov/sbir).
The second main challenge for Oxfordshire is supporting rapid high-tech
economic growth while at the same time maintaining the environmental
qualities that are one of the countys major assets particularly to the local
planning authorities. Negative restraint policies will not be adequate to achieve
the smart growth needed to meet national objectives. Their legacy from the
past has been increasing traffic congestion and reduced agglomeration
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economies as a result of spreading development around the country towns
(Witney, Banbury, Bicester and Didcot) rather than concentrating in larger
centres on public transport routes. The policy implication for other places faced
with issues of growth and environmental protection is that a clear and proactive
policy vision for the next 15-20 years will be needed, and the management of
change towards this vision will need to operate at least at the same pace as the
private sector economic changes in the county. In Oxfordshire, the revised
County Structure Plan (Oxfordshire County Council, 2004) and the emerging
Sub-Regional Strategy for Central Oxfordshire, in the context of the developing
SE Regional Spatial Strategy (SEERA, 2004) include first steps in seeking to better
manage the conflicting environmental pressures. This is an outcome of a
dialogue between local, regional and national government. Thus it is essential
for good communications to be maintained between all relevant tiers of
government and the private sector, for example through Chambers of
Commerce, and with local universities and public research laboratories.
The third point is particularly pertinent in the Oxfordshire case. Emerging
economic constraints relate to shortages in middle-level/technician level
skilled labour, and to still not enough investment in R&D when benchmarked
against international best practice (SEEDA, 2001; EC, 2004). The sustainability
of Oxfordshires high-tech economy requires investment not only in new
intellectual capital and qualified people. A key problem now and in the future
is the further raising of the level of skills and the provision of appropriate
training for the high-tech clusters growing number of firms. Therefore it is
essential to have high quality data on current trends and analyses of how that
translates into forecasts for skill and property needs, as well as a policy
framework which will be able to respond to those needs. Skills are now top of
the Oxfordshire and regional agenda as it is recognised that the clusters
growth will not be sustained without an adequate supply of highly skilled
therefore well trained people. This growing emphasis on skills is to be
welcomed, but Oxfordshire still has some way to go before there is anything
like a coherent local approach to skills development.
Fourth, the Oxfordshire cluster is well provided with incubators for the
start-up phase of new company formation, but there is an increasing difficulty
in finding premises in locations, convenient for suppliers and the universities,
to house the expansion phase of high-tech activity. The policy implication is
that if firms are to make a major contribution to the local, regional and
national export base then the physical infrastructure for the growth phase of
development should be appropriately planned for and designed. This may
mean some modifications to existing land use priorities. The Oxfordshire
high-tech cluster faces an increasing infrastructure deficit in supporting the
expansion of high-tech activity. Problems are especially associated with the
transition of its high-tech firms to more mature stages. Moreover, expansion
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is limited by policies which restrict the in-migration of large scale production
units. These are prohibited under current planning rules because of the
resulting pressure on housing and transport.
Fifth, public sector policy makers are also increasingly concerned about
issues of social sustainability. High-tech development can raise issues of
social cohesion, by virtue of the nature and type of workforce required. At the
top, very high levels of formal qualifications in the emerging sectors are
needed in order to plan and design the transfer of scientific knowledge into
commercial products and services. Lower down, degree level skills are still
required in order to organise and produce these new outputs. But what
contributions can workers without such qualifications make to the changing
economy; will they be excluded from the rewards of change? There is also the
associated issue of whether workers at several levels can afford to live in the
expensive housing of a hotspot high-tech economy. Policy must therefore
address issues of social inequality which appear to be a common outcome of
high-tech led economic development. Compensation through local and
national tax spend may be necessary, combined with a programme targeted at
retraining workers who lack relevant skills. Hence it is necessary for high-tech
firms, schools, colleges and universities to work together in order to come up
with possible solutions.
Sixth, in order for high-tech clusters to be sustained, policies needed to
be developed on the basis of intelligence gathering of current and future
activity so that there can be adequate planning for growth. An ongoing
challenge is to identify latent or emerging clusters and provide a supportive
environment for their future growth. In Oxfordshire, environmental
technologies have been identified as a sector that is likely to expand. This is a
reflection of national and international policy agendas relating to climate
change and other environmental issues such as recycling and land
management. Other developing clusters are around nanotechnologies and
new materials. For those and other clusters to develop quickly and to be
sustained, planning needs to be in place to anticipate the future demand for
business units, homes, skills and transport infrastructure. A considerable
challenge is in orchestrating a coherent response from the range of bodies
responsible for decisions in these areas. Moreover, policy makers should be
aware that when even high-tech industries mature, there can be a loss of jobs
when companies are merged or acquired. Even though the biotech sector is
still growing in Oxfordshire, merger and acquisition of many of its leading
firms has meant some loss of jobs and reorientation of activity.
Seventh, the Oxfordshire cluster has benefited from an extensive set of
networks and initiatives. A current study by OEO has identified five network
hosts (organisations which hold networking events) and 62 business to
business networks. Of the latter, five are related to raising finance.
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Partnerships should be built between firms directly and collectively in the
form of initiatives that promote the conditions for a supportive environment.
Networks and networking are a key element in developing a coherent strategy.
Evidence from other studies suggests that networks have at least three
beneficial effects:
1. Networked businesses are likely to be more successful than non-networked
business. Membership is linked to small business survival and, though
networking with competitors, results in firms having a greater knowledge
of their own strengths and weaknesses and a greater knowledge of the
industry (Besser et al., 2006). Mutual support networks enable their
members to become more competitive through improved marketing and
innovation, sharing of best practice, and access to current research,
collective action and infrastructures.
2. Networked firms are more innovative. A review of networking and
innovation in the UK by Pittaway et al. (2004) confirmed that networks and
networking amongst firms plays a pivotal role in innovation and that this
has become more relevant as technologies become more complex. The use
of networks is crucially important during venture formation and for small
growing firms.
3. Not only do individual firms benefit directly, networks act as open gates
bringing in new ideas and practices to the local economy as a whole (Eradin
and Armatli-Koroglu, 2005).
As the Oxfordshire high-tech cluster has grown, an array of supportive
organisations has grown up. Such partnerships and networking have been
vital ingredients in the development of the cluster, and key individuals have
helped to change underlying mindsets and the environment that shape the
nature of economic growth. In Oxfordshire they have originated more from
charitable organisations and the private sector than local government while
central government and more recently the regional development agencies
have played a vital role in pump-priming networking activity.
It is likely that new organisations will develop networks and in line with
its regional economic development strategy, the regional development agency,
SEEDA, will increase its networking activities and the supply of start-up
funding through the nationally supported Regional Venture Fund initiative.
On the other hand, it has withdrawn funding from two which in the case of
one, the Oxfordshire BiotechNet, this had the consequence that the networks
and its incubator had to close. An issue for this and other policy making bodies
is for how long initiatives such as networks and incubators should be
underpinned by public money? Should the funding be permanent which
might have the effect of making the initiative inefficient, or because of the
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public good nature of the programme, should it be sustained over a longer
period of time in order to maximise the benefit to the community at which it
is targeted?
An example of an organisation which may establish networks is the
Oxford to Cambridge Arc, not necessarily in established technologies such as
biotech and biopharmaceuticals where networks are well developed and
linked across the Arc through, for example, academic networks. The potential
for emerging and disruptive technologies is where the Arc can help to create a
critical mass which is not there at either end. The Arc could play a significant
role in bringing networks together. The policy implication is that scope for
collaboration between clusters should be explored, but such activity might
need to be underpinned by public agencies.
Acknowledgements
This review draws on interviews with:
Professor Peter J. Dobson, Academic Director, Oxford University Begbroke
Science Park.
Sam Foster, PR Department, CCLRC.
Rebecca Lingwood, Director, Continuing Professional Development, Oxford
University.
Joe Barclay, Regional Liaison Director University of Oxford, Business
Liaison Unit.
Ed Metcalfe, Head, Science Technology, Entrepreneurship and Management
Learning and Skills, SEEDA.
Gillian Pearson, CE, The Oxford Trust.
Fiona Reid, Director, Oxford Science Enterprise Centre and Entrepreneurship
Said, University of Oxford, Said Business School.
Dave Waller, Manager of the Strategic Policy and Economic Development
Unit, Oxfordshire County Council.
Notes
1. Using a more restricted definition, OEO (2003) identifies 73 firms.
2. www.oion.co.uk.
3. www.venturefest.com.
4. Economic partnerships are statutory requirements.
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Chapter 4
The Biotechnology Cluster of Vienna, Austria
by
Franz Tdtling and Michaela Trippl,
Institute for Regional Development and Environment,
Vienna University of Economics and Business Administration
This chapter examines the development of the Vienna biotechnology
cluster and the role of policy actions in its evolution. This
contribution challenges the prevailing view that the development of
high-technology industries is always a spontaneous phenomenon. It
will be argued that in the case of regions such as Vienna which have
weak potentials for high-technology industries, the development of
biotechnology clusters can be promoted with proactive policy efforts
to create a favourable environment for high-technology activities.
Furthermore, it will be shown that, besides the leading role played
by large firms, well co-ordinated policy approaches between
the national and regional level are important for developing a
biotechnology industry in a region.
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Introduction
Biotechnology is acknowledged to be a key future growth area of the
emerging knowledge-based economy (Cooke, 2002; OECD, 2004), exhibiting a
strong potential for dynamism and innovativeness. Being a technology of generic
character, biotechnology has strong cross-sectoral effects, brought about by its
application to many sectors including medicine, agriculture, food, etc.
Biotechnology can be regarded as a strongly science-based industry, drawing on
an analytical knowledge-base (Asheim and Gertler, 2005). This implies that it is
dominated by the use of abstract and codified knowledge (Fuchs and
Krauss, 2003). At the same time, complementary tacit knowledge is crucial for
innovation processes in biotechnology (Zucker et al., 1998; Oliver, 2004),
underpinning the industrys strong spatial concentration tendencies in local
clusters (Feldman, 2000; Lawton-Smith and Bagchi-Sen, 2004).
The key aim of this chapter is to get a better understanding of the role of
policy actions for the development of biotechnology clusters. Based on an in-
depth study of the Vienna biotechnology agglomeration we challenge the
prevailing view in the literature that the birth and early evolution of such
clusters are always spontaneous phenomena. It will be shown that in the case
of regions with weak potentials for high-technology industries the rise of
biotechnology clusters is more dependent on proactive policy efforts to create
a favourable environment for high-technology activities (see also Trippl and
Tdtling, 2007). Furthermore, it will be argued that well co-ordinated policy
approaches between the national and regional level are important for
developing a biotechnology industry in a particular region.
This chapter has been written on the basis of available policy documents,
literature and data as well as of research results collected in the context of two
projects on knowledge-based industries in Austria.
1
In the Vienna biotechnology
cluster, 43 qualitative interviews have been taken with representatives from
firms, knowledge providers and the regional policy and supporting systems,
using semi-standardised questionnaires. Furthermore, seven representatives
from the national policy and supporting system have been interviewed.
The remainder of this chapter is organised as follows: the chapter begins
with an overview on the structuring of the biotechnology cluster and its
evolution during the past ten years. This is followed by an analysis of the
drivers of the competitiveness of the cluster and an examination of the role of
SMEs for its development. The impact of the cluster on SME development and
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regional innovation is discussed. Then, key barriers curtailing the dynamism
of the cluster and challenging its future evolution and dynamism are
identified. This is followed by an analysis of the role of public policy at
national and regional levels in promoting the Vienna biotechnology cluster. In
the remaining sections recent policy innovations and future policy challenges
for the cluster are highlighted. Finally, some conclusions are made by
elaborating on general lessons that could be drawn from the experiences of
the Vienna biotechnology cluster.
Nature and evolution of the cluster
Viennas biotechnology cluster shares some features with the Austrian
biotech sector: It is specialised on medical (red) biotechnology (Baier et al., 2000;
Oosterwijk et al., 2003). Like Austria it has to be regarded as a latecomer in the
commercialisation of biotechnology. Although there is a good scientific base the
commercial exploitation of research results is underdeveloped (Reiss et al., 2003).
This is mainly due to weak incentives and conditions for commercialising
research predominating in the past and a lack of tradition and culture for high-
risk taking.
The Austrian biotechnology sector is characterised by a strong tendency toward
spatial concentration. More than 65 per cent of all biotech related firms are located in
the Vienna region. Smaller clusters of biotechnological activities can be found in
the provinces of Styria, Lower Austria and Tyrol (see Table 4.1). In the following
section the main structuring of the Vienna biotech cluster will be analysed.
Nature of the cluster
The Vienna region is Austrias most important centre for medical
biotechnology, hosting more than 70 biotechnology related firms. The
Table 4.1. Biotechnology related companies in Austrian provinces
Region Number of firms Proportion of firms (%)
Vienna
1
74 66
Styria 10 9
Lower Austria 10 9
Tyrol 9 8
Upper Austria 4 4
Salzburg 4 4
Vorarlberg 1 1
Burgenland 0 0
Carinthia 0 0
Total 112 100
1. Data for Vienna for the year 2006, data for other provinces for the year 2005.
Source: BIT and LISA (2004), complemented by our own inquiry.
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structure of the cluster is characterised by the existence of six subsidiaries of
foreign big pharmaceutical companies, 33 small dedicated biotechnology
companies, and several specialised and other suppliers (see Table 4.2):
G There is a long time presence of subsidiaries of multinational companies in
the region which had been attracted in the post-war period by the strong
research base and the easy recruitment of highly skilled scientists. The key
players are Boehringer Ingelheim, Novartis, and Baxter. Boehringer Ingelheim
Austria includes the companys centre for cancer research, one of its two
centres of competence in biopharmaceutical production and its basic
research subsidiary IMP. Novartis is the nations largest pharmaceutical
producer with a total of more than 3 000 workers. Baxter Austria is the
companys most important research operation outside the US. Another key
actor is Eli Lilly which mainly carries out clinical research projects in the area.
Furthermore, there are about 60 sales and distribution firms located in
Vienna. Among these are subsidiaries of Amgen, Aventis, Behring and
Schering that all see the region as a sales and distribution centre for the
Eastern European market.
G The Vienna biotech cluster, furthermore, hosts 33 dedicated biotech
companies. Examples include Intercell (vaccines against oncological and
infectious diseases), Igeneon (oncology) which has recently been acquired by
the US biopharmaceutical company Aphton, Austrianova (oncology, gene
therapy) or Green Hills Biotechnology (oncology). About 40 per cent of the
dedicated biotech firms were founded within the past five years and many of
them employ less than ten workers. There are about 20 specialised suppliers
operating in the area. This segment mainly consists of producers of research
agents (Bender Med Systems, Nano-S), bioinformatics providers (Emergentec,
Insilico) and firms performing clinical trials services. Finally, there are ten
suppliers offering laboratory products and equipment.
G Venture capital firms and business angels are a missing ingredient in Austria
(Senker, 2004) and in the cluster. There are few such firms, e.g. Horizonte
Venture Management (Technopolis, 2006). The main reason for this is the
bank-dominated landscape with a preference for traditional credit
instruments and a widespread adversity to risk taking. Consequently,
successful companies like Intercell or Igeneon had to attract external
financing from international venture capitalists and funds.
An analysis of the fields of activity of the cluster firms (Table 4.2) reveals
that the multinational companies and the biotech firms are mainly
specialised in the segment therapeutics. Moreover, there is a strong presence
of producers of laboratory products, diagnostics and consulting in the Vienna
biotechnology cluster. Bioinformatics, in contrast, only plays a minor role.
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Exact data on the number of employees are not available. A recent study
(Technopolis, 2006) estimates that the three Big Pharma companies
Boehringer Ingelheim, Novartis and Baxter employ about 3 700 people and
that the biotech firms employ about 1 500 workers.
2
Evolution of the cluster
In the past decade, Vienna biotechnology has shown a relatively good
growth performance. The evolution of the local industry in this period was
mainly characterised by new firm creations and the emergence of more
differentiated and specialised cluster structures. In the last ten years, the
number of cluster firms has been growing (Figure 4.1). In particular since the
end of the 1990s there has been an intensification of new firm formation in
the Vienna biotechnology cluster. Since 2003, however, the rate of new
business establishment has slowed down. A more detailed analysis shows
that the dynamic development of the cluster since the mid 1990s mainly rests
on the setting up of new ventures in the fields of therapeutics and specialised
supply (Figure 4.2). Consequently, in the past few years a specialisation on
more high-value activities has taken place.
The specialisation process of the cluster structures is also reflected in the
research landscape. Recently, a strengthening and further differentiation of
the clusters research and education capabilities set in, brought about by the
establishment of new specialised institutes (see next section).
Table 4.2. Classification of biotechnology related firms in Vienna
Classification
Number
of firms
% Fields of activity
Number
of firms
%
Big pharma 6 8
Biotech firms 33 45
Therapeutics 26 35
Diagnostics 9 12
Clinical research 4 5
Specialised suppliers 22 30
Clinical research 3 4
Bioinformatics 3 4
Consulting 7 10
Research agents 4 5
Other activities 5 7
Other suppliers 10 14
Laboratory products 10 14
Other firms 3 4 Other activities 3 4
TOTAL 74 100 74 100
Sales and distribution Firms 61
Source: Tdtling et al. (2006, p. 17).
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Success factors
In international comparison the Vienna biotechnology cluster is rather
young, small and in a catching-up position. Its emergence, however, dates
back a couple of decades. As already mentioned above, Austria and especially
its capital Vienna have an excellent tradition in medicine and biomedicine
(Oosterwijk et al., 2003). Already in the 1950s a first successful spin-off
Figure 4.1. New firm formation in the Vienna biotechnology cluster
Source: Tdtling et al. (2006, p. 19).
Figure 4.2. New firm formation in different fields of activity
Source: Tdtling et al. (2006, p. 20).
10
9
8
7
6
5
4
3
2
1
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Number of foundations
16
14
12
10
8
6
4
2
0
1991-1995 1996-2000 2001-2006 Before 1991
Time
Number of foundations
Therapeutics Diagnostics Specialised supply
Other Laboratory products
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company from the Vienna University, Immuno, entered the scene.
3
We might
identify three subsequent stages of development:
G The period between the 1950s and the 1980s was shaped by the early arrival
of Big Pharma. The strong research base and the easy recruitment of highly
skilled scientists had attracted international pharmaceutical companies.
Boehringer Ingelheim settled down in 1949, Novartis arrived in 1969 and
Baxter opened its doors in 1983.
G In the next phase from the 1980s to the midst 1990s there were first steps to
enter into the new technology. In this period, two academic spin-offs
(Technoclone and Nanosearch Membrane) have been founded. They
remained, however, individual cases as commercialisation of biotechnology
was still in its infancy in the Vienna region. More important for the clusters
development was the foundation of the Institute of Molecular Pathology (IMP)
in 1988 with substantial support from both national and regional policy
makers. The IMP is an internationally renowned basic biomedical research
centre sponsored by Boehringer Ingelheim. IMPs arrival gave rise to the
foundation of the new campus Vienna Biocenter housing space for the IMP
itself and several university institutes with a focus on molecular biology.
4
G Since the end of the 1990s, in a third stage of development the cluster seems
to gain momentum. What can be observed is a rise in commercialisation of
biotechnological research by an intensification of academic spin-off
activities. Moreover, policy makers and public institutions are also enforcing
their efforts to promote the new industry.
The excellent scientific system and research capabilities have not only
been crucial for the emergence of the Vienna biotechnology cluster, but are
also the key driver of its contemporary competitiveness. The subsidiaries of
the Big Pharma companies Boehringer Ingelheim, Novartis and Baxter all have
established research centres in the region of Vienna (see above). The clusters
attractiveness for these business research activities is to be seen in its
excellent scientific base comprising five universities, several hospitals and a
range of other public and private research institutes. There is an estimate of
about 3 800 researchers in the field of Life Sciences employed in the region
(Technopolis, 2006). The annual growth rate of publications amounts to 11 per
cent (see Table 4.3). More than 50 per cent of all scientific publications and
64 per cent of all patent applications could be found in the fields of
therapeutics and diagnostics (Technopolis, 2006), revealing a strong
specialisation in key future areas of biotechnology.
We may identify five different research nuclei in the cluster, underpinning
its dynamic development and competitiveness (Figure 4.3).
The most central research core is the Campus Vienna Biocenter set up
in 1992. It currently employs over 1 000 scientists from 40 nations. It
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encompasses the Vienna Biocenter (VBC) containing eight departments of the
University of Vienna and the Medical University as well as the Institute of
Molecular Pathology (IMP), which is Boehringer Ingelheims cancer research
centre. Furthermore, in 2004 the Institute of Molecular Biotechnology (IMBA) of
the Austrian Academy of Sciences opened at the site focusing on functional
genetics. Several young companies such as Intercell, MedSystems Diagnostics
and VBC Genomics are also located here. Research focuses of the campus range
from cancer therapy to the development of vaccines and state-of-the-art chip
technology.
Another geographical and disciplinary nucleus has formed around the
University of Natural Resources and Applied Life Sciences. The different
departments are focusing on bioprocess research, applied genetics,
microbiology and chemistry and today hold about 100 researchers, students
and technicians. The campus houses companies like Polymun and Nano-S.
The General Hospital has since long been Viennas central medical
research establishment and employs more than 9 000 people. It serves as a
home for 27 different university clinics and eight university institutes. It is a
leading research hospital in areas like dermatology and cancer therapy and an
important centre for clinical studies. Other hospitals in Vienna are also home
to centres for clinical studies. Kaiser-Franz-Josef Hospital is a centre of
excellence for clinical studies in oncology. Also, the Childrens Cancer
Research Institute is a multi-disciplinary competence centre dedicated to
applying research and technology to improving recovery rates for cancers in
children and juveniles. Recently, a new Research Centre for Molecular
Medicine (CeMM) has been established. A new incubator building was finished
in 2004 housing space for firms like Biomay and Fibrex Medical.
The Novartis Research Institute (NRI) was founded in 1970 and is situated
in south of Vienna. Antibiotic Research Institute Vienna (ABRI) is another
Table 4.3. Publications in biotechnology per year
Number of publications
1995 202
1996 287
1997 259
1998 301
1999 321
2000 334
2001 390
2002 425
2003 427
Source: Technopolis (2006).
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privately owned basic research institute owned by Biochemie Kundl (part of
Sandoz R&D) located at the NRI since 2001. The NRI also houses space for
start-ups like Igeneon and Technoclone.
The University of Veterinary Medicine forms another subcentre in the
region. Research activities include the creation of transgenic animal models
for use in the production of medicines and organs for transplantation. The
firm Austrianova is also located at this site.
Besides research and provision of scientific knowledge, the universities
located in the region of Vienna also fulfil an important function as a source of
highly skilled labour. Moreover, the General Hospital Vienna is also home of
the Vienna School of Clinical Research (VSCR) giving postgraduate training to
physicians. In the recent past, the education and training system has become
further differentiated. In order to meet the growing demand for skilled
biotechnology technicians, several advanced technical colleges were founded.
However, their alumni is not yet of considerable size.
Role of SMEs
Newly founded and small businesses play an outstanding role for the
development of the biotechnology cluster in the region of Vienna. They could be
regarded as crucial innovation actors, pointing to a general feature of the
biotech industry per se, i.e. the prevalence of what has been termed an
entrepreneurial regime in the literature (Audretsch, 1995; Fuchs and
Krauss, 2003). The assertion of new small and medium-sized enterprises (SMEs)
as important innovation agents holds true for spin-off firms in the Vienna
biotechnology cluster in particular, which play a key role in transforming new
knowledge into commercial products. An examination of the spin-off process in
the Vienna biotechnology cluster reveals two main characteristics (see also
Table 4.4):
G The overwhelming majority of all spin-out companies originated from
academic institutions (university institutes, hospitals, other research
organisations) operating in the region. Consequently, academic spin-offs
are an important mechanism for the localised transfer of knowledge and
expertise from the science system to the private sector. Moreover, most of
them have established co-operative relationships with their incubators
(see following subheading), thus, contributing to a strengthening and
further enhancement of university-industry intersections in the cluster.
G The potential contribution of new firm spin-offs to the development of the
Vienna biotechnology cluster, however, has not unfolded to a considerable
extent so far. Looking at the age of companies and firm size we find that
most spin-off companies are not older than five years and many of them are
very small employing fewer than ten workers. Unsurprisingly, apart from a
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few exceptions, they did not spin-off further second generation enterprises
so far. Many spin-off firms are still in the phase of product development.
Just a few companies have gone public so far and have reached a stage
where they are earning revenues.
Impact of the cluster on entrepreneurship and employment
The Vienna biotechnology cluster exerts a rather strong influence on the
evolution of small enterprises and their innovation capabilities. In the
following section we will concentrate on two specific issues that deserve
further attention. These include the local labour market and the significance
of the cluster as space for innovation related linkages. Finally, broader effects
of the cluster for regional development will be discussed.
Labour market
The clusters specialised labour market has been found to be crucial for
the competitive edge of the large majority of the Vienna biotechnology firms.
A closer look reveals that it is mainly the local universities with their
continuous supply of highly skilled labour which play an outstanding role as
provider of qualified personnel. The inter-firm mobility of talent at the local
scale, however, is rather weak. Key for the further development of the clusters
labour market is the inflow of highly qualified scientists and managers from
abroad. The influx of the latter group is of particular significance, as there is a
lack of locally available managerial know-how, pointing to a central weakness
of the cluster. Academic founders have only limited managerial competencies
Table 4.4. Characterisation of spin-offs in the sample
Number of firms %
Age of firm Not older than 5 years 9 60
Not older than 10 years 4 27
Older than 10 years 2 13
Total 15 100
Location of parent organisation Local 14 93
National 0 0
International 1 7
Total 15 100
Type of parent organisation Academic institution 11 73
Firm 4 27
Total 15 100
Firm size (number of employees) 1-10 8 53
11-50 5 33
More than 50 2 13
Total 15 100
Source: Tdtling et al. (2006, p. 21).
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and top managers with high-level experience about the markets for
pharmaceuticals and biotechnology are short in supply within the cluster.
A key space for knowledge interactions
The cluster represents an important space for knowledge interactions
(see Table 4.5), enhancing the innovation capabilities of the firms present in
the region (see also Tdtling and Trippl, 2007).
More than 40 per cent of all knowledge links could be found within the
Vienna region, pointing to a strong localised circulation of competences and
expertise. An analysis of the nature of local knowledge links reveals
particularly strong connections between research organisations and
companies. These interactions are a multi-faceted phenomenon, reflecting
the significance of different modes of knowledge transfer. Formal university-
industry partnerships play a key role in this context. Some of them have been
established with financial support of the national and regional governments,
including the competence centre BioMolecular Therapeutics (BMT), the
Austrian Center for Biopharmaceutical Technology (ACBT) and two Christian
Doppler Laboratories (CD Labs). Furthermore, there is evidence of informal
knowledge flows from academia to the local industry, underlining the
importance of local spillovers and milieu effects.
Focusing specifically on the linkages between spin-off firms and their
academic parent organisations uncovers rather vivid flows of knowledge,
channelled by R&D co-operations, the joint use of infrastructure, the exchange
of staff, the buying of patents and also the use of academic networks by the
spin-off companies. Compared to contacts between academia and firms, local
inter-firm relations are of minor significance in the Vienna biotechnology
cluster. Some formal innovation networks between companies could be found
and there is also some evidence of trust-based informal links between firms
present in the region. It is, however, not only local knowledge interactions that
Table 4.5. Types of knowledge links and their geography in the Vienna
biotechnology cluster
Total % Networks Spillovers and milieu Market links Other relations
With
firms
With
RO
Total
With
firms
With
RO
Total
With
firms
With
RO
Total
With
firms
With
RO
Total
Local 72 42 14 25 39 6 10 16 2 8 10 1 6 7
National 7 4 2 5 7 0 0 0 0 0 0 0 0 0
Global 93 54 17 17 34 15 9 24 13 7 20 7 8 15
172 100 80 40 30 22
Note: RO ... research organisation (universities, clinics).
Source: based on Tdtling et al. (2006, p. 24).
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matter. Tapping-in to global pools of expertise is highly relevant for the
Vienna biotechnology cluster. More than 50 per cent of all knowledge
interactions could be found at the international scale, pointing to the crucial
significance of the inflow of knowledge from distant sources and partners.
Formal networks represent a core mechanism for getting access to
international sources of expertise. Additionally, the Vienna biotech firms
benefit from global spillovers and milieu effects and have also established
market linkages with international partners.
Broader effects for regional development
The Vienna biotechnology cluster is too young and too small in size to be
an engine for regional employment growth. Nevertheless, it plays a key role
for driving regional economic change. It could be argued that the emergence
of the cluster has effects on regional development that go beyond the
biotechnology sector. More specifically, the biotechnology cluster acts as a role
model for the development of high-technology and knowledge-intensive
industries in the region. The evolution of the Vienna biotechnology sector has
been accompanied by a far reaching institutional change and the creation of a
more favourable environment for seeding high-technology industries. New
policy programmes, the creation of incubators, institutions fostering science-
industry linkages, specialised structures for promoting high-technology firm
formation, etc. all made their appearance in the past few years, leading to an
upgrading of the regional innovation system. Breeding the biotechnology
cluster a lot of experiences and expertise in nurturing high-technology
clusters have been accumulated in academia, the business system and the
policy community. Other knowledge-based sectors present in the region such
as ICT or creative industries seem also to benefit from these qualitative
improvements induced by the emergence of biotechnology in Vienna.
Barriers to cluster development
In the past years the Vienna biotechnology cluster has shown a positive
development and entered into a catching-up process. In spite of that there are
several barriers curtailing its dynamism and challenging its future evolution.
The most important hindrances include the following factors:
G In international comparison the Vienna biotechnology cluster is rather
small and in an early stage of its development. The cluster has not yet
reached a sufficient critical mass and is still vulnerable.
G A crucial weakness of the cluster is the lack of home-grown Big Pharma
companies which are regarded to constitute a key ingredient of successful
biotechnology centres. There are also only few leading international
companies present in the region, that go beyond simple sales and distribution
activities.
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G The cluster has failed so far to become a magnet for attracting other foreign
companies. Since the 1980s no pharmaceutical companies carrying out
research and production functions have located in the region. Furthermore,
there is a rather low level of moving in of foreign biotechnology firms.
G A key barrier to the development of the Vienna biotechnology cluster is the
bottleneck of venture capital at the local scale (see also Section 2). This does
not only mean that financing opportunities are limited. It also points to a
lack of functions which are usually fulfilled by venture capital firms in
addition to the mere provision of capital. These include above all the
selection of promising technologies and ventures, provision of support for
the formation of management teams, the monitoring of the development of
the young firms, establishment of contacts, etc.
G In the Vienna biotechnology cluster there is a lack of commercialisation
expertise and managerial competences. Experienced managers with
competences in the fields of pharmaceuticals and biotechnology are rare, and
scientists are still not keen and used to commercialise their R&D results.
Although a gradual rise of academic entrepreneurship is clearly observable in
the cluster in the past years (see also Section 4), several factors continue to
exert a hampering influence. Due to a weak entrepreneurial culture and a
lack of experience, publication is still preferred to patent registration and new
firm formation. These factors hamper scientists to take ideas or expertise
they have developed in a knowledge institution and establish a new local
business to further develop and exploit them.
G Finally, there is a low level of labour mobility among local firms. This leads
us to note that there are still limits regarding localised knowledge
circulation and collective learning processes, undermining the clusters
innovation capabilities.
Role of policy
There are three policy levels influencing the development of the biotech
cluster in Vienna (see Figure 4.4). At the supranational level, EU programmes
support and drive biotech related research through calls and funding.
Moreover, legislation regarding biotechnology safe research as well as
regulations of medical drug approval and clinical trials play governing roles.
The Austrian policy and supporting system consists of national and regional
institutions. Its strength lies in horizontal policies, which are not specifically
designed to promote biotech but nevertheless have an impact on the
development of its knowledge-base through calls, grants and funding of
research institutions (Reiss et al., 2003).
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National programmes
The national policy level plays an outstanding role in fostering the Vienna
biotechnology cluster. There are a variety of different policy measures and
instruments in this respect. Many of them, however, are not biotechnology
specific but aim at encouraging technological development per se. There are
just two programmes which specifically focus on the promotion of
biotechnology. These include the Austrian Genome Research Programme
(GEN-AU) and the initiative Life Science Austria (LISA). GEN-AU has been
initiated in 2001 by the Ministry of Education, Science and Culture with a
budget of EUR 10.5 million per year until 2010. It has the mission to strengthen
genome research in Austria by funding interdisciplinary co-operative research
projects undertaken by academic and/or industrial research teams.
Consequently, its main focus is on facilitating dynamic and formal knowledge
flows (networks) between regional and/or national partners. So far
EUR 27.8 million have been allocated to 23 projects run by 91 partner
organisations.
Figure 4.4. Overview of the different policy systems governing Vienna
biotechnology
Source: Tdtling et al. (2006, p. 30).
Vienna Science and
Technology Fund (WWTF)
Calls
LISA
Vienna
Region Kplus
Knet,
Kind
INiTS
Joint initiatives
between national
and regional levels
Regional level
Start-up
New
products
Vienna Business Agency
(WWFF)
MA 27 City government of Vienna
Vienna Spots
of Excellence
Center for Innovation
and Technology (ZIT)
Calls
F&E Public
Parliament
Supranational level: EU legislation and grants, public-private grants
National level
Government
Austrian Council for Research
and Technology Development
Christian
Doppler
Society
Brain
Power
Start Up
GEN-AU
Austrian
Academy
of Sciences
Ludwig Boltzmann
Society
Universities
Ministry for Transport,
Innovation and Technology
Ministry for Education,
Science and Culture
Ministry for Economic
Affairs and Labour
Ministry of Finance
AplusB
Europ.,
internat.
Programmes
Austrian Research
Promotion Agency
(FFF, TIG, BIT)
Austrian
Science
Fund (FWF)
Life Science
Austria (LISA)
Austria
Wirtschaftsservice (AWS)
Tecma
Tec:net
I2B
Uni:invent Uni:venture
Seedfinancing
High Tech
Double Equity
Innovation support
Technology networks
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The majority of the funded institutions are located in Vienna, but a
number of research teams in other Austrian provinces are receiving financial
support, too. LISA is a programme of the Austrian Business Agency (AWS)
launched in 1999 on behalf of two federal ministries. It mainly attempts to
support the foundation of new biotech companies by providing financial
support, advice and education. LISA consists of several components:
G LISA Pre-seed provides funds up to EUR 100 000 for a period of three years to
potential entrepreneurs to establish the proof of principle.
G Moreover, LISA offers information and advice to firm founders with respect to
technological and commercial issues.
G Best of Biotech (BOB) is a business plan competition promoting the
entrepreneurial activity of researchers in bioscience related fields. Its goal is to
increase the number of young life science firms by stimulating researchers to
translate their ideas into business plans. BOB provides participants with advice
and coaching with respect to prepare a business plan.
G Furthermore, lectures and training sessions are organised to enhance the
commercial and managerial competencies of scientists.
G Finally, through the Life Science Circles meetings it also stimulates the
informal exchange of ideas and experiences among actors. This is of particular
importance in terms of enhancing the innovative milieu in the Vienna region.
Since 1999 about 35 new firm foundations in the field of life sciences have
been supported, a large majority of which have settled down in the Vienna
region.
At the national level we can find many other initiatives which were not
specifically designed to promote biotechnology, they nevertheless contribute
to its development. There are, for instance, several programmes set up by the
AWS that aim to advance high-technology entrepreneurship. These include
the initiatives Seed financing (loans), High-Tech Double Equity (acceptance
of guarantees) and uni:venture, which provides venture capital to academic
spin-offs. Companies can receive up to EUR 1.1 million for a period of ten
years. uni:venture contains a total funding volume of EUR 7.2 million.
Furthermore, there are the programmes Tecma and uni:invent by
which the AWS supports universities, researchers and companies to patent
and license their research results. This is done by providing expertise, training
as well as funding support for patenting. Moreover it is engaged in searching
for license deals.
Brain Power Austria is a programme carried out by the Austrian Research
Promotion Agency (FFG) on behalf of the Ministry for Transport, Innovation
and Technology. It has the goal to attract talented Austrian scientists from
abroad. Scientists who are currently living or working in foreign countries are
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assisted in looking for career opportunities in Austria. The main activities in
this respect include amongst others the provision of financial support,
relocation services and coaching but also a promotion of Austrian job
opportunities. Furthermore, the FFG actively promotes the participation of
Austrian firms and research organisations in international co-operative RTD
projects. More specifically it provides information and assistance relating to
the Framework Programme of the EU, EUREKA and INTAS. Key activities
include creating awareness, motivating, informing, and assisting on European
Union and international research and technology activities, informing and
coaching for preparing projects, as well as informing on issues of eligibility,
evaluation criteria and procedural administrative and legal aspects. It also
assists in searching for partners in collaborative EU and EUREKA projects. In
addition, as the coordinator of the Innovation Relay Centre Austria, the FFG is
actively involved in the transfer of new technologies and in other measures
supporting innovation.
The Christian Doppler Society, founded in 1989, promotes the collaboration
between universities, research institutions and industrial partners for a length up
to seven years. Specifically, it has the aim of bridging basic and applied research
in a certain area. Although it sets out for a more general programme, it is
specifically targeting research in red biotechnology in the Vienna region.
Regional programmes
For a long time Viennas economic policy was about providing subsidies to
individual companies and attracting multinational firms. It was only by the end
of the 1990s that a stronger focus on innovation and technology could be
observed. Today, Viennas strategic policy priorities are on life sciences, ICT,
creative industries and the automotive sector. This reorientation of policy has
been accompanied by a process of institution building. In 2000, the Centre for
Innovation and Technology (ZIT) was established. Among its main activities are
the funding of R&D activities of high-tech companies. One year later the Vienna
Science and Technology Fund (WWTF) was set up to provide financial support
to research organisations. Both funding agencies have special programmes for
biotechnology organised as contests of proposals, thus following a picking the
winner approach. Looking specifically at the promoting of knowledge links in
biotechnology, the ZIT turns out to be the key institution. On the one hand, it
provides infrastructure (laboratories, offices) to newly founded firms, thus
advancing knowledge spillovers in form of spin-offs. On the other hand it has
recently launched a comprehensive funding programme (ZIT 05 plus) that
consists of several initiatives that are designed to be key drivers of knowledge
links at the regional level:
G The initiative Vienna Spots of Excellence aims at promoting longer term
university-industry partnerships.
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G The new programme Innovationssupport provides funding for initiating
and preparing partnerships with educational institutes as well as for co-
operations in the fields of production, marketing and distribution.
G In order to support the formation and existence of networks in specific
technological fields or centres, the programme Technologienetzwerke
was launched. It provides funding for all networking activities that
contribute to the success of the innovation network (e.g. information
services, events, publications).
Joint programmes between regional and national policy levels
In the recent past, regional policy makers have managed to build up
strong links with national actors, thus improving vertical coordination
between the regional and national policy levels. The Life Science Austria
Vienna Region (LISA VR) represents a good example in this respect, as it is a
joint initiative between the ZIT and the AWS. LISA VR provides cluster
management services to the local biotech industry and acts as a one stop
shop. By bundling the support available at federal and local levels, it offers a
variety of services including consulting, pre-seed financing, education and
mediation of incubation space. It also stimulates knowledge transfer as well
as spin-offs. Furthermore it also promotes non-local formal and informal
knowledge flows by participating in international fairs and promoting the
cluster in relevant international media sources.
The national AplusB Programme has the task to support regions to
establish centres that focus on the stimulation of new firm formation. In the
case of Vienna this led to the creation of INITS. This centre has been founded
in 2003 by the ZIT and two universities with the aim to promote technology-
oriented spin-offs from the academic sector in Vienna by offering incubation
space, counselling and assistance, specifically to academia, in the process of
turning a good idea into a viable business.
The programmes Kplus and Knet/Kind focus on the formation of co-
operative research centres between university institutes and companies. Both
programmes were initiated in the second half of the 1990s by national
ministries. Funding for the centres, however, comes not only from the
national policy level but also from the regional one (in the case of Vienna, ZIT).
The programmes demand a minimum of five partners and have a limit of
seven years. Kplus has the general strategic goal of enhancing knowledge
(basic research) within a specific discipline whereas Knet/Kind has the goal of
innovating within the specific discipline (applied research).
Finally, the programme Start Up, which is co-operatively run by the FFG
and ZIT aims at supporting the formation of research intensive enterprises by
funding R&D projects of young companies.
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Overall, Vienna has been quite successful so far in achieving a certain
cluster dynamics with relatively little money involved. The activities that have
contributed to this success are:
G Vienna has used and combined quite effectively existing national (GENAU,
LISA, BOB, AWS seed financing, uni:venture) and new regional
instruments (ZIT, WWTF Biotech Calls) for the development of its biotech
Table 4.6. Regional and national policy programmes for promoting
high-technology activities in general and biotechnology in particular (selection)
Programme Funding Agency Aims: Promotion of ... Instruments
NATIONAL PROGRAMMES:
GEN-AU BMBWK
*
Co-operation Financial support
LISA: AWS
Life Science Circles Local interactions Meetings, conferences
LISA Pre-seed New firm formation Financial support
Best of Biotech New firm formation Business plan competition
Tecma AWS Patents, licences Advice, evaluation
uni:invent AWS Patents, licenses Qualification of scouts
Seed financing AWS New firm formation Loans
Uni-venture AWS, BAWAG New firm formation Venture capital
i2b FFG Networks between business
angels and firms
Brokering
Brain Power Austria FFG Inflow of highly qualified labour Information, advice, financial support
Christian Doppler Labs BMWA** University-industry partnerships Financial support
European and international
programmes
FFG R&D co-operations Information, advice, brokering
REGIONAL PROGRAMMES:
Infrastructure ZIT New firm formation Provision of infrastructure
ZIT 05 plus: ZIT
Vienna Spot of Excellence University-industry linkages Financial support
Innovation Support Co-operations Financial support
Technology Networks Networks Financial support
Life Science Calls R&D, innovation in single firms Financial support
New Products R&D, innovation in single firms Financial support
F&E Public Awareness raising Financial support
Life Science Calls WWTF Scientific interactions Financial support
JOINT PROGRAMMES BETWEEN REGIONAL AND NATIONAL LEVELS:
LISA VR AWS + ZIT New firm formation, attraction of
Foreign companies, etc.
Information, advice, location
marketing
INITS (AplusB) FFG + ZIT New firm formation Information, advice
Kplus, Knet/Kind FFG + ZIT University-industry linkages Financial support
Start Up FFG + ZIT New firm formation Financial support
* BMBWK Ministry of Education, Science and Culture.
** BMWA Ministry of Economic Affairs and Labour.
Source: Own compilation.
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cluster. It seems that there was a relatively good coordination between the
national and regional level institutions.
G It has leveraged and stimulated private R&D investment through relatively
small amounts of public money. Useful instruments have been horizontal
programmes such as Kplus, Knet/Kind and CD laboratories.
G It has strengthened the clusters scientific capabilities by setting up new
specialised research organisations such as IMP and IMBA. Again, these were
mainly nationally funded. IMP in particular was a public-private partnership
between the Vienna University and Bhringer Ingelheim. A further positive
effect has been the spatial concentration of science organisations and firms
in specific centres of biomedical research such as the Vienna Biotech Center
(VBC). This has allowed for a better knowledge exchange and knowledge
spillovers.
G Vienna has used competitions (calls by the WWTF, ZIT, BOB) as a selection
tool to support the most promising projects.
Vienna seems to have been less successful in the following fields so far,
pointing to weaknesses and shortcomings in the overall set-up of policy
actions and public efforts:
G The provision of finance for more capital intensive phases of product
development, testing and firm growth remains limited. There is still a
marked lack of policy measures dealing with these critical issues, which are
central for the further development of the Vienna biotechnology cluster.
G Policy programmes geared towards attracting international risk finance and
venture capital have not proved to be successful so far.
G The region of Vienna is not yet an internationally well known biotechnology
location. This becomes clearly apparent if we consider the clusters poor
performance regarding the attraction of international big pharmaceutical
companies and biotechnology firms. The outcome of policy measures which
have been introduced to improve the location marketing is still modest.
G The Vienna biotechnology cluster is still very vulnerable and in a critical
phase of development. The overall ensemble of policy actions has not been
very effective to secure a stable growth of the cluster.
Policy adaptations over time
In the recent past biotechnology has attracted a lot of interest from policy
makers in Austria and in the Vienna region. Compared to many other nations
and regions, however, the support for this highly science-based sector comes
late. As already outlined above, it was only by the end of the 1990s that
systematic efforts to promote the biotechnology sector can be observed. This
might be explained with the fact that Austria has no tradition and little
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experience in promoting high-tech industries. Whilst having a good research
base, its national and regional innovation systems have not been ripe for
breeding a strong and dynamic biotech sector as early and fast as it could be
observed elsewhere. In the last years, however, an intensive stimulation of
biotechnology has set in, brought about by a deep institutional change. There
exists now a broad range of activities to foster start-ups and knowledge links
in this sector, indicating that policy actors act like spiders in the web. This
reorientation has been accompanied by a process of institution building:
besides the Centre for Innovation and Technology (ZIT) and the Vienna
Science and Technology Fund (WWTF) another new centre is INITS, which was
founded in 2003. Its aim is to support technology-oriented spin-offs from the
academic sector by offering counselling and assistance to scientists in the
process of turning a good idea into a viable business. There are a variety of
other organisations such as technology liaison offices at the universities.
These supporting organisations are connected by informal relations. Regional
policy makers have managed to build up strong links with national actors.
Recently a joint initiative called Life Science Austria Vienna Region has
started to provide cluster management services to the local biotech industry.
Overall, the RIS has undergone a far reaching transformation. Key aspects in
this context include the establishment of new research and educational
organisations, which have strengthened the regions biotechnological
capabilities, plus the creation of supporting agencies specialised in promoting
high-technology industries and new policy routines.
G Looking at the types of instruments in use it is clearly visible that more
traditional approaches such as funding and provision of infrastructure are
still very important. They are, however, combined now with newer forms of
intervention such as brokering, advice and cluster management services,
resulting in a relatively balanced mix of older and newer modes of
governance.
G It is obvious that national policy makers play a key role in the multi level
governance system. Nevertheless, the regional policy level must not be
neglected, as it plays a complementary role. Furthermore, there is a good
vertical coordination in the policy and supporting system that manifests
itself in the establishment of the initiative LISA Vienna region. Interestingly,
a comparison of the policy actions undertaken at the regional and national
level shows some unexpected results: national policy makers adopt a
broader strategy, focusing on the promotion of many different types of
knowledge (collaboration, informal contacts), new firm formation and
international labour inflow etc. Furthermore, they fulfil various tasks such
as financing and funding, brokering as well as provision of information and
advice. At the regional policy level, in contrast, the focus is narrower, as new
firm formation and formal networks are the key targets with funding as the
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main instrument. This is somewhat astonishing as in most cases it is
particularly the regional level where softer forms of intervention can be
observed. We might conclude that policy makers in the Vienna region are
addressing important barriers for the development of the biotechnology
industry but are so far not using the full spectrum of available instruments.
Future policy challenges
Drawing on the insights presented in the last sections, we can identify
the following future policy challenges for the Vienna biotechnology cluster
(see Figure 4.5).
Competence building and provision of venture capital
To stimulate the dynamic growth of the Vienna biotechnology cluster,
continual investment in research, qualification and managerial competences as
well as the provision of new forms of financing seem to be of vital importance:
G Further strengthening of research capabilities: excellent research institutes
are regarded to be a key element of dynamic biotechnology clusters. In the
past years, the knowledge infrastructure of the Vienna cluster has been
Figure 4.5. Policy challenges for the further development
of the Vienna biotechnology cluster
Source: Tdtling et al. (2006, p. 59).
Global
knowledge
flows
Centrope
Institutional
networking
Attraction and embedding
of foreign companies
Venture
capital
Commer-
cialisation
Qualification Research
Multi actor
governance
Networking
Location management
Competence building and provision of venture capital
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substantially strengthened by the establishment of new research institutes.
This strategy of accumulation of scientific excellence should be continued
and intensified, as scientific knowledge is the central base for innovation in
biotechnology.
G Qualification: The universities located in the Vienna region are a key source
of highly qualified labour. In the recent past, the foundation of several
technical colleges and the establishment of the Vienna school of clinical
research have led to a further development of the educational system. The
clusters future evolution is critically dependent on further investment into
human capital. The focus of activities should not be restricted to personnel
with scientific capabilities but should also include labour with know-how
regarding the commercialisation of scientific discoveries (see also below).
G Strengthening of managerial competencies: The Vienna biotechnology
cluster suffers from a lack of experienced managers with competencies in
the fields of pharmaceutical and biotechnology. To deal with this central
problem, two policy approaches seem to be adequate. First, there is a need
for measures to attract international top managers to the cluster. Second, to
enhance the local commercialisation capabilities, special courses and
seminars should be offered.
G Venture capital: Venture capital is the key missing ingredient in the cluster.
To establish a public-private venture capital fund or to attract international
venture capital firms should, therefore, be key objectives of the policy
system.
Attraction and embedding of foreign companies
In the past years the Vienna biotechnology cluster has failed to attract
foreign Big Pharma and young biotech firms, carrying out research and
production in Vienna. This calls for new strategies in the field of location
marketing and management, enabling to attract new companies to the region
and to retain them in the cluster.
Networking
The relational dimension of the cluster also deserves further policy
efforts. The most important measures in this context include:
G Intensification of institutional networking: The networking between regional
and national policy organisations and supporting institutions (multi level
governance) are well developed. In other areas of institutional networking,
however, deficits prevail, demanding institutional innovations: First, the
relationships between regional policy and supporting agencies are strongly
informal in nature and do not go beyond an exchange of information and
experiences. So far, no joint strategy for promoting the cluster has been
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developed. Second, the relations between the Austrian biotech centres
Vienna, Styria and Tyrol are characterised by a strong competition. More co-
operation between the provinces is called for to enable an exchange of
information and experiences and joint policy learning processes. Third, a
stronger networking between Vienna and other European biotech centres
also seems to be a sound strategy.
G Multi actor governance: The process of strategy development for the cluster
should also include representatives from the business sector and the science
system. This accentuates the exigency of new institutional arrangements.
G Stimulating global knowledge interactions: The overall set of policy
measures is characterised by a strong focus on promoting regional and
national knowledge interactions. In comparison, only few policy initiatives
are designed to explicitly stimulate international knowledge flows. To avoid
the danger of lock-ins, more emphasis should be put on connecting the
cluster with global knowledge sources.
G Intensification of networking within the Centrope region: The potential for
a stronger networking between Vienna cluster actors and foreign
companies and research facilities located in the Centrope region (formed by
Vienna and neighbouring regions in the Czech Republic, Slovakia and
Hungary) should be examined. If there is a critical mass of actors and
sufficient synergies, measures geared towards the development of a cross-
border biotechnology cluster should be adopted.
Lessons for other clusters
The emerging Vienna biotechnology cluster represents an interesting
example for seeding high-technology industries in regional settings which have
no tradition and little competencies for developing such sectors. The Vienna case
challenges the prevailing view that the rise and evolution of such clusters are
always spontaneous phenomena. The experiences of the Vienna biotechnology
sector clearly demonstrate that there is a strong role of the state in facilitating the
birth, early development and growth of high-technology clusters.
To promote biotechnology clusters in regions with weak potentials for
high-technology industries, however, is a very complex and demanding
process, requiring a large variety of policy measures and their sound
combination. The most important activities in this context include to :
G Strengthen the clusters scientific capabilities.
G Create new training and education centres.
G Ensure the availability of finance in general and risk capital in particular.
G Create organisations supporting entrepreneurship and the commercialisation
of scientific knowledge such as academic spin-off centres.
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G Attract innovative firms and talent.
G Promote knowledge interactions both within the cluster and beyond.
G Adapt framework conditions, etc.
Strengthening the clusters scientific capabilities requires the support of
existing research organisations as well as the setting up of new ones. Public-
private partnerships such as IMP seem to be a useful instrument to stimulate
research activities with an application perspective. Collaborative R&D
organisations such as Kplus centres and the support of collaborative R&D
projects through programmes such as GENAU help to enhance the knowledge
flows within the cluster and beyond.
New training and education centres are needed to provide the required
qualifications and skills in a growing biotechnology cluster. Schools for both
high level research and development staff (internationally well known
universities) and for technicians and laboratory skills (technical colleges) are of
vital importance.
Financial support should include different phases of projects and firm
development: from R&D support and early phases of seed finance to the more
mature and capital intensive phases of testing and product development. Both
local and international venture capital firms are essential elements for such a
financial support.
The Vienna and Austrian cases show quite clearly that programmes and
policies can get more momentum and synergy if networks of public and
private actors and supporting organisations can be formed. Such networks
allow for the effective coordination of EU, national and regional programmes
and instruments in order to stimulate cluster development.
Arguably, the development of a biotechnology cluster has to rely on a good
endogenous R&D and innovation potential, i.e. local research organisations,
firms, spin-offs and start-ups. But it cannot rely on local knowledge and
entrepreneurial potential alone. The attraction of international innovative firms
and of talent seems to be highly important for bringing in external competences
and knowledge. Viennas programmes and activities have not been so
successful in this respect so far.
The spatial concentration of specialised research organisations and firms
in specific biotechnology centres helps to stimulate local, often informal,
knowledge flows and spillovers. Knowledge exchange should not be confined
within the cluster and the region, however. In particular in the case of young
and emerging clusters, such as in the Vienna case, the insertion into national
and international networks and collaborations is of utmost importance. The
support of collaborative projects at national and EU levels (framework
programmes) is a useful tool in setting up such networks.
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More often than not a renewal of the whole regional innovation system
(RIS) and considerable institutional innovations are needed to effectively foster
the emergence of biotechnology clusters in regional settings with weak
conditions for high-technology sectors. RIS changes should become manifest in
a broad set of areas, ranging from the field of hard infrastructure to socio-
cultural factors such as new routines, conventions and attitudes. In terms of
government modes it has to be emphasised that traditional instruments such
as funding and the provision of infrastructure should be combined with modern
forms of intervention, covering activities such as brokering, advice or cluster
management services. Given the high level of complexity of such a
transformation and the large number of policy agents involved, the success will
critically depend on the interplay of different fields of policy at various spatial
levels. There is a strong need of both horizontal and vertical policy coordination.
The establishment of LISA Vienna region constitutes a good practical example
for how to create an effective institutional arrangement for co-operation
between regional and national policy makers. Vienna, however, has failed so far
to provide the full range of elements necessary for a strong biotechnology
cluster to emerge. Policies geared towards the development of a vivid venture
capital scene have not been very effective in the past. Furthermore, a strong
orientation of policy makers on promoting regional and national knowledge
interactions could be observed and little has been done so far to encourage
international knowledge flows which are of utmost importance for young
biotechnology clusters in non high-technology regions. Finally, location policies
have not been very successful to attract new innovative firms to the cluster. The
key general lesson which could be drawn from the experiences of the Vienna
biotechnology cluster is that considerable learning efforts and well co-ordinated
actions in the policy community are necessary to facilitate the rise of high-
technology clusters.
Notes
1. Collective Learning in Knowledge Economies: Milieu or Market? (2002-04) funded
by the Austrian Science Fund; Cluster development and policy in the Vienna
biotechnology sector (2005-06) funded by the Jubilee Fund of the City of Vienna
for the Vienna University of Economics and Business Administration.
2. These numbers, however, refer to the larger Vienna region including the city of
Vienna and the provinces Lower Austria and Burgenland and comprise not just
red biotechnology but also other segments of the industry. Most of the
employment, however, is concentrated in the Vienna region.
3. Starting with blood products, the company has profitably launched novel
vaccines, went to the stock market in Zurich and then became acquired by Baxter
in 1996.
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4. Funding for this project from the city of Vienna and the federal government was
about EUR 10.6 million and can be seen as an initial step towards strengthening
biotech research.
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ISBN 978-92-64-04442-5
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Chapter 5
The Life Science Cluster of Medicon Valley,
Scandinavia
by
Professor Bjrn T. Asheim, Lars Coenen, Jerker Moodysson,
CIRCLE (Centre for Innovation Research and Competence
in the Learning Economy), Lund University, Sweden
This chapter provides a good example of a successful cross-regional
cluster, and presents the challenges and benefits of such a structure.
The engagement and the equal collaboration of the regions involved
have been crucial in developing the cluster. Also, this chapter
highlights the relevance of the triple helix model (industry,
university, government) to stimulating innovation in a cluster, and
the appropriateness of promoting a regional innovation system to
dynamise the region. Moreover, this case shows and assesses the
contribution of national and regional agencies for innovation in
supporting the development of the cluster and encouraging
collaboration.
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Nature and evolution of the cluster
The life science cluster Medicon Valley are located in the bi-national
resund region which spans greater Copenhagen in Denmark and Scania in
southern Sweden, including the university town Lund and Swedens third
biggest city, Malm (see Figure 5.1). In 2000, these two national parts were
physically connected by the establishment of the 18 kilometre long resund
fixed link (bridge and tunnel).
In a recent study of the globalisation of biotechnology and life science
industry, Phil Cooke (2005) identifies a hierarchy of globally networked
bioregions in terms of size and level of innovation activities. A handful of US
megacenters like Boston, New York and San Francisco are in the top of this
chart, followed by European centres like Munich, Cambridge, Stockholm-
Uppsala and Oxford. Medicon Valley can be considered a potential
megacenter if seen as one bi-national cluster (see Table 5.1).
Figure 5.1. Map of Medicon Valley
Source: Department of Social and Economic Geography at Lund University, Sweden.
Lund
Malm
Copenhagen
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Since the 1970s the life science sector has been led and dominated
by l arge pharmaceuti cal compani es (Bi g Pharma) , produci ng and
commercialising relatively few biotechnology based drugs. In the past decade
the number of possible applications of biotechnology has multiplied, and Big
Pharma is therefore increasingly dependent on new knowledge created by
dedicated biotechnology firms (DBFs). In turn, DBFs are heavily dependent on
the financial resources of Big Pharma (and venture capital) since the large up-
front costs and long development times of new drug candidates require
substantial cash-flow. Another important factor is the need for close relations
with universities, research hospitals and other research organisations for
intellectual property and knowledge inputs as well as the recruitment of
skilled research personnel.
This transformation of biotech, with increased variety and complexity
as major characteristics, has created new requirements for successful
bioregions. The regions need to host a critical mass of strong actors
representing not only the pharmaceutical industry but the whole value chain,
provide suitable opportunities for basic research as well as commercialisation,
and link up with knowledge sources in other bioregions across the globe. This
report describes the development of the Medicon Valley biotech cluster over
the last decade, both assessing how the cluster has adapted to these new
requirements and identifying future challenges that the cluster faces.
Table 5.1. Comparative global performance indicators for bioregions
Location DBFs
1
Life Scientists VC (million USD)
Big Pharma Funding
(million USD/annum)
Boston 141 4 980 601.5 800
2
San Francisco 152 3 090 1 063.5 400
2
New York 127 4 790 1 730.0 151.6
3
Munich 120 8 000 400.0 54
4
Medicon Valley 104 5 950 80.0 300
5
San Diego 94 1 430 432.8 320
2
Stockholm-Uppsala 87 2 998 90.0 250
5
Washington DC 83 6 670 49.5 360
3
Toronto 73 1 149 120.0 n.a.
Montreal 72 822 60.0 n.a.
Zurich 70 1 236 57.0 n.a.
Cambridge 54 2 650 250.0 105
3
Oxford 46 3 250 120.0 70
3
1. Dedicated biotechnology firms (DBFs).
2. Data 1996-2001.
3. Data 2000.
4. Data 2001.
5. Data 2002.
Source: Cooke, 2005.
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Evolution of the cluster
The life science sector in Scania has long traditions through the presence
of Astra (subsequently merged with Zeneca to become AstraZeneca) and
Pharmacia (subsequently merged with Upjohn to become Pharmacia
and Upjohn, and eventually acquired by Pfizer). Both these companies
historically located significant research activities in Lund; AstraZeneca are
still present with a major research unit employing 1 200 persons. After the
Pharmacia merger the research on cancer and immunology was spun out to
form the Lund based Active Biotech AB in 1997, while the rest of the
companys activities disappeared from the region (the company still has a unit
in Uppsala). Active Biotech AB is today, with 90 employees, the second largest
and second oldest DBF in the region, after BioInvent International AB which
today employs a staff of around 100 persons. BioInvent was created in 1995 by
researchers at Lund University that wanted to commercialise their research.
Besides these two medium-sized firms, the Swedish part of the region hosts
about 35 other DBFs of varying size and age. A large share of the companies
are university spin-offs (e.g. Camurus, Cellavision, Genovis and Wieslab) while
others are local sub-units of global biotech companies (e.g. Acadia with
headquarter in San Diego and research unit in Malm).
Also the Danish part of the region has been a strong milieu for life science
for a long time. Large anchor firms like Novo Nordisk and Lundbeck are still
among the major players in the world, but local spin-off companies like
Novozymes (research part of Novo Nordisk), local but world leading diagnostics
companies like Dako (founded in Copenhagen 1966, today with sub-units in
Colorado and California), and strongly associated pairs of complementary
companies like Neurosearch (a biopharmaceuticals spin-off from Novo Nordisk)
and NsGene (cell technology research spin-off from Neurosearch), have
contributed to a renewal of the bioregion meeting new requirements on the
global market. In total the Danish part of the region hosts about 100 DBFs.
The term Medicon Valley was first introduced in 1994 by the resund
Comittee. This is a forum of public agencies from the Danish and Swedish part
of the region with the mission to stimulate bi-national regional development.
Feeding into the existing industrial specialisation of the region, it decided to
focus specifically on the emerging field of biotechnology. Besides the historical
l ocal i sati on of Bi g Pharma ( i n fact, 60 per cent of Scandi navi an
pharmaceutical companies are located in Medicon Valley) an enormous
potential for life sciences within the region was identified as it hosts
11 universities and 26 hospitals. However, the potential of becoming a global
bioregion or megacenter are conditioned by the ability to achieve integration
between the two national counterparts. This was hence the main ambition
with the creation of Medicon Valley.
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The efforts to promote actual integration, making it justified to speak
about Medicon Valley as one cross-border cluster (as opposed to two separate
national clusters with less dignity on the global bio-market), took off for real
with the formation of Medicon Valley Academy (MVA) in 1995 (in 1997, the
organisation changed its name to Medicon Valley Alliance). MVA was initiated by
Lund and Copenhagen Universities as an EU Interreg II project. The rationale
behind the initiative was to stimulate the formation of a cross-border life
science region by promoting local integration and cross-fertilisation between
industry and academia. The MVA initiative has contributed to the development
of the cluster, not the least because of its power of attraction on venture capital,
research funds and human capital. This, together with the general
transformation of biotechnology towards increased variety and complexity, has
led to a shift in dominance from large pharmaceutical companies taking care of
the entire value chain to small DBFs mainly focusing on basic research and early
stages of development. Several of the large pharmaceutical companies have
gradually downsized their production activities in the region, yet increasing
their research facilities. At the same time there has been an impressive growth
in number of DBFs. 65 new DBFs have been established since 1998, and if
medical technology companies and R&D based service firms are included, the
number of start-ups exceeds 100. Only in the period 2004-05, 29 new small R&D
based firms were established in the region (MVA, 2006). Today there are
approximately 130 DBFs of which approximately 70 per cent are located on the
Danish side of Medicon Valley. Also university research, representing the
earliest stages of the biotech value chain, has increased in the region.
This shift in dominance from single actors spanning the entire value
chain to actors mainly representing the early stages has also affected the
integration of the cluster and the needs for linking up with other bioregions.
Actors in life science are today by necessity part of global research
communities rather than regional ones. Due to their extreme specialisation
they are forced to seek collaboration among the few potential partners
available in the global arena, often only to be found in global biotech
megacenters (Moodysson, 2007; Moodysson and Jonsson, 2007). For reasons
like this, the initial enthusiasm over MVA as an initiative with the aim to
strengthen local and cross-border integration has partly diminished. Several
of the commercial actors gradually realised that network promoting
activities without substantial output in terms of new formal collaboration
were hard to justify, and academic actors felt a growing alienation against
what they felt was more the business of the local business than something
for them to engage in. As a result of this, MVA has adapted its strategy to meet
the requirements of its members of a more dedicated focus on promoting
global visibility of world class research. In its present vision and mission
statement the focus has thus been broadened, not only to promote regional
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integration but also to initiate synergetic collaboration with other bioregions
and organisations and, together with others, promote and brand Medicon
Valley, as well as the entire resund region, locally and globally (MVA, 2006).
Recent examples of this strive to link up with other global biotech
megacenters is the establishment of MVA embassies in places like Kobe,
Vancouver, Seoul and Beijing, as well as the UK-Medicon Valley Challenge
Program initiated in 2005. The aim is to develop world class biotechnology
research and products by promoting research exchange and interaction between
organisations in the Medicon Valley cluster and the biotech clusters in
Cambridge, London, Liverpool-Manchester and Edinburgh. Examples of concrete
activities within the programme are seminars, exchange of experiences between
MVA board members and their UK counterparts, a joint EU 6th Framework
Program including MVA and the Scottish Enterprise, and a UK-Medicon Valley
Post-Doc Programme (MVA, 2006). The long-term vision of this collaboration is,
according to the MVA chairman Per Belfrage to create an air bridge from Medicon
Valley to London and Cambridge, giving young scientists from Copenhagen and
Lund the opportunity to experience these hot spots without having to move
families and without having to worry about exorbitant housing prices.
Major actors of the cluster
Firms are key actors in the cluster as main drivers for innovation and
industrial dynamics. According to MVA there are in total 130 biotech
companies, 70 pharmaceutical companies and 130 medtech companies
located in the region. Not all of these firms are engaged in or affected by
research and development related to life science. When omitting those that
only have sales or service departments in the region, or for other reasons
cannot be classified as knowledge-intensive firms, the number is reduced to
approximately 150 companies. Of these 150 firms, 130 can be classified as
DBFs while the remaining 20 are either large pharmaceuticals or medtech
firms. The ten largest firms in Medicon Valley are shown in Table 5.2.
Table 5.2. Ten largest firms in Medicon Valley
Company Empl. Loc.
1 Novo Nordisk A/S 9 000 DK
2 H. Lundbeck A/S 2 100 DK
3 Coloplast A/S 1990 DK
4 Novozymes A/S 1 669 DK
5 Leo Pharmaceutical 1 270 DK
6 Unomedical A/S 1 200 DK
7 AstraZeneca R/D Lund 957 SE
8 Pfizer Health AB 850 SE
9 Radiometer A/S 847 DK
10 Chr. Hansen A/S 725 DK
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Universities are other important actors in Medicon Valley. Their role can
be described according to three tasks. Firstly, they provide training and
education to create and sustain a skilled pool of local researchers and
scientists. Secondly, universities conduct publicly funded scientific research
which can serve as knowledge input for DBFs. Finally, there is the so-called
third task of universities which refers to direct collaboration between
university and industry in the form of contract research as well as
commercialising scientific research through licenses and start-ups of
knowledge-intensive firms by university researchers. The most important
universities in the region have been the universities of Lund and Copenhagen
due to their long history of scientific excellence in medicine, biology and
chemistry. Below we provide a general overview of the most important
universities (and their departments) related to Medicon Valley.
Lund University was founded in 1666 and hosts eight faculties and
a multitude of research centres and specialised institutes. It is today the
largest unit for research and higher education in Sweden covering more or less
all academic disciplines. The university has approximately 40 000 students
and 6 000 employees. More than 3 000 post-graduates work at Lund
University. Most doctorates are awarded in the medical sciences, followed
closely by technology and the natural sciences. In 2006 the University
had 581 professors. About half of all research at the University is externally
financed. The most important research units for the Medicon Valley
cluster are:
G Faculty of Medicine In 2005 the faculty had 2 500 undergraduate students,
950 postgraduate students with 130 dissertations presented annually, while
staff consisted of 139 professors and 450 other teachers and researchers.
The faculty collaborates intensively with the university hospitals in Lund
and Malm to create an environment with productive communication
between basic research and the healthcare system. One of the results of this
collaboration is the Biomedical Centre (BMC).
G Biomedical Centre This research centre, including the Stem Cell Centre and
the Strategic Centre for Clinical Cancer Research (Create Health), is the
largest single unit for teaching and research at Lund University, comprising
half of the research at the Faculty of Medicine. It has a total of 700 scientists,
including 50 affiliated professors, post-docs, Ph.D. students and
technicians/administrative staffs working across 90 research groups. Major
strongholds are today found in the fields of diabetes, immunology,
neuroscience and cancer (BCG, 2002).
G Faculty of Science In 2005 the faculty had 1 700 undergraduate and
440 postgraduate students with 85 doctoral dissertations presented. Staff
consisted of 100 professors and 270 other teachers and researchers.
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G Lund Institute of Technology The Lund Institute of Technology, forming the
engineering faculty of Lund University, was founded in 1961. It is Swedens
third largest institute of technology.
The formation of the Biomedical Centre (BMC) in 2001, initiated by Lund
University to promote life science in the region, was underpinned by similar
rationale as the MVA. The BMC assembles all the universitys life science research
under one roof, located adjacent to Lund University Hospital. This was primarily
an attempt to rationalise the university research and strengthen the brand name
of Lund University as centre of excellence in biomedical research. Hence, this
initiative was mainly geared at strengthening the knowledge generation
subsystem of the regional innovation system, while at the same time it
contributed to promoting the integration of knowledge generation and early
stages of knowledge exploitation. The concentration of related activities in one
unit is completely in line with Lund Universitys building centres of excellence as
part of a general development towards a more entrepreneurial university. The
flagship of BMC is without doubt the Lund Strategic Research Center for Stem
Cell Biology and Cell Therapy (Stem Cell Centre), established in 2003. Since the
autumn 2006 BMC also houses a Bioincubator unit, which draws both on the
concept of IDEON Incubation, and the services of Teknopol at (the immediately
adjacent) IDEON, which was the first science park to be established in the Nordic
countries in 1985, and on (the university-hospital hybrid) BMC as a source of new
businesses, to extend the scope of commercialisation undertaken by the
university to the active formation of biotech firms.
The University of Copenhagen was founded in 1479 and is the first
university of Denmark. Spread over eight faculties from January 2007 after the
integration of Danish University of Pharmaceutical Science and Royal
Veterinary and Agricultural University as two new faculties, there are
approximately 37 000 students and more than 7 000 employees. Except for
management and engineering faculties, the University of Copenhagen qualifies
as a broad, comprehensive university. Most relevant for Medicon Valley are the
Faculties of Health Sciences (Medicine) and Science (as well as parts of the two
new faculties). The University of Copenhagen has selected four Research
Priority Areas for the years 2003 to 2007. The Research Priority Areas are set up
to promote cross-faculty co-operation, encourage interdisciplinary research and
education and strengthen the communication of research results and dialogue
with society. One of these research areas is Biocampus targeting core
biotechnological research.
G Faculty of Health Sciences In 2005 the faculty had about 4 000 students of
which 500 on the postgraduate level with 160 dissertations presented. Staff
consisted of approximately 60 professors and 400 other teachers and
researchers. Active collaboration takes place between the faculty and BRIC
the Biotech Research and Innovation Centre and the University Hospitals.
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G BRIC The Danish Ministry of Science, Technology and Innovation
established BRIC to form an international centre of excellence in molecular
biology. BRIC is a consortium of leading Danish research institutions and is
associated with the University of Copenhagen. One of its missions is to
establish collaborations between public research institutions and industry,
and to promote exchange of ideas within the Danish biotech research
community. To achieve this, BRIC is managed by an independent board of
directors representing academic institutions as well as industry. BRIC has
now 5 research groups and a total of 40 employees.
G Faculty of Science In 2005 the faculty had approximately 6 000 students of
which 317 on the post-graduate level with 85 dissertations presented. Staff
consisted of approximately 90 professors and 560 other teachers and
researchers.
In addition to firms and universities, research institutes play an important
role for basic research and discovery. The most important institutes in Medicon
Valley are:
Carlsberg Research Center is an independent private research centre and part
of Carlsberg A/S. Traditional competences are in malting, brewing and
fermentation but it has become increasingly active in biotechnological
production processes and biomedical sciences to target early drug
discovery.
The Hagedorn Research Institute is an independent basic research component
within Novo Nordisk A/S in the field of diabetes and its complications. The
three main areas of research activity are 1) stem cell research and
developmental biology of the pancreas 2) immunology and genetics of
Type 1 Diabetes and 3) structural and systems biology of ligands and
receptors of the insulin peptide family. The institute also fulfils an
educational mission by training a substantial number of masters and PhD
students in collaboration with Danish universities, the Ministry of Science,
Technology and Innovation (VTU) and the Medicon Valley Academy (MVA).
AstraZenecas respiratory research unit in Lund, with approximately
800 research employees, accounts for roughly two-thirds of inflammation
and immunology R&D in Medicon Valley.
IHE, the Swedish Institute for Health Economics is a non-profit research
institute that has been operating in Lund since 1979 and is a wholly-
owned subsidiary of Apoteket AB (the National Corporation of Swedish
Pharmacies).
SIK the Swedish Institute for Food and Biotechnology has a regional office in
Lund. SIK conducts strategic and applied research within food and
biotechnology in accordance with an industry-governed, goal-oriented
research programme and through joint industrial projects.
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Statens Serum Institut is a public enterprise operating as a market-oriented
production and service enterprise under the Danish Ministry of the
Interior and Health. The institute aims to ensure advanced control of
infectious diseases, including new infections and biological threats and
conducts state-of-the-art research in this field.
The Danish Cancer Society has two dedicated institutes both located in
Copenhagen: the Institute of Cancer Biology and the Institute of Cancer
Epidemiology.
Health care institutions supply expert assistance and research in
different aspects of drug and device development. The most important
hospitals are Copenhagen Hospital Corporation, Copenhagen County
Hospital, Lund University Hospital and Malm University Hospital.
Success factors
Venture capital
Financial backing is essential for the development and growth of a
biotech cluster. Venture capital is needed to facilitate entrepreneurship and
commercialisation of scientific research. MVA identifies 41 relevant investors
for venture capital with offices inside (61 per cent) as well as outside the
region (39 per cent). This is due to the fact that the Danish investors are
primarily located in Copenhagen while the Swedish investors are
predominantly concentrated in Stockholm. 50 per cent of all investors can be
found in Copenhagen against only 10 per cent in Malm or Lund.
Figure 5.2 provides an overview of the distribution of financial
specialisation in terms of investment stages. It shows that most emphasis lies
on seed and start-up capital while pre-seed and restructuring receive relatively
less attention. However, the tendency for 2005 was that more investments were
made in mature companies and less in start-ups, which makes somewhat of a
trend shift compared to the figures presented below (MVA, 2006b).
The national venture funds are especially important players for Medicon
Valley even though they can only invest in their own country. In Denmark
these are Vaekstfonden and Dansk Innovationsinvestering, both located in
Copenhagen. During 2003 Vaekstfonden made investments in biotech
companies for EUR 10 million and Dansk Innovationsinvestring for
EUR 7 million. The Swedish Industrifonden, which is located in Stockholm but
with a regional office in Malm, has invested EUR 4 million in Medicon Valley.
Another important category is the venture capitalists affiliated with the
incubator centres in Medicon Valley: DTU Innovation (connected to the Danish
Technical University), CAT-Symbion Innovation and Teknologisk Innovation in
Denmark and TeknoSeed in Lund. Finally, private seed investors include Novo,
the biotech fund for Novo Nordisk and LEO incubator.
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Network organisations
Network organisations have proven to be key venues and meeting
grounds that provide the social platforms to exploit the opportunities of co-
location in a cluster.
Medicon Valley Alliance (MVA): The largest and probably most important
network organisation for Medicon Valley with 280 members (counted
January 2008). If any, MVA should be considered as the cluster organisation. As
a member financed network organisation it works to promote the necessary
interaction for network formation and knowledge transfer between academia,
public health, and biotech related industries. Important tools in this are
seminars and conferences, as well as initiating and coordinating projects
associated with educational, scientific and business activities in the region.
MVA also sets up and manages comprehensive knowledge databases and has
initiated a range of working groups to analyze regional competences within
specific subject areas. In addition, MVA contributes to the regional and
international marketing of Medicon Valley by visiting and presenting the
cluster at conferences and other events and, as mention above, by establishing
embassies in other important bioregions globally.
MVA is a non-profit association predominantly based on revenues
generated through membership fees. In 2005, these constituted 75 per cent
(Denmark, 52 per cent and Sweden 23 per cent) of the total annual turnover of
approximately EUR 1.2 million. Forty-seven per cent of the total membership
fee is paid by private funds while 53 per cent is funded publicly. The remaining
Figure 5.2. Distribution venture capital Medicon Valley
Note: One investment firm can cover multiple investment stages.
Source: MVA (2001).
35
30
25
20
15
10
5
0
Investment stage
Number of investment firms
Initial growth
Preseed
Expansion
Seed
Restructuring
Start-up
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25 per cent were accounted for by a contribution from the resund Science
Region (13 per cent), PhD administration (5 per cent), sponsorships and funds
(4 per cent), a VINNOVA project (2 per cent), and seminar fees (1 per cent). In
total, MVA has a staff of 10 people responsible for daily operations and a board
of directors of 15 representing the different members of the organisation. The
board of directors is elected at the annual general assembly.
resund University: This is a consortium of fourteen universities and
university colleges in the resund region with the objective to increases
quality and efficiency among the participating institutions by opening up all
courses, libraries and other facilities to all students, teachers and researchers.
Of the fourteen universities, four are Swedish and ten are Danish. The number
of Danish and Swedish students, however, is about the same. resund
University is, similar to MVA, part of resund Science Region.
resund Science Region: SR joins the forces of six regional research and
innovation platforms, resund University and a number of regional co-
ordination bodies in an attempt to strengthen regional co-operation and
integration between universities, industry and the public sector. The six SR
platforms are: Medicon Valley Academy; resund IT Academy; resund Food
Network; resund Environment Academy; resund Logistics; resund Design.
The activities of the platforms include establishing partnerships,
benchmarking, enhancing research and education, innovation, technology
transfer and marketing.
Role of SMEs
Enterprises
In a number of enterprises, the Danish side of the region has historically
dominated. Eighty-six per cent of the regions medico/health enterprises were
located here in 1995. However, since the mid 1990s the number of enterprises
has increased significantly in Sweden, while Denmark has experienced a
slight decrease. In 2004 resund hosted about 4 300 private enterprises within
the field of medico/health. 255 of those are in the fields of biotechnology and
pharmaceuticals, and 235 are specialised in research and development.
Seventy-five per cent of all enterprises are located on the Swedish side
(Figure 5.3), but within the subgroup of biotechnology and pharmaceuticals,
59 per cent are still located in the Danish part (Vinnova, 2005b).
Analyzing this change in relation to the employment figures and
developments on the national levels, it becomes evident that this does not
reflect a major catch-up of Scania. What happened on an aggregated level is
that while the Swedish firms have become more in numbers but smaller in
size, the Danish have become fewer and larger. Similar changes seem to have
taken place on a national level. Still, similar to 1995, resund hosts about
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15 per cent of all Swedens medico/health firms, compared to 60 per cent of all
Denmarks. We can trace no change over time in these relative figures. In the
biotechnology sub-sector about 25 per cent of all Swedish firms are located in
resund (Vinnova, 2001). In Denmark, 75 per cent of all biotech firms are
located in and around Copenhagen (Bloch, 2004).
Looking at the size structure of the life science enterprises in the region
(both public and private sector, but excluding hospitals) we can see that small
units dominate (Figure 5.4). About 90 per cent of all local units have less than
50 employees. This is not surprising however, since the calculations are based
on numbers of local units, not on their share of total employment. What is
Figure 5.3. Number of medico/health enterprises (private sector)
Source: restat (2007).
Figure 5.4. Size structure of local medico/health units in resund
Source: restat, 2007.
25 000
20 000
15 000
10 000
5 000
0
1995 2004
MV DK + SE MV DK MV SE DK (excl. MV) SE (excl. MV)
1 2-4 5-9 10-19 20-49 50-99 100+
Sweden Denmark
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striking though, and in accordance with the observed changes in number of
firms, is that the size structure differs significantly between the Swedish and
Danish part of resund. In Sweden, we find a large share of single-employee
firms (publicly employed researchers or doctors with their own company on
the side), while these are hardly represented in the Danish part. The three
larger groups in the classification (local units with 20-49, 50-99 and more than
100 employees) are on the other hand far more represented in the Danish part
of resund (Figure 5.4). When it comes to the really large pharmaceutical
firms, only AstraZeneca are located in the Swedish part, compared to more
than ten companies in Denmark (Vinnova, 2005a).
Impact of the cluster on entrepreneurship and employment
Economic performance
The total life science turnover in the region has increased from EUR 6.9 to
EUR 14.8 billion between 1995 and 2004 (Figure 5.5), while value-added has
increased from EUR 3.3 to about EUR 4.9 billion in the same period (Figure 5.6).
This may appear as strong growth, but corresponding figures for Sweden and
Denmark as a whole, EUR 16.4-39.3 respective EUR 9.3-14 billion, put these
figures in perspective. As in the case with employment, the Danish part of
resund represents a large share of Denmarks total turnover (83 per cent) and
value-added (88 per cent), while the Swedish part is far below the country as a
whole. In 2004, the Scanian share of Swedish medico/health turnover and
value-added was about 8 per cent. However, it is not primarily in purely
economic terms that Medicon Valley stands out as a success story.
Figure 5.5. Turnover medico/health
Source: restat, 2007.
30 000
25 000
20 000
15 000
10 000
5 000
0
1995 2004
MV DK + SE MV DK MV SE DK (excl. MV) SE (excl. MV)
Turn over M
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Employment
In a region with about 3.5 million inhabitants, the resource area medico/
health employs 50 000 people (full time equivalent numbers). This means a
growth of nearly 15 000 employees since the mid 1990s (Figure 5.7). Thirty-
five thousand are employed in companies active in research and development
in the field of biotechnology, medtech and pharmaceuticals (Vinnova, 2005a).
Figure 5.6. Value-added medico/health
Source: restat, 2007.
Figure 5.7. Medico/health employment (private sector)
Source: restat, 2007.
12 000
10 000
8 000
6 000
4 000
2 000
0
1995 2004
MV DK + SE MV DK MV SE DK (excl. MV) SE (excl. MV)
Value added M
120 000
100 000
80 000
60 000
40 000
20 000
0
1995 2004
MV DK + SE MV DK MV SE DK (excl. MV) SE (excl. MV)
Number of employees
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More than 5 000 private sector employees are trained researchers
(i.e. hold a PhD degree). If public sector academic research is included, the
number of researchers adds up to more than 10 000. In addition, the region
hosts about 2 000 PhD students within the field of life science, affiliated to the
regions universities and university hospitals (MVA, 2004).
The employment distribution in resund is quite unequal from a
national perspective. Eighty-three per cent of all medico/health (as measured
in full time employment) takes place on the Danish side. Also in relation to
overall national figures, the Danish part stands out as particularly strong.
In 2004 more than 80 per cent of all Denmarks medico/health activity was
concentrated in the Greater Copenhagen region. In Sweden, Scania accounts
for about 13 per cent of all Swedens medico/health, which makes it the third
most important life science node in the Swedish economy after Stockholm-
Uppsala and Gothenburg (Vinnova, 2005b). This skewed distribution can partly
be explained by a Swedish specialisation in the small-firm dominated and
labour extensive sub-sector of dedicated biotechnology whereas the Danish
side has more large pharmaceutical companies.
Entrepreneurship
Even though the local presence of Big Pharma in Medicon Valley should not
be underestimated as a key and, to a certain extent, unique cluster asset, it is
equally important that an innovative milieu is maintained for the start-up and
growth of smaller DBFs. Globalisation processes in life sciences remind us of the
volatile business behavior of large pharmaceuticals (e.g. Novartis decision to
relocate its headquarters from Basel to Boston). Current presence of Big Pharma
is by no means guaranteed on the long run. Nonetheless, the local node global
network pattern implies that there are certain factors that favor concentration
of biotechnology. These factors are more strongly connected to local academia
and the presence of DBFs than to Big Pharma. It seems however that the region
does not entirely reap the commercial potential of this. The strategic report by
Medicon Valley Academy (2004) on this issue, called From Bioscience to New
Jobs confirms the regions strength in scientific research but remains critical
about the commercialisation performance of Medicon Valley universities
compared to other prominent bioregions such as Stockholm-Uppsala, Oxford
and Stanford. While the number of invention disclosures leading to a patent is
high for academic researchers in Medicon Valley, the rate by which these
disclosures result in license agreements or firm start-ups is disappointingly low.
On a general level, the number of start-up companies is however high. This
outcome can be explained by a specific weakness in the academic system to
commercialise research.
In Medicon Valley the majority of the science parks and their incubator
facilities are independent, market-driven organisations and, as such, only
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loosely connected to the universities and their technology transfer offices.
Only IDEON in Lund and SCION-DTU in Copenhagen serve as an exception.
This may hamper a close relationship between academic researchers and the
various incubators. This in turn can partly explain why start-ups in Medicon
Valley seem to originate more often from employees having previously worked
in a corporate setting than from university researchers.
There is also a major difference between the ways commercialisation of
academic research is regulated in the two countries. In 2000, Denmark
adopted a law similar to the well-known Bayh-Dole act in the US which allows
public research institutions (universities and hospitals) to claim the
commercial rights of inventions from their employees. Disclosure is therefore
a legal requirement in the Danish system. Following the adoption of this law,
each university and university hospital established a local technology transfer
office. Commercial revenues of an invention (in the form of license agreement
with an existing company or by transferring these rights to a new firm start-
up) are divided along the rule: one third goes to the inventor, one third goes to
the tech transfer office, and one third to the university.
According to the Swedish teachers exception, university researchers are
allowed to keep the intellectual property rights of invention and, in contrast to
Denmark, there is no obligation to disclose new findings to the university. There
is thus more individual freedom for an inventor to choose which route to use for
commercialisation. Technology transfer offices at university are therefore less
widespread than in Denmark. However, somewhat similar organisations to the
universitys own technology transfer offices exist in the form of the Technology
Bridge Foundation organisation. This is a foundation which has been set up by
Swedish parliament and which is organised and co-ordinated on a regional basis.
The office for Scania (which is also covering four other regions in southern
Sweden) is located in Lund. The Technology Bridge Foundation in Lund has
separate divisions for evaluation and counseling (Teknopol), patents and licenses
(Forskarpatent i Syd) and seed investment (TeknoSeed). A difference between the
university based technology transfer offices and the science-park based
Technology Bridge Foundation is that the former are considered to be more
proactive in their efforts to scout for and commercialise new research findings.
Still, according to the MVA report (2004) these technology transfer offices (in both
Sweden and Denmark) have strong competencies in mainly science, law and
regulations but relatively little experience from industry (as compared to
technology transfer offices in the US or UK). It is indicated that a lot of the
resources have been used for patents that are not very commercially attractive or
were not properly marketed. These offices are fairly small with limited staff
compared to similar offices in other global bioregions. In San Francisco, Boston
and Oxford, the number of employees is between 24 and 35 while the average
size in Medicon Valley is 3. This is however not surprising given the novelty of this
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institution in Scandinavia. Finally, several of the large Danish pharmaceuticals
have technology incubator facilities in place but these are mainly directed at spin-
outs from their own R&D facilities.
Due to the local presence of many private venture capital firms, national
public seed investors (particularly in Copenhagen) and the various incubator
facilities, the general venture capital climate in Medicon Valley is considered to
be good. However, due to the fact that Copenhagen, the financial heart of
Denmark is located on the Danish side of Medicon Valley, the distribution of
investment capital is skewed. Moreover, the division of the region in two
national jurisdictions further aggravates this situation. National public seed
investors are allowed to only invest in national ventures. Private venture
companies are less restricted in this respect. However, in order to stimulate
commercialisation of university research more pre-seed venture capital would
be needed. Secondly, initial growth conditions for novel biotech firms are
considered to be less beneficial for Medicon Valley in terms of funding support.
Barriers to cluster development
The cluster is unique in being located in a region that spans parts of two
different countries. This feature can and should not be ignored as a weakness
of the cluster compared to similar life science clusters in scope and size such
as nearby Stockholm-Uppsala. The national border contains a liability for
fragmentation of cluster activities. This report shows that the full potential for
synergy effects derived from close proximity may be hampered because of
this. In other words, cross-border regional interaction is only weakly
developed. In addition, extensive parts of the regulative environment (e.g. tax-
rules, employment legislation) as well as research and innovation policy is
shaped and implemented within a national framework which complicates
cross-border cluster interaction.
Part of the explanation of cluster fragmentation, can be the imbalance
between the different parts of Medicon Valley. The Danish side is strongly
characterised by being the capital city region and the only major urban area in the
country. More or less by default, there is a lot of business activity going on in terms
of financial markets, presence of business headquarters as well as political activity.
Scania, on the Swedish side, is typically a second tier region being relatively far
away from the action in the capital Stockholm. In terms of inhabitants, number of
firms (especially Big Pharma), and venture capital investors, there is clearly a
skewed distribution in favor of the Danish part of Medicon Valley. As for
university and research facilities however, the situation is more balanced.
Another potential barrier to the development of the cluster is the somewhat
disappointing results in commercialising academic research especially compared
to North-American life science clusters. Measured in terms of establishing start-
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up companies or license agreements following patent filings, the Medicon Valley
universities (and university hospitals) fall behind important competitors such as
Karolinska Institute in Stockholm, Oxford University and Stanford University
alone. Partly, this can be explained by the fact that the entrepreneurial
university has its origin in the US while Europe in general (with the exception of
the UK) is following suit. Therefore, it should be emphasised that legislation and
the establishment of technology transfer offices is still in the process of catching
up and considerable progress is being made. A lot of policy efforts can be expected
to contribute to this. Another disadvantage, at least compared to the North
American life science clusters, is the lower supply of venture capital.
Role of policy
Both countries have thriving innovation policy environments. The main
governmental innovation body in Sweden is VINNOVA (Swedish Agency for
Innovation Systems) which was established in 2001. It has an annual budget of
about EUR 110 million to support innovation on a national, regional and
sectoral level in active collaboration with industry and academia (following
the triple helix model). Life sciences are broadly covered in four so-called
growth areas: drugs and diagnostics, biotechnical tools, medical
technology and innovative food. It can therefore be seen as a prioritised
technological platform in Swedish innovation policy not the least because it
receives approximately one tenth of the total annual budget. Moreover,
VINNOVA has committed itself to support the absorption of biotechnology in
the food sector in Scania through its regional innovation systems programme
VINNVXT. In Denmark, innovation policy is co-ordinated through the
Ministry of Science, Technology and Innovation (VTU). Compared to Sweden,
there is less explicit state support and involvement for innovation or triple
helix collaboration. VTU supports however innovation consortia to enhance
co-operation between public institutions and private enterprises. An example
of this is the recently established Danish Pharma Consortium under initiative
of four Danish Medicon Valley universities (Copenhagen University, Danish
Technical University, Danish University of Pharmeceutical Science and the
Royal Veterinary and Agricultural University). Another important component
of Danish innovation policy are the 15 national Business Service Centres
(Erhvervsservicecentre) which provide counselling and information to SMEs at a
local level. The aforementioned incubator facilities should also be mentioned
as part of both countries innovation policy. In sum, therefore, it needs to be
emphasised that the innovation policy environment for Medicon Valley is very
strongly divided along national boundaries. There is no systematic
collaboration or coordination between VINNOVA and VTU for Medicon Valley.
Even if Medicon Valley is not a direct result of national or regional political
initiatives, it has indirectly benefited from the favourable political environment
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for supporting high-tech as well as cluster development. Sweden has for many
years pursued an active innovation policy through the national responsible
agency VINNOVA. This has been a combination of technology policies,
supporting specific, strategic technologies and sectors of which biotech was/is
considered to be one of the most important, and innovation policies, promoting
the formation of regional innovation systems, primarily for supporting high-
tech industries. So far, out of eight Vinnvxt projects, three belong to the biotech
sector (two red bio in Gothenburg and Uppsala, and one green bio in Lund).
Denmark on the other side has a tradition of less direct public intervention,
and leaves more to the market. Thus, Denmark, which in contrast to Sweden, is
dominated by SMEs, is characterised by a market-driven innovation system
supporting non-R&D based, incremental consumer product innovations. One of
the exceptions to this is the pharmaceutical industry, which is research intensive
and dominated by large companies. The support of this industry mainly takes the
form of science policies of funding basic research at universities and research
institutes, even if it amounts to less than the similar funding in Sweden.
As has already been stated in the report, the establishment of Medicon
Valley Academy/Alliance is a result of an Interreg project initiated by Lund and
Copenhagen universities. The strategic role of universities as the key
providers of new knowledge is evident with respect to promoting the
formation of biotechnology and other high-tech clusters. Lund University has
undergone a transition from a traditional Humbolt type university to become
an entrepreneurial university taking and implementing strategic decisions
(Melander, 2006). One example of such strategic decision making is the
building of transdisciplinary and transfaculty research centres, such as the
Biomedical and Stem cell centres mentioned earlier in the report, which is
located in the so-called tenth area directly under the vice-chancellor.
In Sweden, as is the case also in Finland and Norway, the universities have
got a so-called third mission in addition to teaching and research, i.e. to co-
operate with the surrounding society on everything from commercialisation of
new knowledge to policy advice. Denmark on the other hand tries to achieve
this by giving the universities an external majority in their boards, which elects
the vice-chancellor, and by giving increased authority to appointed leaders on
faculty and departments levels. Another part of this strategy is the initiative to
force universities to merge with other universities and research organisations in
order to get bigger and stronger universities. The merger of Copenhagen
University with Danish University of Pharmaceutical Science and Royal
Veterinary and Agricultural University mentioned before is one such example,
becoming one of three so-called super universities in Denmark. This merger
might have some positive effects on strengthening basic research relevant for
the biotech industry, and, thus, for Medicon Valley.
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Moreover, another important element of the bottom-up initiative behind
the establishment and development of Medicon Valley is the efficient and
well-functioning public-private partnerships with respect to research
collaboration between university and both, Big Pharma and small DBFs,
venture capital raising, and general support for cluster formation. The
regional level offers particularly favourable conditions for such partnerships
due to the presence of social capital as well as spatial and social proximity
between various actors and agencies.
Future policy challenges
Based on the above analysis, the following strengths, weaknesses,
opportunities, and threats for Medicon Valley are identified (see Table 5.3).
In principle Medicon Valley has many essential cluster components in
place in terms of key players in the drug development value chain (big
pharmaceutical companies co-operating with small and medium sized DBF in
new drug development), support infrastructures and presence of skilled
researchers. As such, it ranks high in the hierarchy of global bioregions.
However, the cluster is unique in being located in a region that spans parts of
two different countries. This feature can and should not be ignored as a future
policy challenge of the cluster compared to similar life science clusters in
scope and size such as nearby Stockholm-Uppsala. The national border
contains a liability for fragmentation of cluster activities. The full potential for
synergy effects derived from close proximity may be hampered because of
this. In other words, cross-border regional interaction is only weakly
developed. In addition, extensive parts of the regulative environment (e.g. tax-
Table 5.3. SWOT analysis of Medicon Valley
Strengths Weaknesses
G Local presence of Big Pharma
G Large number of small and medium sized DBF
G Strong academic research
G Extensive breadth in value chain components
G World leading in four therapeutic strongholds
G Presence of network organisation Medicon Valley
Alliance
G Embedded in global knowledge networks
G Cluster fragmentation along national borders
G Imbalance
G Weak commercialisation of academic research
Opportunities Threats
G Inter-sector collaboration (food)
G Increased cross-border integration
G Quality of life
G Dependence on Big Pharma
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rules, employment legislation) as well as research and innovation policy is
shaped and implemented within a national framework which complicates
cross-border cluster interaction.
Diversification opportunities lie primarily in exploiting biotechnology as
a generic platform technology through expanding its application into new
areas of related variety, e.g. green and white biotechnology. This diversification
process has already begun with the development of bio-agro research and
industry connected to the VINNOVA Vinnvxt initiative Food innovation at
interfaces, which as one of its potential growth areas focus on functional
food. Building on the idea of related variety will secure maximal knowledge
spillover effects by combining industries with complementary and
differentiated knowledge-bases (Asheim et al., 2006).
Lessons for other clusters
From earlier research (Asheim et al., 2003a) the need for a more system-
oriented as well as a more proactive innovation based regional policy has been
emphasised. A re-orientation of what is called the target level of support,
changing innovation policies from being firm-oriented to a (regional) system-
oriented perspective has already gained growing attention among
researchers and policy makers (Asheim et al., 2003b). However, the second part
of the recommendation concerning the form and focus of support implying
a change of focus from allocation of resources for innovation to focusing on
learning aiming for behavioral value-added has only been addressed more
recently through new policy initiatives by EU and various national and
regional agencies of constructing regional advantage (Asheim et al., 2006).
The theory of constructed advantage allows for more attention to the role
and impact of the public sector and policy support, preferably in public-private
partnerships, by acknowledging to a greater extent the importance of
institutional and economic complementarities in knowledge economies than
theories of comparative and competitive advantage do. Institutional
specificities constitute the context within which different organisational
forms with different mechanisms for learning, knowledge accumulation and
knowledge appropriation evolve. Instead of market failure, the rationale for
policy intervention is the reduction of interaction or connectivity deficits
which lies at the core of a networked regional innovation systems approach.
Innovation policy tools can be classified in two dimensions, resulting in a
four quadrants table (see Table 5.4). The recommendations of pursuing
innovation support policies that are more system-oriented and more
focused on learning aiming for behavioural value-added are, thus, clearly
confirmed. The key role played by the network organisation Medicon Valley
Academy in promoting collaboration and networking in the cluster is very
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illustrating of the importance of a system-oriented approach, while the
weaknesses in commercialisation of academic research is a telling example of
the need for a change in the behaviour of all actors in a triple helix context.
The SWOT analysis emphasised furthermore the competitive advantage
of having a combination of Big Pharma and a stock of small and medium-sized
DBFs, the presence of strong academic research as well as well-developed
links to the leading global nodes of the industry. These factors point at the
necessity of both building-up and strengthening the endogenous knowledge
infrastructure (universities and research institutes) and stimulating co-
operation with national and international leading research institutions and
companies. The Nordic tradition for co-operation and collaboration, also
found in Medicon Valley, is according to the SWOT analysis perhaps the most
important individual factor contributing to its success. Of these collaborative
relationships university-industry co-operation has been by far the most
important and successful, while the public sectors contribution has been of
minor importance, and can partly be said to be responsible for some of the
shortcomings of the cluster (e.g. the lack of harmonisation in policies between
the two parts of the cluster which, however, must be blamed on the two parts
belonging to different national states).
The encouraging lesson to be learned from Medicon Valley is, however,
how much can be achieved and accomplished on a regional level, if the
necessary and strategic resources as well as the will, capacity and ability to co-
operate are present and utilised.
List of abbreviations
DBF Dedicated Biotechnology Firm
DK Denmark
MV Medicon Valley
MVA Medicon Valley Academy
R&D Research and Development
SE Sweden
VC Venture Capital
Table 5.4. Two-dimensional classification of main innovation policy
instruments
Support: financial and technical Behavioural change: learning to innovate
Firm focused G Financial support
G Brokers
G Mobility schemes
System focused G Technology centre G Regional innovation systems
Source: Asheim et al., 2003.
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References
Asheim, B. et al. (2006), Constructing Regional Advantage: Principles, Perspectives, and
Policies, European Commission, DG Research Report, Brussels.
Asheim, B., A. Isaksen, C. Neuwelaens, F. Tdtling (eds.) (2003a), Regional Innovation
Policy for Small-Medium Enterprises, Edward Elgar, Cheltenham.
Asheim, B., L. Coenen, M. Svensson-Henning (2003b), Nordic SMEs and Regional
Innovation Systems Final Report, Nordic Industrial Fund, Oslo, available at
www.nordicinnovation.net.
Asheim, B. and M. Gertler (2005), The Geography of Innovation: Regional Innovation
Systems, in J. Fagerberg, D. Mowery and R. Nelson (eds.), The Oxford Handbook of
Innovation, Oxford University Press, Oxford, pp. 291-317.
BCG (2002), Commercial Attractiveness of Biomedical R&D in Medicon Valley. The Role of R&D
in Attracting Regional Investments, Boston Consulting Group, Copenhagen.
BMC (2006), BMC biomedicinskt centrum, available at www.med.lu.se/bmc.
Bloch, C. (2004), Biotechnology in Denmark: A Preliminary Report, Working
Paper 2004/1, The Danish Centre for Studies in Research and Research Policy,
University of rhus, rhus.
Cooke, P. (2005), The Evolution of Biotechnology in Bioregions and their
Globalisation, paper prepared for the Unlocking Biotechnology sub-theme of
the EGOS Colloquium, 30 June-2 July, 2005, Berlin.
Melander, F. (2006), Lokal Forskningspolitik. Institutionell dynamic och organisatorisk
omvandling vid Lunds universitet 1980-2005, Lund Political Studies, Department of
Political Science, Lund University.
Moodysson, J. (2007), Sites and Modes of Knowledge Creation: On the Spatial Organization of
Biotechnology Innovation, Meddelanden frn Lunds Universitets Geografiska
Institution, Avhandlingar CLXXIV, Department of Social and Economic Geography,
Lund University.
Moodysson, J. and O. Jonsson (2007), Knowledge Collaboration and Proximity: the Spatial
Organisation of Biotech Innovation Projects, European Urban and Regional Studies,
Vol. 14, No. 2.
MVA (2001), Medicon Valley Investment Guide 2001, Medicon Valley Academy, Lund
and Copenhagen.
MVA (2004), From Bioscience to New Jobs in Medicon Valley: A Medicon Valley
Academy Strategic Report, Medicon Valley Academy, Lund and Copenhagen.
MVA (2005), Medicon Valley Annual Report 2004, Medicon Valley Academy, Lund and
Copenhagen.
MVA (2006), Medicon Valley Annual Report 2005, Medicon Valley Academy, Lund and
Copenhagen.
Vinnova (The Swedish Governmental Agency for Innovation Systems) (2001), The
Swedish Biotechnology Innovation System, Vinnova (Swedish Agency for
Innovation Systems), Stockholm.
Vinnova (2005a), Nationella och regionala klusterprofiler. Fretag inom bioteknik, lkemedel
och medicinsk teknik i Sverige 2004, Kompletterings-PM 05 05 05 med hela Medicon
Valley, Vinnova (Swedish Agency for Innovation Systems), Stockholm.
Vinnova (2005b), Strategi fr tillvxt Bioteknik, en livsviktig industri i Sverige, Vinnova,
Stockholm.
restat (2007), Open resund Data Bank, www.orestat.scb.se/website/index.aspx.
ISBN 978-92-64-04442-5
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Chapter 6
The Engineering Cluster of Dunedin,
New Zealand
by
Ifor Ffowcs-Williams,
CEO, Cluster Navigators Ltd, Nelson, New Zealand
This chapter illustrates how a remote medium-sized city can
transform from losing human capital and industry, to becoming one
of the most important economic centres of its country, on the edge of
engagement with the world economy. This case will show that
communication is important to attract investment and highly
qualified talents to a cluster in a less known region. It will also
demonstrate that active policies and initiatives are essential to
ensure the availability of human capital in the cluster. Moreover, this
chapter addresses the challenge of building networks of trust and
collaboration in an environment in constant change due to important
flows of migration. Finally, Dunedin is also a good example of the
efforts required to build and strengthen international linkages in
order to expand the market and increase the network of partners and
suppliers abroad.
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Introduction
In the late 19th century Dunedin was New Zealands main industrial and
commercial centre, servicing the rapidly growing gold mining, shipping and
rail industries. During these prosperous times many institutions and
businesses were established in Dunedin: the colonys first daily newspaper, its
first university, art school and medical school among them.
With the passing of the gold rush, the more rapid growth of cities to the
north of Dunedin, and the major New Zealand recession of the 1980s, the
relative importance of Dunedin was severely reduced. Between 1976 and 1985
Dunedin lost 10 000 people; between 1987 and 1991 over 5 600 jobs were lost.
Dunedin is now New Zealands fifth largest town with a population of 120 000.
Dunedin has been described as The most southerly city in New Zealand
one of the most remote economic centres on the planet . with a cluster of
engineering firms that are on the edge of engagement with the world
economy (Campbell-Hunt, Chetty and Matear, 2005).
1
Many other engineering clusters around the world have succeeded in
developing specific and narrow capabilities leading to the competitiveness to
profitably service distant markets. For example:
G Taranaki, New Zealand
2
with an oil and gas engineering focus.
G Swedens Robot Valley.
3
G Marine engineering, Saint Nazaire.
4
Dunedin has yet to develop a similar core competency.
Nature and evolution of the cluster
As the surviving engineering firms slowly emerged from the period of
rationalisation in the 1980s, it became evident the industry still had a number
of problems to address:
G The rapid removal of tariff barriers was opening up the domestic market to
a flood of imports.
G A high New Zealand dollar was having a significant impact on export
prospects, particularly the SMEs.
G As firms battled to survive, apprenticeship programmes were largely
overlooked and this impacted on school leavers who saw engineering as a
poor career choice.
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G Large international orders were being lost by the lead firms because of the
lack of suitably qualified staff and the absence of an apprentice intake.
G Old rivalries were still evident; competition was fierce, with little trust existing
between firms. This limited familiarity impeded the ability of the firms to deal
with common industry problems and to develop complementary areas of
expertise co-specialisation and out sourcing.
G There was a perceived view that Dunedin engineering firms were servicing
a small local market, with low growth, and offering little opportunity.
The accumulated pool of engineering experience within Dunedin was
undermined during the severe 1980s recession. More recent employment data
is showing a significant turnaround: the number of full time employees
increased by 13 per cent in 2004 to 2 334 at a time when employment in the
region grew by only 2 per cent and national employment in engineering
increased by only 3 per cent.
Today Dunedin is home to a broad base of engineering firms producing a
range of short-run complex products. Within the cluster a number of firms
have been experiencing significant growth. Total revenues are now around
NZD 200 million (approximately EUR 100 million).
There are around 80 engineering firms in total, of various sizes and
capabilities, with eight of the more export intensive firms having over 50 staff
each. Two sub-groups within the cluster are evolving:
1. The rainmakers
These firms are servicing established international markets with niche,
design-to-order products. They are strong on design intensive products and
innovation. There is co-specialisation between these firms, their product
ranges do not compete and they are proactive in developing partnership
arrangements with local suppliers. They network and collaborate nationally
and internationally; their key relationships tend to be outside of the city.
They are able to accumulate and internalise learning. Employment is
typically between 50 and 100 or more.
2. The feeders
These smaller firms focus on the local market; many are satisfied with their
current level of activity. Their product range is typically broader than the
rainmakers. Many are jobbing shops servicing the local market. There is
increasing collaboration and co-specialisation between these firms.
Accumulated learning tends to be shared in the community. Employment is
often around a dozen staff.
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A snapshot of five Dunedin rainmakers
DC Ross: a Dunedin tool-maker and precision engineering firm that
exports car components. Each year, DC Ross produces about 10 million
individual automatic transmission, brake, and seat and plumbing parts for
cars as diverse as Ford, Holden and Maserati. Australia accounts for 75 per
cent of its business, thanks in part to a direct shipping route from Dunedin to
Melbourne. The firm has around 28 staff.
Farra Engineering: one of Dunedins oldest engineering companies with
roots going back 140 years. The Managing Director is a fifth generation
member of the family business that began looking for off shore work in
the 1980s, focusing on its access hoists for the external maintenance of high
rise buildings. These are now exported to Singapore, Hong Kong, and UK, and
generate spin-off work for local sub-contractors in hydraulics and electrical
controls. Offshore we are regarded as the company that can do difficult work
in a short time
5
Engineering Dunedin Inc., the clusters association, is
currently chaired by Farras Managing Director. The Farra Engineering group
has around 130 staff.
Fisher and Paykel (F&P): major manufacturer of white goods, especially
dishwashers. The firm was initially an importer, then in the 1930s started
manufacturing under license, and finally manufacturing to its own designs
which have become world firsts. The firm now also design and build their own
production lines, and production lines for other appliance manufacturers
around the world.
In the early 1990s a young designer at the Dunedin factory looked sideways
at his filing cabinet and thought for one crazy moment that it might make a
dishwasher, with drawers. The DishDrawer, as his idea became, took eight years
to develop and is now one of F&Ps leading exports. This manufacturer has
approximately 680 staff.
Millers Mechanical: this group produces specialised engineering
equipment for abattoirs, exporting to Australia, Japan and USA. It has around
74 staff.
Scott Automation Systems: designer and manufacturer of automated
process and production equipment. The parent company was established in
Dunedin in 1913. The firms association with the appliance industry dates
back to the 1940s when Scott Washing Machines and Refrigerators were
manufactured under license from Whirlpool and Norge. The parent firm is a
New Zealand-owned, publicly-held engineering company. The company is
recognised by all the major appliance builders in the USA and internationally
as a world class builder of advanced automation systems. Scott is currently
working on robotic systems for the meat industry, a world first. This firm has
approximately 60 staff.
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Development of the clustering intervention
The clustering i niti ative started in Dunedin in 1998 with the
encouragement of New Zealands national export organisation. This led in 2003
to the establishment of a fully Incorporated Society known as Dunedin
Engineering Inc..
The Dunedin City Council (DCC) Economic Development Team has been
instrumental in supporting Engineering Dunedin Inc. The clusters leadership
team includes the CEOs of the major engineering companies. DCC facilitates
the Leadership meetings and full cluster meetings.
Financial support from DCC, supported with small grants from the
national agency, has enabled a wide range of projects and activities to be
developed, including:
G Building the social connections amongst the diverse range of competitors.
DCC state that this simplest of support programmes (soft networking) took
at least five years to show any significant return to the cluster or the local
economy. This underlines the need for patience when trying to expedite the
development of what is essentially an organic entity.
G Early initiatives involved development of database/directory of competencies
which was made available in hard copy and on the website and promotional
material for members to take offshore. This proved quite effective when
trying to secure large international orders, especially for F&P DishDrawer in
US. Members were able to demonstrate that they were from a location with
some critical mass in engineering, earning credibility by association.
G Promotion of Engineering within the region as a career option for school
leavers, and the development of Engineering Career Days.
G Promoting Dunedins engineering employment opportunities in conjunction
with recruitment agencies at Expos; seeking skilled migrants with the UK
Immigration Expo (one company has employed 25 new immigrants).
G Engineering Dunedin Inc. and the local Otago Museum launched a Robotics
Competition for Otago school students, drawing together engineering firms
and education providers.
G Forwarding appropriate CVs on to firms seeking skilled employees.
G Feasibility study regarding a Major Regional Design Initiative.
G Development of the Engineering Dunedin website.
6
G The development of the Supply Cluster at Fisher and Paykel.
G Seeking to fill gaps in the local clusters capabilities, e.g. attracting a hot dip
galvanising firm to Dunedin.
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G Close links with the local polytechnic regarding research, student employment
opportunities and international business to business linkages. A Reciprocal
Student Exchange to and from Ulm, Germany is in place.
G Assistance regarding the successful joint application with the Otago
Polytechnic for Polytechnic Regional Development Funding of NZD 257 000.
A full audit of Dunedin engineering companies will be carried out regarding
current skills gaps, new apprentice skill requirements and possible synergies
regarding capabilities that may exist between firms. The Polytechnic will
then work with engineering firms to deliver appropriate courses, relative to
business needs either on a firms site or at the Polytechnic.
G Media enquiries and presenting to the media appropriate engineering stories.
G Arranging regular meetings with guest speakers to draw together the clusters
firms.
G Securing funding from the national agency to co-fund cluster joint activities.
G The EDU has also drafted a Code of Ethics and Incorporation document for
the Engineering Cluster, and funded the legalities associated with
Incorporation.
Success factors
G The cluster originally emerged in the 19th century in response to a specific
local demand to service developing industries, in particular foundries for
the gold mining activity inland of Dunedin and engineering for the sea and
rail transport sectors.
G There are indications that firms within the cluster have a higher ratio of
R&D investment to sales than is typical of New Zealand firms in general.
G The clusters firms also have a higher ratio of investment in process equipment
and in training and education (Greatbanks, Batley and Everett, 2006).
G Sensitivity to exchange rates, especially the American dollar.
G Stable workforce.
G The availability within the cluster of a wide range of subcontractors offering
increasingly specialised services to the lead exporting firms.
G Flexible support.
G Co-specialisation, consolidating of demand for components and sub-
assemblies.
Role of SMEs
G SMEs are a key to the competitiveness of the Dunedin cluster, providing the
lead exporting firms with a wide range of competencies that they do not need
to maintain in-house.
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G A number of Dunedin firms through their cluster involvement are now
utilising other cluster members to carry out work for them, whereas firms from
outside the province previously carried out this work.
G Whilst new firms are emerging, conservative traditions within the community
limit entrepreneurial activity.
Impact of the cluster on entrepreneurship and employment
G New firms, some started with redundancy funds, are emerging in Dunedin
because of the reputation for engineering excellence amongst the larger
firms (Brown, 2005).
G Firms are now able to tender for larger contracts than was feasible before
the start of the clustering engagement.
G Collaboration in an array of forms is leading to an upgrading in
competitiveness and employment growth. Collaboration now includes the
joint promotion of engineering education; joint commitment to train
apprentices, capacity-sharing and staff sharing to even out spikes in demand
in this lumpy, contract-driven industry; and subcontracting components.
G Companies are now helping each other out in unprecedented ways ...
bringing their skills together on new products borrowing staff from each
other subcontracting out more to cope with increased book orders.
Three hard business networks have emerged from the clustering
initiative. These are consortiums/strategic alliances between smaller groups
of firms, frequently SMEs:
1. United Tooling Solutions (UTS) was formed in 2001 with help and funding
from the Dunedin City Councils economic development unit. Its objective
was to market, co-ordinate and work for three precision tool manufacturers
within the engineering cluster. This network came out of high level
discussions; Fisher and Paykel (F&P) were having tools made outside of
Dunedin, and in order to secure F&P work the toolmakers had to secure
other work to balance out the peaks and troughs. Several million dollars in
orders were gained by UTS work, but in 2006 UTS was voluntarily wound up
after nearly five years operation (Otago Daily Times, 2006). An extended
period of a high New Zealand dollar and an influx of cheap China-made
tools during the previous 18-24 months meant UTS was no longer viable for
its three joint venture companies.
2. Dunedin Marine Construction: Dunedin has a solid ship building past
which today is underutilised. Drawing on this accumulated competency,
20 firms (some from beyond the local engineering cluster) were identified
through a capability assessment funded by a national agency, Technology
New Zealand. Subsequently these firms contributed NZD 100 000 between
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them (with matching funds from Industry New Zealand, another national
agency) to seek tenders for the maintenance of fishing vessels and tourist
launches. Although work has not been steady, projects have been
completed on time, to budget and to a high standard. A tender is currently
being prepared which if successful would involve input from 15 firms over a
12 month period.
3. Foundry group: As a result of the informal soft networking through cluster
meetings three foundries began to work together in prompting their
complementary skills internationally. Following a visit to Australia, an initial
NZD 140 000 order was secured. Joint initiatives have not occurred over the
last 12 months due to each of the independent foundries being kept busy
with their own projects.
There has been a steady increase in employment since 2001 as shown in
Figure 6.1.
Barriers to cluster development
G While Dunedin has (for a young country) a strong and well-established
engineering tradition, the cluster remains vulnerable to the possibility,
however remote this may be, of one of the major rainmaking firms exiting.
G A current weakness in the industry is attracting the right young people
into engineering as a career option. This problem relates partially to the
industry contracting in the 1980s and early 1990s and to parents, teachers
and young peoples impressions of a dirty industry. There is a need to
continue boosting the profile of the industry with young people.
Figure 6.1. Full time equivalent employment trend
Source: Dunedin City Council Report, 4 October 2005.
2 500
2 250
2 000
1 750
1 500
1 250
1 000
750
250
500
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Engineering FTEs
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G Dunedin engineering also needs to continue working on skilled staffing
issues as well as possible joint purchasing initiatives.
G Dunedin engineering firms in the future will need to foster ongoing
innovation and product development.
G Opportunities exist to improve the interface between educational institutes
and the engineering sector. The local university has yet to substantially
engage with the cluster.
G Other opportunities may emerge regarding co-specialisation, which will
hopefully foster innovation and ongoing product development.
G Continuing to move away from a jobbing approach to specialisation.
G Continue moving from passive co-location to active networking and co-
operation.
G Exchange rate fluctuations.
Role of policy
G In 1996 the New Zealand Trade Development Board, a national agency,
introduced the concept of clusters to regional development agencies
throughout New Zealand with a series of regional presentations.
G Dunedin was an early mover in New Zealand in introducing a clustering
approach, with industry clusters becoming the basic unit of focus for the
Dunedin economy from 1997. The emphasis moved from investment
attraction to supporting the citys own entrepreneurs, the grow your own
programme as it was known. The small budgets were initially used to
encourage soft networking of firms within the cluster in an effort to build trust
and to stimulate joint commercial activity in the form of sub-contracting. Soon
after soft networking began, research on cluster capabilities and market
opportunities was undertaken.
G DCCs direct financial support in 2004/5 for the cluster amounted to
NZD 35 000. In addition was a part time cluster facilitator, employed by DCC.
The staff member appointed was a mature, seasoned professional with
strong networking skills. This person has been in the role for 4 years. He has
been a major player in developing the clusters social capital, and driving key
projects, with strong support from the senior members of DCCs economic
development team. He is proactive in encouraging the Executive Members of
the cluster to take responsibility for a number of activities and projects.
G The hardest thing for local government involvement/investment in
clustering interventions is the desire of politicians to see immediate results.
As a minimum, a five year time horizon is needed, well beyond the usual
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political cycle. In Dunedin it was necessary to fight to keep the resources for
this project because of its long-term nature and the difficulty in showing a
causal link.
G One of the clusters first projects was to develop a mechanism to share
apprentices between firms, so that young employees were guaranteed work
within the cluster without it necessarily being with just one firm. Today
even skilled staff are shared between firms; one firm has had staff from
26 other firms working on export orders during high demand periods.
G The driving force behind turning the cluster into a more dynamic actor
within the local economy was the development of trust between firms that
led to the harnessing of existing technical capabilities to target new
markets. The firms needed a neutral corner to explore each others
capabilities without risk to themselves. The clustering initiative, resourced
largely by local government, provided that, and led to firms choosing to
work together with other firms they trusted.
Policy adaptations over time
Central and local government have had some major impacts on the
development of the cluster.
On the positive side:
G A national agency introducing the merits of engaging locally through a
clustering initiative, and offered small scale financial support for cluster
facilitation during the initial stages.
G The local government stimulating the development of social networks, the
cluster group meetings, bringing together firms in a neutral setting.
G A noticeable change in attitude the cluster no longer waiting for national
initiatives, support.
G Collaborative offshore marketing programmes co-funded by a national
agency.
G Programmes of skill development in the regions labour market.
G Recently a national agency has sought to improve linkages between
engineering clusters within New Zealand, in particular Taranaki and
Dunedin.
And on the negative side:
G Radical reform of apprenticeship training.
G Radical economic reform leading to the major recession in the 1980s.
G Difficulty in obtaining tight alignment between the needs of the local firms
(with Dunedin City Council responding well to those needs) and the more
top down approach of the national agencies.
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Future policy challenges
G Arguably, this small remote cluster in a far corner of the globe has yet to
establish sustainable critical mass.
G There is vulnerability at this stage of the development of the cluster that
rainmaker firms move resources out of Dunedin, possibly on a large scale.
The key relationships (and ownerships) of many of the rainmakers are
outside of Dunedin.
G Attracting school levers, and retaining within Dunedin the skilled workforce.
G The Polytechnic has been proactive in collaborating with the cluster; the
University (aside from the Department of Management) has yet to engage in
a meaningful way.
G Most of the engineering businesses the feeders are comfortable with
their current size, take a low-risk approach and are reluctant to significantly
invest in new facilities.
G Continuing the move from jobbing (selling machine time) to own product,
with own IP.
G Once fierce competitors have over recent years learnt to work together, but
there is still scope to opening up further the trust and dialogue to accelerate
the move to co-specialisation.
G Blowing its own trumpet nobody is going to do it for them!
Lessons for other clusters
G Importance of taking a long-term perspective, with (long-term) public
funding being used to continually drive the agenda forward in upgrading
the competitiveness of the cluster.
G Sustained and steady intervention will be more effective:
O Steady investment in the regions skill and knowledge-base, and/or its
physical infrastructure.
O Sustained policies of support to the processes of regional agglomeration
and resource relocation.
O And for the development of offshore markets.
G Dont ignore the payoffs provided by a neutral agency in bringing
competing firms together, building trust and dialogue between them.
G The value of taking time in establishing the legal entity for the cluster
group. This should not be an early priority.
G Dont consider an exit strategy for the publicly funded agency rather
consider an exit from maturing projects/initiatives which should over time
become owned and then financed by the benefiting firms.
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G Garnering whole-of-government support for a cluster does not come easy.
Aligning different government agencies at national and local levels takes
time and energy. Cluster development is a local activity, yet national
agencies have difficulty in empowering those closest to the cluster in the
allocation of national funds.
G Dont wait for national support/hand outs consider these as an extra, a
bonus rather than essential for the life of the clustering initiative.
G Value of resourcing long-term a senior, mature professional with strong
networking skills as the clusters facilitator.
Acknowledgements
Grateful thanks are due to Des Adamson and Peter Harris from Dunedin
City Councils Economic Development Unit. Also to Damian ONeill and Peter
Brown, who were instrumental in establishing this clustering initiative when
they were with Dunedin City Council. Professor Colin Campbell-Hunt of Otago
University has also contributed significantly to this chapter.
Notes
1. This review draws extensively on this paper and on reports generously provided
by Dunedin City Councils Economic Development Unit.
2. See www.engineeringtaranaki.co.nz.
3. See www.robotdalen.org/english/english.htm.
4. See www.pole-marine-atlantique.com.
5. Rod Oram quoting the then General Manager.
6. See www.cityofdunedin.com/city/?page=cluster_engineering.
References
Brown, Peter (2005), Walking the Talk Lessons from Dunedins Cluster Development
Programme, Dunedin City Council.
Campbell-Hunt, Chetty and Matear (2005), Clustering at the Edge, Growing
Businesses of Global Reach from Thin Local Soil (Working Paper in
Competitiveness), University of Otago.
Greatbanks, Batley and Everett (2006), International Manufacturing Strategy Survey,
University of Otago, Department of Management, PowerPoint presentation
29 May 2006.
Otago Daily Times, Dunedin 24 July 2006, p. 18.
Rod Oram (2002), Pride of the South, Unlimited Magazine, April, Infego Communications
Ltd.
ISBN 978-92-64-04442-5
Clusters, Innovation and Entrepreneurship
OECD 2009
167
Chapter 7
The University-centric High-tech Cluster
of Madison, United States
by
Martin Kenney, Amanda Nelson and Donald Patton
University of California, Davis
This chapter shows the central role played by the university in
promoting economic development, innovation and knowledge
across the region. The initiatives of the national and regional
governments to spread the outcomes of the university to the
regional economy are well illustrated in this chapter. The case of
Madison, Wisconsin, also illustrates the various efforts made by
the university to encourage commercialisation, licensing and
technology transfer from the university to industry. With the
support of related bodies such as the alumni association, the
faculties and the technology transfer bureau, the University of
Wisconsin Madison shows that universities can also play an
important role in linking innovations to venture capitalists and
industry, in stimulating the creation of spin-offs, and in facilitating
the identification of the market for new products.
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Introduction
The city of Madison, Wisconsin covers 111 km
2
in mid-western United
States and is surrounded by farmlands and rolling hills. Within this farmland
sits a hotbed of high-technology activity. Home to a flourishing biotechnology
industry, the city of Madison is particularly interesting as a focus of high-
technology cluster research as it is a location that has undergone a reinvention
in the last two decades. In 1980, the city was dependent upon public sector
employment due to its position as Wisconsins state capital and the presence
of the states flagship public university, the University of Wisconsin, Madison
(UWM) an educational institution with a large student base and significant
direct employment. The private sector was composed of services, smaller
manufacturing plants, and significant industrial food processing, in particular
meat processor Oscar Meyer. The manufacturing and food processing portions
of the Madison economy have collapsed. Despite this loss the public sector
would certainly have been sufficient to prevent too precipitous an economic
decline, though Wisconsin itself has experienced economic difficulties.
In roughly 1980, UWM began to experience an upswing of entrepreneurship
from its faculty a development that is roughly contemporaneous with the
commercialisation of university molecular biological research (Kenney, 1986).
This trend has accelerated in recent years. While Madison area employment in
manufacturing has remained essentially static from1998 through 2004 (3.6 per
cent growth over six years), employment growth in the life sciences has been
54.4 per cent over this same time period. Similarly, employment growth
in information technology (44.3 per cent) and physical sciences (22.6 per cent)
between 1998 and 2004 indicates that Madison is increasingly dependent upon
high-technology enterprises to provide employment opportunities.
(See Figure 7.1 and Table 7.1 on Dane County, Wisconsin [Madison area]
employment.)
In 2007, Madison had a vibrant entrepreneurial cluster that was
motivated by the knowledge and innovation of the UWM faculty, students,
and local alumni. We report on the genesis and evolution of this cluster using
primary source material on the origin of the entrepreneurial start-ups, various
secondary sources of aggregated statistics, and the results of personal
interviews.
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Nature and evolution of the cluster
Madison, located in southern Wisconsin, has a population of just over
220 000 persons and has one of the highest concentrations of advanced
degrees in the US at 2 per cent of the residents. Actually identifying the
number of high-technology firms in Madison depends upon definition. For
Figure 7.1. Dane County employment, 1993-2004
Source: County Business Patterns Data, US Census Bureau.
Table 7.1. Dane County employment
Life sciences IT Physical sciences Manufacturing
1993 1 952 849 1 916 25 652
1994 2 022 612 1 218 26 896
1995 2 181 847 1 250 30 640
1996 2 066 1 172 1 453 31 916
1997 2 777 1 468 1 220 32 192
1998 3 138 1 834 2 107 26 902
1999 3 099 2 224 2 345 26 681
2000 3 630 2 801 2 463 27 623
2001 4 183 3 031 2 546 27 166
2002 4 489 3 214 2 653 25 299
2003 4 707 2 897 2 646 26 823
2004 6 883 3 294 2 722 27 920
Growth rates (%)
1993-2004 71.60 74.20 29.60
1993-1997 29.70 42.20 57.00 20.30
1998-2004 54.40 44.30 22.60 3.60
Source: County Business Patterns Data, US Census Bureau.
Information technology
Manufacturing (left axis)
Physical sciences
Life sciences
35 000 7 000
6 000
5 000
4 000
3 000
2 000
1 000
0
30 000
25 000
20 000
15 000
10 000
5 000
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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example, the broadest definition, which includes small PC assembly and
routine blood testing laboratories, is typical as many jurisdictions in the
US and around the world inflate their number of high-technology firms and
entrepreneurial start-ups. Therefore some sources claim that there are
currently between 450 and 500 high-tech firms in Madison this would be a
growth of approximately 14 per cent over the last five years (Ladwig, 2004;
MG&E, 2006). If all of these firms are taking together, they provide greater than
8 per cent of the regions total employment or 26 000 jobs (MG&E, 2006). The
statistics on biotechnology firms are even more discrepant. For example,
Willis (2004) claims there are approximately 250 biotech firms in the region
that have revenues of nearly USD 5 billion annually. The Madison Gas and
Electric (M&GE, 2006) claims there are 112. Our rigorous count of only the
entrepreneurial biotechnology firms that excludes blood testing laboratories,
hospitals, seed testing laboratory and the like finds there are 59 such firms,
33 of which are direct UWM spin-offs by founder. Clearly, definitions are all
important.
Madison is one of the most politically liberal (in the social democratic
sense, not traditional English liberalism) cities in the Midwest, and yet it also
is considered business friendly. This has been recognised in the US media. For
example, in 2004 Madison was ranked the number one US city for business by
Forbes, a well-known US business journal (Tatge, 2004). A senior editor of the
magazine justified this in the following way, Madisons number one ranking
is a result of its labour supply, strong income growth, as well as the fact that
the city ranked tops in per capita number of PhDs and third highest in the
US in terms of people with college degrees (MG&E brochure, no date). In
addition to the economic success of the region, it attracts residents with a
vibrant downtown area and multitude of recreational opportunities, including
boating, biking, skiing, art and entertainment.
Madison is a knowledge cluster, based largely on research, in particular, in
biotechnology done at the UWM. Of the 182 high-technology firms identified by
our research, just under half have direct ties to founders from UWM. The extent
to which UWM is a direct source of these firms varies considerably by sector.
Over 62 per cent of the 59 biotechnology start-ups in our population are directly
related to the university through one of their founders. This level of
involvement declines to 50 per cent for biotech support firms, 43 per cent for
engineering start-ups, and just one of the 16 IT start-ups has a founder that
came directly from UWM. Table 7.2 provides this data in greater detail.
On average, firm size is small with most companies employing 5 to
500 individuals. Early firm creation began in the late 1970s, but the majority of
growth in the cluster has occurred in the last 15 years. Figure 7.2 presents new
firm formation from before 1960 to the present.
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As a field of entrepreneurship, biotechnology is well suited to the
university environment because for the most part new biotechnology firms
are direct results of university/medical school laboratory developments whose
research was funded by the US National Institutes of Health. Much of
Table 7.2. Relationship to UWM of the start-up founders
Industry UWM founder No UWM founder Total
Biotechnology 18 11 29
Biotech Support 15 15 30
Medical 15 8 23
Vet/Ag 4 1 5
Total life sciences 52 35 87
Electronics 9 11 20
Engineering 10 13 23
Telecom 0 2 2
Total physical sciences 19 26 45
IT 1 16 17
Software 11 14 25
Internet 0 3 3
Total information technology 12 33 45
All firms 84 98 182
Source: Authors Database Martin Kenney and Donald Patton.
Figure 7.2. New firm formation in Madison, Wisconsin by year
Source: Authors Database Martin Kenney and Donald Patton.
Information technology
Madison startups
Physical sciences Life sciences
P
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this research results in products that a small firm can protect with patents,
which if sufficiently promising can attract the interest of angel investors or
venture capitalists (for one of the earliest explications of this process,
see Kenney 1986).
Though biomedical-related firms make up approximately 50 per cent of
the high-technology start-ups in the region, the other 50 per cent are from the
physical sciences, engineering, and the IT fields. In these other fields, UWM
start-ups are relatively small and have not experienced the growth that IT spin-
outs such as SAS from North Carolina State University; Sun Microsystems,
Yahoo!, and Google from Stanford; Paypal and Netscape from the University of
Illinois, or Cadence and Synopys from UC Berkeley. Having said this, there are a
number of high-technology firms in Madison that are not the direct products of
UWM, though the university ambiance pervades the city.
Unlike many other high-technology and particularly biotech clusters,
around half of the Madison biotech firms are concentrated in the areas of
biomedical inputs and services. There are many reasons that can be cited for
this focus, but on a basic level, this type of technology involves less risk and less
capital. As Randall Willis points out in his 2004 article on Madison, these
companies rarely hit a home run and accumulate great wealth for the
founders or shareholders. However, when successful they can provide
consistent and solid returns and good employment opportunities (Willis, 2004).
While they may never create enormous capital gains, the start-up costs for
input and service firms are relatively low. Harry Burrill from local start-up
Lucigen notes that, you can bootstrap starting a products company with
much less money, then get products on the market relatively quickly to
generate a revenue stream for survival and growth (ibid).
The biotech cluster in Madison does not resemble the typical cluster
formation based on interaction between similar firms. In reality the cluster is,
in large part, a hub-and-spoke morphology with UWM at the centre. UWM
dominates the region and is the source of most of the firms. In contrast to
Silicon Valley where there have been wave after wave of entrepreneurial spin-
outs, in Madison there have been far fewer firms whose founders came from
another firm.
The biotechnology research materials firm, Promega, is the notable
exception. Promega was founded in 1978 by William Linton. Today, it operates
i n 11 nations, has 850 empl oyees, has revenues of approximately
USD 175 million, and sells 1 450 different life science research materials. Not
only is Promega a successful firm, but between 1987 and 2005 three firms have
spun-off from Promega. One of the founders of these firms came directly from
Promega, while another firm was established with key personnel from
Promega. The third firm was PanVera, a company that develops technology
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used to determine drug components. Former Promega employees founded the
company in 1992. Since then six additional companies have spun off of
PanVera on the basis of key personnel and founders from the firm.
Although our methodology in establishing firm genealogy is based
exclusively on founder(s) previous employment, a greater understanding of
the movement of key personnel allows us to recognise the true importance of
these firms to the Madison cluster.
1
Key personnel from PanVera were directly
involved in the creation of five firms from1995 through 2000, although none
of them were identified as a founder.
Serial spin-offs are not atypical of the cluster. It has, however, been vital in
speeding the expansion of the cluster. Promega was a pioneer and not only have
other firms spun-out of Promega and its progeny, but also many employees at
other local firms once worked at Promega. So it is a source of entrepreneurs and
seasoned executives. As Feldman et al. (2005) observe, the early entrepreneurs,
if sufficiently successful, actually begin to change their environment. In effect,
the environment is not a simple unchanging selection grid, but actually evolves
with its resident actors. So, for example, the second-generation entrepreneurs
are able to leverage the knowledge and experience gained from initial
endeavours in their new firms. The earlier entrepreneurs create awareness and
reputation in the community enabling not only them, but next-generation
founders to use the pioneers as proof that their new concepts have a similar
possibility of success thereby allowing them to attract funding and support. By
virtue of its success, Promega has been an icon and model for other
entrepreneurs in the Madison cluster.
Entrepreneurial support network in Madison
2
The focus on biomedical inputs and services provides a partial
explanation for the lack of venture capital in the region, as these firms do not
grow sufficiently quickly and to sufficient size to justify venture capital
investment.
3
Conversely, the focus may be a result of this dearth in funding.
Although Dane County ranks in the top 100 counties nationwide for venture
capital funding, Wisconsin as a whole falls in the bottom half of all states for
venture capital investment (Table 7.3).
4
According to PanVera founder Ralph
Kauten[rdquoe] there is little venture capital in Wisconsin so most of the start-
ups have worked without it[rdquoe] (Kauten, 2006). In 2005 California received
the bulk of the nations venture capital funding (USD 10 220 million or 47.1 per
cent of the total). In contrast, Wisconsin received USD 68 million, less than
one per cent of the funding (Rosen, 2006).
Venture capital often emerges in entrepreneurial clusters, and many
researchers consider venture capital an important indicator of the dynamism
of a cluster.
5
Of course, some Madison firms have received venture capital.
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Overall 14 per cent of all Madison start-ups have received venture capital
funding. 18 per cent of the life sciences and physical sciences firms have
received VC funding, while just 2 of the 45 information technology firms
received VC funding (see Table 7.4).
Table 7.3. Venture capital firms operating in Wisconsin
Firm name
Location(s)
in Wisconsin
Date established
(date closed)
Reported capital
(USD million)
Fund size
(USD million)
Advantage Capital Partners # Madison 1993
Avolte Venture Fund Midwest #
(a sector fund of the Peak Ridge
Capital Group)
Madison 2006
Baird Venture Partners # Madison
and Milwaukee
2001
Kegonsa Capital Partners, LLC Madison 1997 11.0 10.7
Madison Capital CIP Corp. Madison 1982 0.4
Mason Wells Biomedical Fund Milwaukee 2000 and 2006
Pangaea Partners Madison 1989
State of Wisconsin Investment Board* Madison 2002 61 500.0
Venture Investors, LLC Madison 1982 80.0 9.0
Wisconsin Investment Co. Madison 1985 1.0
* Government affiliated.
# Firm has multiple offices, some may be located outside of Wisconsin.
Source: Venture Expert 2007; OCR 2007.
Table 7.4. Madison start-ups and venture capital funding
Industry VC funded Not VC funded Total
Biotechnology 8 21 29
Biotech Support 5 25 30
Medical 3 20 23
Vet/Ag 0 5 5
Total Life Sciences 16 71 87
Electronics 2 18 20
Engineering 5 18 23
Telecom 1 1 2
Total Physical Sciences 8 37 45
IT 2 15 17
Software 0 25 25
Internet 0 3 3
Total Information Technology 2 43 45
All Firms 26 156 182
Source: Authors Database Martin Kenney and Donald Patton.
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The funding Madison high-technology start-ups have received reflects this
higher interest by VC firms in science-based firms. In the year 2000 information
technology firms received just 10 per cent of all VC funding in Madison,
compared with life sciences which received 54 per cent of the total. In 2005,
after the dot com bubble, life science-based firms increased their share to 80 per
cent of all VC funding. Figure 7.3 presents this data in greater detail.
Madison differs from clusters such as the San Francisco Bay Area, San
Diego, Boston and the Washington DC area because it has successfully created
an environment encouraging the formation of new technology businesses
without having a concentration of venture capital. To some degree, this absence
was mitigated by WARF which was willing to substitute for the venture
capitalists in the earliest stages. But the success of Promega, PanVera and others
also created an environment within which bootstrapping was understood. In
particular, scientists understood how they could use Small Business Innovation
Research grants to carry their firms through the early stages of the firms
development. Like traditional VC funding, in lieu of payment WARF frequently
accepts equity in a start-up as compensation for their services.
Location
It is not just the business climate in a region that draws entrepreneurs and
sparks new firm creation. The programmes and factors discussed above have
encouraged and supported the creation of Madisons biotech cluster, but the
Figure 7.3. VC backed firms Dane County Wisconsin
Venture capital investments, excluding acquisitions, in USD 000s
Source: Thomson Venture Economics/National Venture Capital Association, 2007.
Life sciences contribution
Information technology contribution
Non high-tech
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0
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physical and social environment also plays a role. For Richard Florida,place has
become the central organising unit of our time, taking on many of the functions
that used to be played by firms and other organisations, (Florida, 2002: 6).
Florida cites diversity and high quality of life as well as a vibrant nightlife and
outdoor recreation as important factors that attract and retain individuals.
Though we did not conduct a scientific sampling, there is a general belief
in the region that Madison is a desirable location in terms of life style and that
the university is an attractive employer. As the founder of Madison company
NimbleGen Systems states, UW is a highly respected research facility and
draws talent from across the nation. In the end, the talent really does not want
to leave Madison, due in part to the relationships people have formed with a
wide range of like-minded people and the attractive standard of living they
experience (Potera, 2004: 2).
Most studies agree that Madison has an excellent public school system,
reasonably priced housing, and a wide range of recreational activities. In the
winter, skiing is popular, and in the summer Madison offers an extensive bike
trail system, golf and hiking. City boosters cite the downtown area as being
vibrant with the character of a small city but the amenities of a major
metropolitan area (MG&E, 2006). One widely mentioned drawback is that its
relative small size discourages airline connections, thereby making travel
more burdensome. For example, one entrepreneur observed that, there are
direct flights to only a very limited number of destinations, and there also
seems to be a psychological barrier that hinders companies on the East and
West coasts from working with companies in the Midwest (Willis, 2004).
Though logistically it suffers from some handicap, the social amenities appear
to provide a level of compensation.
Success factors
This section discusses the institutional drivers of the Madison cluster.
The institution at the centre of the Madison high-technology cluster is the
UWM. Of all of the technology-based start-ups in Madison, 46 per cent have at
least one founder from the university.
6
UWM has a unique institutional model
for commercialising research in that the university does not have an office of
technology licensing. As a parenthetical note, because UWM is the only major
research university in Wisconsin it has increasingly been involved in
encouraging entrepreneurship around the state.
7
As the outcome of a
historical accident discussed in more detail later, its technology licensing is
channelled through an affiliated non-profit organisation called the Wisconsin
Alumni Research Foundation (WARF), which is not directly controlled by the
university. It is UWM and WARF that have had the greatest impact on the
inception and growth of Madisons entrepreneurial ecosystem.
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The university
UWM is at the core of Madison cluster and has been the source of many
start-ups. Very importantly, because a university is a decentralised
organisation, just because the UWM is at the centre does not mean that the
various start-ups have technologies or personnel in common. For example, a
software spin-out of the university may share no information transfer paths
with a biotechnology start-up. Furthermore it is difficult to establish precisely
how many of the start-ups have their origins in the university. In many cases
start-ups are direct spin-offs from the university. But in many cases
entrepreneurs are emerging from university spin-offs to start yet other firms
as is the case with Promega, PanVera and NimbleGen Systems. Of course,
these connections are only the most visible and in the discussion of Promega
we show that there are many more connections to the point at which it would
be fair to say that there is a biomedical materials sub-cluster in Madison that
exhibits the buzz that geographers have identified with dynamic clusters
(Pinch et al., 2003; Bathelt et al., 2004).
UWM follows a typical hub (UWM) and spoke (start-ups) morphology. The
most important exceptions to this are the firms that are genealogically
connected to Promega, which is discussed further below.
Founded in 1848, UWM is a public university that was designated as a land
grant institution in 1864. It was in the early 1900s that university president
Charles Van Hise verbalised the concept of the Wisconsin Idea. In keeping
with the US land grant university tradition, he, and other members of the
schools faculty and administration, believed that university knowledge should
spread to the borders of the state or that, the boundaries of the university are
the boundaries of the state (Sobocinski, 1999: 9). This established the
continuing mission of service to the state (UWM Board of Regents 2003). For
the last decade, UWM has been among the Top Five universities in the US in
terms of R&D expenditures (see Table 7.5).
In 2004, the last year for which US National Science Foundation (2004) data
is available, UWM (and the other University of Wisconsin campuses, which are
statistically insignificant) expended in excess of USD 763 million. In 2004, the
life sciences received USD 474 million while math, computer sciences, and
engineering (MCE) received USD 113 million (NSF, 2004: 78) (see Table 7.6). The
disciplinary expenditures show the strength of UWM in the life sciences. MCE at
UWM is respectable, but it is not as strong as at some other Midwestern
universities such as the University of Illinois. Not surprisingly, this strength in
the biological sciences is expressed in the start-ups.
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Wisconsin Alumni Research Foundation
The Wisconsin Alumni Research Foundation (WARF) plays a critical role
in the UWM ecosystem as an intermediary in the commercialisation of
university research. It was established in 1925 as a non-profit patent
organisation funded initially by UW alumni and managed by a Board of
Trustees composed of alumni, but it has always been independent of the
university. As such, and as a result of a historical accident relating to the
patenting of ultraviolet irradiation of food to increase Vitamin D, it is a unique
institution unlike that of any other US university. The independence allows it
to operate in an entirely business-like fashion and it is not involved in
university politics or managed by the academic administrators. WARFs
primary purpose was and is to manage patents based on UWM research.
Since 1928, WARF has provided more than USD 750 million to the University to
support further research. As such, WARF has been a major force in the
development and growth of the university as a research institution and in the
entrepreneurial environment in Madison (WARF, 2007).
Table 7.5. R&D expenditures by year (USD 000)
Rank Institution 1997 1998 1999 2000 2001 2002 2003 2004
All institutions 24 370 716 25 856 006 27 530 968 30 068 664 32 793 818 36 367 358 40 056 637 42 945 081
1 Johns Hopkins
University
829 241 853 620 874 518 901 156 999 246 1 140 235 1 244 132 1 375 014
2 University
of California,
Los Angeles
398 865 447 367 477 620 530 826 693 801 787 598 849 357 772 569
3 University
of Michigan,
all campuses
483 485 496 761 508 619 551 556 600 523 673 724 780 054 769 126
4 University
of Wisconsin,
Madison
419 810 443 695 499 688 554 361 604 143 662 101 717 044 763 875
5 University
of California,
San Francisco
343 384 379 970 417 095 443 013 524 975 596 965 671 443 728 321
6 University
of Washington
409 959 438 191 482 659 529 342 589 626 627 273 684 814 713 976
7 University
of California,
San Diego
376 655 418 790 461 632 518 559 556 533 585 008 646 508 708 690
8 Stanford
University
395 310 410 309 426 549 457 822 482 906 538 474 603 227 671 046
9 Pennsylvania
State University,
all campuses
339 955 362 643 379 402 427 575 458 066 492 739 533 427 600 139
10 University
of Pennsylvania
296 141 333 477 383 569 430 389 469 852 522 269 564 635 596 756
Source: NSF 2006, Table 27.
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WARF was successful nearly from its inception due to faculty assigned
patents on the use of ultraviolet irradiation to increase Vitamin D in foods
(in 1927), derivatives like coumadin and warfarin (a rat poison) (series of patents
from1941 through 1948), methods of preserving organs for transplantation
(series of patents from1967 through 1987), and magnetic nuclear resonance
technology (WARF, 2007). WARF still receives between 60 and 70 per cent of its
total income from Vitamin D technology (Gulbrandsen, 2003). Many of these
lucrative patents were not commercialised through start-ups, but rather
through licensing to large firms.
In 2005-06 alone WARF filed for 300 US patents on UWM technology and
gave USD 65 million to UWM to support research. The process of patenting
through WARF is described as:
If WARF accepts the invention for patenting and licensing, the foundation
provides an attorney to help the researcher with the patent application.
The researcher also agrees to assign ownership of the invention to WARF.
It is at this point WARF may contact companies considered good matches
for the technology. WARFs policies call for 20 per cent of the gross
licensing revenue from an invention to be returned to the inventor (or
inventors). The remainder is shared with the UW Madison Graduate
School, and the inventors laboratory and department (WARF, 2007).
In addition to logistical support with the patent, WARF is able to help put
scientists in touch with venture capital money (or other funding sources),
offer loans and physical space for their company, and to provide advice and
Table 7.6. R&D expenditures by discipline, University
of Wisconsin, Madison, 2004 (USD 000)
National
rank
Field R&D amount
29 Agricultural Sciences 43 238
6 Biological Sciences 155 682
17 Chemistry 17 115
23 Computer Sciences 13 457
14 Engineering 94 860
10 Environmental Sciences 54 127
7 Life Sciences 473 733
24 Mathematical Sciences 4 803
11 Medical Sciences 272 640
14 Physical Sciences 51 853
15 Physics 21 969
1 Psychology 29 329
4 Social Sciences 41 686
Source: NSF 2006, Tables 45-62.
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counselling in the early years. Deepak Divan, a UWM professor and founder of
SoftSwitching Technologies describes WARF as a gorilla standing beside you,
who can enforce patents and act as an advocate (Ladwig, 2004).
The WARF support, and the connections, experience and funds it can
provide help create an environment in which research and innovation are
highly valued. This is especially important in the field of biotechnology, where
the majority of advanced research is done at the university level, as opposed
to in private or industry labs. Critical to the impact UWM has on the business
landscape in Madison, and vital to the function of WARF, is the fact that
professors retain the rights to the fruits of their research. This is unusual
among research universities, as ownership tends to belong to the institution
itself, not the individual. WARF has been able to capitalise on this fact.
Business school
Though it is debated as to what direct role business school programmes
can have in assisting high-technology entrepreneurship, the UWM business
school has become quite active in the field of entrepreneurship. (There are
other programmes and departments within the UWM that have had roles in
the development and evolution of the cluster.) A recent addition to the
ecosystem is the Weinert Center for Entrepreneurship within the University
of Wisconsin, Madison School of Business, which interacts with the high-tech
f i rms i n a novel way. Through the Wei nert Appl i ed Ventures i n
Entrepreneurship (WAVE) programme founded in 1998, 12 MBA students are
selected each year to work with a new local firm. The students get experience
while creating comprehensive strategic, operating and financing plans for the
firm (Weinert Center, 2007). In return, the firm may benefit from the students
knowledge, a set of skills very different from those of the professors who are
developing the technology. This programme is unique, and helps to create an
environment where entrepreneurship is encouraged and enabled. The WAVE
programme allows professors to market the products of their research while
remaining an active member of the Universitys faculty by limiting their
involvement in day-to-day business operations.
Though there have been no evaluations as to its impact, the Small
Business Development Center, founded in 1979 and also a part of the
University, offers courses in fundamental business areas. The SBDCs stated
mission is, [t]o enhance the success of small business owners and managers
in our three county service area of Dane, Sauk and Columbia counties and
encourage growth in our economy. We strive to achieve this mission by
providing practical, customer-focused management education, training,
counselling and networking (SBDC, 2007). Class offerings range from what
you need to know before starting a business to leadership skills and how
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to protect your firm in the case of a natural disaster. The organisation also has
business counsellors available at no charge who can assist with specific
issues.
Office of University-Industry Relations and Office of Corporate Relations
Established in 1963 as the University-Industry Research Program and
renamed in 1994, the Office of University-Industry Relations was the campus
link to small and large business, as well as the office that managed campus
invention disclosures. Its mission was to establish the most productive
relationship possible between the private sector and the University of
Wisconsin, Madison. Some of the methods used to achieve that goal
included campus tours of faculty research, the introduction of industry to
UWM research consortia, and facilitation of partnerships through federal
programmes such as Small Business Innovation and Research grants (SBIR).
In 2005, the state of Wisconsin received USD 35 million in these federal grants
for commercialising research (Wisconsin Department of Commerce 2005). As
Table 7.7 indicates, the overwhelming bulk of this money went to Dane County
where Madison is located.
Following a recommendation of the Chancellors 2002 Task Force on
University-Business Relations, UIR was phased out and replaced by The Office
of Corporate Relations (OCR) in July 2003. The task force determined that the
operating model of UIR was unable to keep pace with the rapidly changing
needs of the business community in Madison and did not provide a visible,
single point of contact for Wisconsin business. The new office, now located at
the Universitys Research Park, is central point that provides clear access to a
variety of programmes.
According to Allen Dines, Assistant Director at OCR, the role of the office is
as broker, connector, consultant and cheerleader (personal interview, 2007).
The OCR does not oversee programmes related to business start-up and
industry support, rather it behaves as an interpreter of and liaison between
Table 7.7. State of Wisconsin SBIR grants by county in 2005
Geographical distribution of awards # of companies USD amount % of total
Dane County Alone 37 36 508 922 86.8
Dane, Sauk, Iowa Counties 39 36 649 227 87.1
Southeastern Wisconsin 10 3 414 004 8.1
Northwestern Wisconsin (Eau Claire) 1 456 965 1.1
Northeastern Wisconsin (Appleton) 1 69 345 0.2
Central/Northcentral (WI Rapids, Chili) 2 1 471 431 3.5
TOTALS 53 42 060 972
Source: www.commerce.state.wi.us/NEWS/releases/2005/157.html (Accessed 30 January 2007).
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these programmes and current businesses. It also works to connect new, start-
up companies with the outside world. We interpret the companys needs and
refer them to University Programs (ibid). In addition, the OCR serves as a public
relations manager; Dines sees public relations as one of his, and his colleagues,
major tasks as they act to promote the idea that the University is friendly and
open to business. It should be noted that, while the OCR is located in Madison
and has a special interest in the city, their support of business reaches to the
rest of Wisconsin as well as across the United States.
Research parks/small business incubators
Madison has experienced a proliferation of small business incubators.
The principle behind business incubators is that new firms may be unable to
mobilise the resources necessary for success.
8
The University supports one
such incubator, but there are many others. The UWM-sponsored incubator,
University Research Park (URP), is a non-profit entity established in 1984 that
develops land to lease to start-up companies (Sobocinski, 1999: 306). The
profits from this development are donated to UWM. There are currently
110 tenants, who have access to core services on such as accountants, lawyers
and venture capitalists (Potera, 2004; URP, 2007).
The URP also houses the Madison Gas and Electric Innovation Center
financed by the local utility and opened in 1990. The Innovation Center provides
office and laboratory space for small companies, as well as shared support
services and equipment. For companies beyond the start-up stage, but not ready
or unable to move, the University Science Center at URP provides flexible space
with room to expand. There is also land available at the Park where companies
can build their own facilities. In early 2007, the URP plans to complete a second
phase of development, which will add 270 acres and 53 buildings to the site,
allowing an increase in the number of tenants to more than 200.
A second incubator, not associated with the University, is the TEC
Incubator Center. It is geared toward technology firms and provides conference,
classroom, and computer lab space as well as high-speed internet and phone
service (TEC, 2007). The region is also home to the Fitchburg Technology
Campus with a focus on nanotechnology research. Since the mid 1990s,
Madison has experienced a proliferation of firm incubators not limited to the
ones mentioned here.
Role of SMEs
The Madison cluster is a university-centric cluster. Whereas, biotechnology
clusters like North Carolina will have large multinational corporations at their
core, there are no such giants in Madison. Invitrogen, a biomedical input firm
based in Carlsbad, California, employing 4 500 worldwide does have an operation
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in Madison. When understood from this perspective, entrepreneurial firms and
SMEs drawing upon the universitys research are the cluster. With the university,
the SMEs are central to the cluster and new entrepreneurial firms are not
unusual.
The success of small and medium sized businesses has reached critical
mass and entrepreneurship has become an accepted path. Jane Homan, a
UWM professor and co-founder of local biotech firm Gala Designs established
in 1996 reflected upon the earlier ethos in Madison, we were considered the
mavericks of the University Now were pretty normal (Fikes, 2000). Absent
these start-ups, it is likely that the Madison economy would be a typical public
sector economy served by a small services-based private sector. Moreover, the
state economy would have no growth regions or industries.
Barriers to cluster development
Despite the success of the region in creating start-ups, there are
difficulties. The lack of airline connections has already been mentioned. A
more important obstacle is a shortage of seasoned executives in situ that can
be recruited to provide the business experience to the university-related
innovators. The success of any start-up is predicated as much upon the ability
to attract top-notch business talent as having first-rate scientists. An
important recruiting ground for these seasoned executives are established
firms within the industry. In biotechnology that would be the large
pharmaceutical firms and in the IT sector it would be firms like IBM, Intel, and
Microsoft; none of which have significant facilities in Madison or even
Wisconsin. There can be little doubt that this is a handicap to Madison firms.
Pam Christenson, acting administrator in the Business Development Division
of Wisconsins Department of Commerce believes workforce development is
one of the biggest barriers facing the cluster to this day (Christenson, 2007).
The University and the business school have responded to this shortage by
creating various programmes such as entrepreneurship and technology
management specialties and a masters of science in biotechnology, but
ultimately these cannot overcome the lack of large firms with seasoned
management in the region.
A lack of venture capital funding is also cited as an obstacle to the growth
of the cluster. However, Allen Dines of the OCR has a slightly different
perspective. For him, the obstacle has been the ability to create fundable
deals that are attractive to investors (Dines, 2007). Many Madison start-ups
have not sufficiently clearly identified their markets as they make the
transition from technology to product. Were this identification more clear,
then he believes the search for funding would be more successful. He also
notes that most of the Madison start-ups are not attractive to VC funders,
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because the types of products and services they intend to produce will not
serve sufficiently large markets. Conversely, the small specialised (but very
lucrative) markets do not require such large expenditures in the establishment
of the firm.
The barriers to the further development of the cluster are difficult to
predict. Obviously, one barrier is the number of highly-educated university
facul ty and graduates that have devel oped technol ogy worthy of
commercialisation. Further, if they have developed technology worthy of
commercialisation, do they wish to be involved in commercialisation. In terms
of technologies and markets, it seems likely that there will be a continuing
flow of opportunities to commercialise various research technologies,
materials, and services. For example, a UWM professor through WARF holds
key patents on stem cell lines, patents that may create an ample income
source, but which have also created much controversy due to the severe
licensing restrictions WARF has imposed on industrial and academic
researchers.
9
Role of policy
Together with the University and WARF, public policy plays a role in the
development and maintenance of the high-tech cluster in Madison,
Wisconsin. What follows is a discussion of some of these policies.
Federal policies
The US is quite different from other nations in that the Federal
government has had very few region-specific policies with the possible
exception of the major support for defence firms and bases on the West
Coast during World War Two. The US governments most significant policy for
UWM has been enormous and unremitting funding of university research
particularly the life sciences; some small portion of the research results are
commercialisable. In the case of UWM, the most important research funding
has been in the biomedical and, to a lesser degree, agricultural fields. UWM has
not been one of the elite US computer science and electrical engineering
schools so DARPA funding was not as significant for the local start-up economy.
Bayh-Dole is credited by some such as Howard Bremer, emeritus patent
counsel at WARF, as being important to the development of a commercialisation
ethic at UWM, though it should be noted that many of WARFs greatest
successes came long before Bayh-Dole was signed. UWM was the first school
to sign an Institutional Patent Agreement (IPA) with the then US Department
of Health, Education, and Welfare that granted UWM the right to license
inventions to firms without having to clear it with the federal government
(WARF, 2007). Use of IPAs quickly spread to other major US research universities
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(Mowery et al., 2004), and they were the precursor to the Bayh-Dole Act of 1980
that was a blanket transfer of the rights to federally-funded university inventions
to universities.
The passage of Bayh-Dole and the success of firms, such as Genentech,
Amgen, Hybritech, and many others, in commercialising the new
biotechnologies that had been developed in university laboratories piqued the
interest of university administrators searching for new sources of income. The
result was a rush of universities establishing offices for technology licensing.
At UWM, WARF was already established for commercialising university
faculty inventions and, unsurprisingly, it moved into this field. One change in
the environment was that increasingly professors wanted to be involved in the
commercialisation of their inventions through establishing a firm. And,
frequently, the firm was located close to the university. It is this dynamic that
led to the emergence of a local cluster of technology firms in Madison.
The SBIR programme provides about USD 35 million to the Dane County
economy, and has been significant in the growth of some firms. Since SBIR
funds substitute for early stage venture capital, and the Madison area has only
minimal amounts of venture capital, the SBIR programme probably is of some
importance to entrepreneurship in the Madison. Despite the debates about
the overall efficacy of the SBIR programme, it is likely to have been important
to certain firms in the region.
State and local policies
While the University and WARF are central to the creation of the cluster,
local and state government have provided the infrastructure and support
necessary to maintain its growth. One way this is pursued is through groups
such as the Wisconsin Technology Council and the Wisconsin Biotechnology
and Medical Devices Association, who lobby the federal and state
governments in the interest of local firms. These organisations also help with
regulatory issues. The state responds well to such lobbying efforts. In 2004,
Governor Doyl e announced t hat Wi sconsi n woul d i nvest up t o
USD 750 million in biomedical research over the next few years. One such
programme included in that pledge is the planned Wisconsin Institutes for
Discovery. Construction began in 2008 for the public-private partnership that
includes a large private donation well as matching gifts from WARF and the
state of Wisconsin. The Institutes will be housed on the UWM campus and
have as their goal the fostering of interdisciplinary collaboration and
innovation.
Outside of Madison, many of the cities in Wisconsin have faced economic
difficulties in recent years. State wide, the Grow Wisconsin Initiative looks to
reverse this trend by creating an environment that encourages business
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development. The plan laid out by the governor in September 2003 focuses on
four key areas: 1. the creation of competitive business climate; 2. investment
in the people of Wisconsin; 3. investment in Wisconsin businesses, and; 4. the
reform of regulations and increased government responsiveness.
10
It is too
early to gauge the results of this initiative that plans to invest over one billion
dollars to achieve its goals, including USD 300 million in seed and venture
capital funds and another USD 10 million for a free training fund for
companies looking to invest in new high-tech jobs. Regardless of this, the
support of the government is impressive.
Unlike many other regions with high rates of start-up creation, there are
limited venture capital funds available in Madison. In 1998, there were
40 states that recorded venture capital activity. Only eight of these had lower
levels of activity than Wisconsin. Rates of VC funding have increased since
that time, but they remain well behind those typical of regions with high levels
of technology-based entrepreneurship. Supported by local and state policies,
angel financing has been able to fill this void. The first angel investing group
in the state of Wisconsin was founded in 2000. Today, there are 15 networks
(Table 7.8).
Indicative of the willingness of state and local government to support the
biotech cluster and angel financing is the recent adoption of the Wisconsin
Angel Tax Credit (Act 255). Beginning in January 2005, the state of Wisconsin
made USD 3 million available annually in angel tax credits. The full amount
Table 7.8. Angel investment groups in Wisconsin
Firm name Location(s) in Wisconsin
Badger AgVest, LLC Wausau
Badger Alumni Capital Network (BACN)
Central Wisconsin Business Angels Wisconsin Rapids
Chippewa Valley Angel Investors Network Eau Claire
IQ Corridor Angel Network Pewaukee
Marshfield Investment Partners, LLC Wausau
New Capital Fund, LP Appleton
Origin Investment Group LaCrosse
Pennies from Heaven Racine Country, Kenosha County
Phenomenelle Angels Fund I, LP Madison
Silicon Pastures Milwaukee
St. Croix Valley Angel Network River Falls
The Golden Angels Network Milwaukee
Wisconsin Investment Partners, LLC Madison
Women Angels Milwaukee
Source: NorthStar Economics, Inc. 2007.
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was expended in 2005 and just over USD 900 000 remain from 2006
(Commerce Department, 2007). While analysis on the effects of the tax credit
is still incomplete, initial findings are optimistic. According to a report filed by
NorthStar Economics, Inc., investing by angel groups in 2005 increased by
65 per cent over the previous year. Of course, the ultimate test is whether
high-quality firms were created, thereby justifying the state investment.
On a local level, ordinance amendments have been passed to alter zoning
restrictions for companies looking to set up biotechnology research facilities.
In addition the city provides tax incremental financing for businesses locating
in specific districts as well as revolving loans. Together with three other
counties in Wisconsin, Dane county is involved in a programme that offers tax
credits for new and expanding high-technology businesses (Office of Business
Resources, 2007).
While the policies and programmes mentioned above have played an
important role in the cluster, it is important to realise that these influences
can only do so much. Pam Christenson from the Wisconsin Department of
Commerce points out that we see clusters as a private sector driven initiative,
not a programme the public sector can impose on an industry (Christenson,
2007). Her office produced a white paper in 2003 entitled Fostering Cluster
Development in Wisconsin. The publication reads, the private sector must lead
successful clusters. Business and other key stakeholders should examine
the changes and improvements that need to occur within the cluster and
not focus solely on what government should do for the cluster (Wisc. Dept. of
Commerce 2003: 2).
Future policy challenges
For a state l i ke Wi sconsi n, whi ch has fel t the ful l brunt of
deindustrialisation, research-based entrepreneurship has been seen as an
important boon to the state. The success has been so great that recently the
state has been asking UWM and WARF to assist other cities in Wisconsin to
develop technology clusters. From the political perspective, this makes perfect
sense. However, there is a possibility that the institutions at UWM and in
Madison will lose their focus on growing the cluster in Madison, thereby
inhibiting its growth, while it is unlikely that the other regions have the
technological bases to establish viable clusters and, perhaps, even viable
firms. Thus its very success might lead local and state politicians to extend
UWMs mission in directions that divert it from doing what it does best, which
is grow its local cluster.
Tom Still of the Wisconsin Technology Council is quoted in a recent
newspaper article on the future challenges facing high-technology start-up
business in Wisconsin.The bottom line is Wisconsin is seeing more activity
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that doesnt mean were where we need to be; were well behind the curve,
but at least were laying a strong foundation for stronger investment activity
years ahead.
The Madison biotechnology cluster is significant. However, government
and industry leaders believe that growth, especially outside of the supply and
services fields, will depend on increased venture investment both in
quantity and value of deals. Whether this belief is justified or not is beyond
this chapters scope. Unfortunately, the prospects for more local venture
capital do not look particularly promising because the UWM start-ups do not
offer the promise of the enormous returns of a blockbuster drug. In addition,
the region does not have many IT-related start-ups that provide extremely
the rapid returns that ensure high internal rates of return for the venture
capitalists.
Taxation is often mentioned in Wisconsin as an issue for the health of the
cluster. A recent study for the Small Business Administration found that
Wisconsin has above-average tax levels. While the Commerce Department
notes that business taxes are lower in Wisconsin than those in 35 other states,
an anti-tax group, the Wisconsin Taxpayers Alliance, reports that state and
federal taxes claimed 33.4 per cent of personal income in the state on 2006
(Still, 2007). Some believe that if the state wants to encourage the continuing
development of the high-tech cluster, these supposedly high rates of state
taxation should be lowered. It should be noted that the most successful state
in the US in terms of high-technology entrepreneurship, California, has a
roughly similar tax burden. Also, given that Wisconsins start-ups are so
university-linked, it is unlikely that these entrepreneurs would relocate to a
state with very low tax burdens such as Mississippi. Tax cuts that weakened
UWM would almost by definition in such a public university-centric cluster
have a negative effect on the cluster. Those arguing that tax cuts would
strengthen the development of the Madison cluster likely are more interested
in tax cuts than in the furtherance of cluster growth.
The greatest policy challenges for the cluster centre upon any changes in
the levels of Federal funding for research. The current federal deficit spending,
particularly on the invasion of Iraq and the military, could lead to a situation
within which federal research funding decreased. Because of the centrality of
UWM research to overall cluster health, such an event would almost certainly
weaken the cluster. The impact would be magnified if biological research were
particularly singled out for cutbacks. The dependence of the cluster on federal
funding of biological research, both for continuing growth both in existing
firms, many of which produce biologicals for research, and the flow of new
start-ups cannot be underestimated.
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Lessons for other clusters
It is hazardous to draw too strong conclusions from a single case study.
However, Madisons experience does suggest the following observations:
1. High-technology entrepreneurship has been important for the growth of
the Madison economy, and has made it the fastest growing part of the state
of Wisconsin.
2. The development of the Madison cluster has been underway for
approximately 25 years, and it has developed a regional recipe that does not
require large amounts of venture capital. A number of firms have received
venture capital. The exact chronology of this co-evolution between
technology fields and financing strategies is not clear, but in 2007 it is now
conventional wisdom among entrepreneurs.
3. UWM has a unique institutional relationship with the fully independent WARF,
which is responsible for all licensing and technology transfer. This contrasts
with dominant model in US and increasingly universities around the world
where the technology transfer organisation is a part of the university. The
success of university entrepreneurship and WARF in returning funds to the
university suggests that the dominant model may not be best for all
universities, and that experimentation with other models might be valuable.
4. For university-based clusters, national-level decisions on research funding
may be as important as any local or state decisions particularly in smaller
less wealthy states such as Wisconsin.
5. As Klepper and Sleeper (2005) and others have discovered, one firm such as
Promega in Madison or Fairchild in Silicon Valley may be very important as
a source of still further entrepreneurial firms.
6. UWMs research excellence particularly in biology has translated into local
economic development.
7. The state government has invested in a large variety of initiatives to encourage
the growth of the cluster. However, there have been few evaluations of the
efficacy of this funding. The most successful UWM firms such as Promega
received little direct assistance from these new state programmes as WARF has
historically been the locus of university-based spin-off activity.
8. The living conditions retain Madison entrepreneurs. Unfortunately,
Madison has been less successful in attracting either top-flight executives
to the region or entrepreneurs that established their firms elsewhere. Thus
it falls in between regions such as Pittsburgh with universities like Carnegie
Mellon that often lose their entrepreneurs to other regions such as Silicon
Valley or Boston, and universities and regions such as Stanford/UC Berkeley
and regions such as Silicon Valley that attract entrepreneurs from around
the world.
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As was the case in Silicon Valley and many other high-technology
clusters, Madison suggests that it was not far-sighted policy makers that were
responsi ble for the creation of the cluster, but rather pioneering
entrepreneurs. Moreover, the Madison entrepreneurs did not compete in
human therapeutics, which required large tranches of venture capital and
were extremely risky, but rather found niches that could be bootstrapped into
profitable small businesses. In the overall scheme of things, the Madison
cluster is relatively small, however for the medium sized city of Madison it is
an important component of the citys overall success.
Ultimately, the inception of every cluster is based upon entrepreneurship
and, rarely, is this an outcome of government policy. Usually, policy follows the
emergence of a cluster, and hopefully it does not retard the clusters growth.
One of the greatest mistakes by practitioners, policy makers, and academics is
to examine an established cluster and the extant policies at that time and
assume that the policies were responsible for the birth and growth of the
cluster. It is only through longitudinal analysis that we can surely identify the
reasons for the birth of the cluster and evaluate the reasons for its growth.
Notes
1. This detailed information was provided by Allen Dines, Assistant Director, Office
of Corporate Relations, UWM.
2. On entrepreneurial support networks, see Kenney and Patton 2005.
3. On the dynamics of venture capital investment see Florida and Kenney (1988) or
Gompers and Lerner (1999).
4. www.wisgov.state.wi.us/docview.asp?docid=707&locid=%2019.
5. Kenney and Patton 2005, Powell et al. 2002.
6. Our research has strict definitions of high-technology. For example, while some
lists of technology firms in Madison include personal computer assembly shops or
routine blood testing firms, we exclude these. For this reason our list is shorter
than the one produced by Madison Gas and Electric.
7. This may be politically correct, but may also be a waste of UWM-affiliated persons
time even if the resources are provided by the state.
8. The belief by the supporters of incubators is that they can shepherd small firms
over the initial difficulties typical of firms. Another school of thought, frequently
held by successful entrepreneurs, argues that locating firms to an incubator
merely prolongs the lives of unworthy firms and might harm good firms by not
exposing them to market rigors immediately.
9. Initially, UWM attempted to charge royalties to any researchers wishing to do stem
cell research. This policy created enormous criticism and in late January 2007 it
modified the policy to allow researchers to use the materials and techniques
royalty free.
10. www.wisgov.state.wi.us/docview.asp?docid=707andlocid=%2019.
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Chapter 8
The ICT Cluster of Waterloo, Canada
by
David A Wolfe, Ph.D. Program on Globalisation
and Regional Innovation Systems,
Centre for International Studies, University of Toronto
This chapter illustrates the approach and initiatives of the
entrepreneurial university in Waterloo in building the regions
information and communications technology (ICT) cluster. The
creation of spin-offs seems to be encouraged by a series of policies
implemented in the university, among students and academia. This
case study is also a good example of collaboration between
university and industry to meet the demands of the cluster labour
market concerning skills. The adaptation of the university to the
needs of industry, and the tight co-operation between industry and
university in training and developing specific skills in students,
have had a positive impact on the development of the cluster. This
chapter also shows how flexible intellectual property regulations at
the university play an important role in stimulating innovation,
collaboration and business creation.
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Introduction
The search for effective local economic development strategies has
assumed greater significance over the past decade. Concern with the factors
that sustain innovation in local and regional economies has led to a growing
fascination on the part of policy makers with industrial clusters due to their
perceived impact on competitiveness and innovative performance. Closer
examination of the origins and development path of specific clusters provides
some guidance for cluster policy. Also important is the relationship between
large and smaller enterprises in clusters. Much of the cluster literature
documents the role of lead anchor firms in grounding the cluster in a specific
geographic location. At the same time, a key success factor in cluster
development is the ability to spin-off and grow newer small and medium-sized
enterprises (SMEs). Much of the cluster literature views large and smaller scale
firms as integrally linked in terms of buyer-supplier relationships, with the
smaller scale firms forming a critical part of the supply architecture of the
regional economy. Yet evidence from more recent studies indicates that buyer
and customer relationships with external partners can be equally important for
cluster firms as their internal relationships. A number of these studies point to
the role of niche clusters within the global economy, as individual clusters in
photonics, for instance, have come to specialise in particular technology and
sectoral niches. Another key issue involves the relationship between different
levels or scales of governance in supporting cluster policy. While clusters are
clearly defined as a local or regional phenomenon, there is growing recognition
that vibrant and dynamic clusters draw effectively on a range of policy
instruments from senior levels of government to sustain their development.
The case of the information and communication technology (ICT) cluster
in Waterloo, Ontario, is instructive for developing a better appreciation of the
implications of these factors for the process of cluster formation. This chapter
draws upon a recent case study of the Waterloo, Ontario, ICT cluster
conducted as part of a larger Canadian study of industrial clusters to explore
these issues. The following discussion examines the origins of this vibrant
regional economy and explores how a deeply rooted regional culture,
historical patterns of trade and knowledge flows, and locally created
institutions each contributed to the emergence of the region as a dynamic
centre of high-tech activity. Along the way, it provides some valuable insights
for policy makers interested in emulating the regions cluster-based success.
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Nature and evolution of the cluster
The ICT cluster in the Kitchener-Waterloo-Cambridge (Waterloo) region,
located an hour west of Toronto, is one of the most dynamic sources of high-
tech activity in Canada. Although the present contours of the cluster can be
traced back to the formation of the first software and computing firms in
the 1970s, the Waterloo region has long been an important location for
manufacturing in the Southern Ontario industrial landscape. Kitchener-
Waterloo has been the home to major national and international corporations
for more than a century, from Dominion Electrohome Ltd. to present day
success, Research in Motion Inc. manufacturer of the iconic Blackberry.
The region has had a pioneering presence in some of the major technological
advances in North America, including automobiles, radio, processed foods,
financial services, biotechnology and computing. Today, this history of
technological leadership continues in fields such as internet-enabled wireless
communications, software, aerospace, engineering, ecommerce, robotics, and
laser technology.
The emergence and contemporary dynamism of the Waterloo ICT cluster
owes its success to critical decisions taken by industrial leaders in the local
economy in the years following World War II. The period between the wars
saw the growth of complex engineering, metalworking, food and automotive-
related industries in the region on the foundation of the traditional
manufacturing base. One of the key local institutions to emerge in the
interwar period was Waterloo Lutheran College, established in Kitchener
in 1924. Although the college did not contribute directly to the high-
technology development in that era, its offspring, the Associate Faculties, was
the precursor to the University of Waterloo. The University of Waterloo is one
of several colleges and universities in the region with strong ties to local
industry. However, more than any other research institution in the region, it
has exerted a singular impact on the regional economy. The period of post-war
reconstruction in Canada and the growing recovery of the leading industrial
powers brought home some important lessons for government and industry
in Canada. In a world where national survival was predicated on technological
capabilities, Canada was found woefully lacking by industrialists and
government alike. Local leaders and institutions in Kitchener-Waterloo played
a key role in translating those lessons into practical measures. The University
of Waterloo, founded in 1957, emerged in response to the growing demand for
more sophisticated and technical educational institutions.
Certain prominent members of the local industrial community in
Kitchener-Waterloo played a strategic role in Waterloo Lutheran College
through their membership on the Board of Governors and recognised the
growing demand for trained technical personnel and the implications of this
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demand for the employment requirements of the local economy. Recognising
the need for more technical education in the regional economy, Ira Needles
(president of B.F. Goodrich and chairman on the Board of Governors for the
newly created Associated Faculties of Waterloo Lutheran College) proposed a
unique solution in the form of The Waterloo Plan. This plan called for a new
type of education to be offered on a co-operative basis with industry. In
sharing the burden of technical training with industry, the university would be
able to support twice the number of students (as one class rotated out to co-op
placements in industry while another took its place in the classroom), provide
a greater depth of education both theoretical and practical and build a
closer relationship with industry in order to anticipate employment needs,
secure additional funding and ensure that classroom education remained on
the cutting edge. This proposal became the basis for the University of
Waterloos highly successful co-operative education programme, widely
regarded as the largest and the best university co-op programme in North
American and a significant asset to the region.
Chance also played an important role in the early development of the ICT
cluster as it often does. The original plan incorporating the Associated
Faculties assumed that it would remain affiliated with Waterloo Lutheran
College, which would provide the liberal arts and social science components of
the new universitys curriculum. However, when the Associated Faculties
acquired university status, the original college decided not to participate in the
new institution. This serendipitous development resulted in the establishment
of the new university with the overwhelming bulk of its faculty and course
offerings in the sciences, math and engineering. Waterloo is one of the few
universities in North America with a dedicated Faculty of Mathematics. In its
formative period the university was mainly concerned with training a pool of
local talent and transferring knowledge to the local economy through its
graduates. It set out to provide the best possible science, math and engineering
curriculum possible. The co-operative education programme, adopted in part
out of financial necessity and in part out of the foresight of its founders, rotates
students to industry and back to the classroom on a regular basis. This reflexive
relationship allows the curriculum to keep up with the ever-changing
technological frontiers of industry, while strong industry support for the
programme has funded the acquisition of technology to enhance classroom
learning. It was thus that Waterloo became one of the first universities in
Canada to enable students to actively explore and make use of innovations in
the relatively new academic field of study computing.
A key development in the emergence of the cluster occurred with the
installation of the first electronic computer. In the late 1950s, Wes Graham was
recruited to the university from IBM to teach a statistics course. With his
background in computing, Graham quickly became involved in a project to
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launch the new discipline of computer science at the University. The first
computer arrived from IBM in 1960 at a time when there were just over one
hundred installed across the country and it became the foundation of a
computing centre that was continuously upgraded. By 1967, the University had
an IBM 360/75, the largest computer in Canada. The first major ICT breakthrough
at the University was an innovation in software the WATFOR compiler. As soon
as it obtained its first computer, the engineers who wanted to, and the
mathematicians who could, started developing software. The only language
available that allowed undergraduates to programme computers was FORTRAN,
but it was too inefficient for practical use by large numbers of students and
faculty. Faced with this limitation, students and faculty at the University
invented the Waterloo FORTRAN compiler to speed up programming
computations. This new technology, dubbed WATFOR, became the basis for one
of the Universitys first spin-off companies and the first software company in
Waterloo WATCOM (1974) now the parent company to several generations of
subsequent spin-offs in the ICT cluster. The WATCOM spin-off established the
basis for a new business model of the relationship between the company and the
University. It allowed the founders of the company to retain ownership of their
research and intellectual property and thus formed the basis for the Universitys
current intellectual property policy. Furthermore, it provided an important
example of the entrepreneurship which served as both a model and a stimulus
for successive generations of university spin-off companies.
Geographically, Canadas Technology Triangle encompasses the four
municipalities of Waterloo, Cambridge, Kitchener and Guelph. Overall, the
region boasts 455 companies involved in the high-technology sector. The
compani es are spread across four sub sectors: i nformati on and
communication technology, scientific and engineering services, advanced
manufacturing, and the life sciences biotech and environmental sub sector. Of
these, information and communications technology accounts for 62 per cent
of the high-tech firms and employs 13 000 people or 45 per cent of the total in
the high-tech sector (Communitech, 2005). Though there may be several firms
involved in a particular market segment or technology niche within the
region, they rarely compete directly with one another. This is a testament to
the incredible diversity of high-tech activity in the region. The competitive
advantage of firms is the uniqueness of their products. Since these products
are so highly differentiated, most firms in the region compete globally on the
basis of this technical excellence, rather than on cost.
Despite the relatively small size of the local community the population of
the Waterloo region was 438 515 in the 2001 census the ICT cluster ranks
among the top ten among census metropolitan areas (CMAs) in Canada and
among the top thirty in North America on most indicators. The ICT
manufacturing and service clusters are far from the largest in terms of number
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of employees, with 7 165 and 11 615 in the 2001 census. However, their
combined employment ranks second behind the automotive parts cluster in the
regional economy and the location quotients for each are well above 1.00
(Tables 8.1). Where the ICT sector makes its most significant contribution to the
regional economy is in value-added. In a very conservative measure of ICT firms
in the region, Canadas Technology Triangle reported that in 2000 ICT
companies generated over CAD 8 billion in revenue. Furthermore, between 1993
and 1999 this sectors revenue increased 120 per cent, assets increased by
163 per cent and equity increased 420 per cent, indicating strong actual and
potential growth (Canadas Technology Triangle, 2004). While export figures
dont specifically target ICT-intensive industry, the research also indicates that
most of the ICT firms in the Waterloo cluster produce almost exclusively for
North American and global markets. The majority of measured exports from
the region came from advanced manufacturing including ICT-intensive
firms. In 2000, the region exported CAD 8.9 billion worth of products, 55 per cent
of the regions GDP that year. Export activity in Waterloo is so significant that
measured by the dollar value of exports per employee it ranks third in
comparison to all US metropolitan areas (Canadas Technology Triangle, 2004).
The nature of the commercialisation process in the region, and in
particular, the role of the University of Waterloo as a key institution in
transferring new knowledge into the region has evolved considerably over the
Table 8.1. ICT manufacturing and services
ICT
Kitchener Ontario Canada
Manufacturing Services Manufacturing Services Manufacturing Services
Number
of establishments 138 400 3 357 13 348 7 813 28 420
Total labour force 7 165 11 615 134 375 266 285 242 950 628 885
Average establishment
size 52 29 40 20 31 22
Location quotient
employment 2.00 1.25 1.44 1.10 1.00 1.00
Average annual income
(CAD) 43 648 43 349 48 942 48 241 45 589 44 445
Compound annual
growth, 1998-2005 (%) 2.9 8.7 1.2 6.2 1.4 4.9
% Full-time employment 97.4 85.9 95.9 89.2 95.3 89.2
% Part-time employment 2.8 13.8 4.1 10.8 4.7 10.8
% Self-employment 1.3 3.7 1.3 6.1 1.5 5.3
Average age of labour
force 39.2 37.8 38.3 37.6 37.8 37.8
% foreign born 30.1 25.4 43.3 35.6 35.0 26.5
Source: Statistics Canada, Census of Canada, 2001.
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period. Whereas it played a more direct role as a knowledge generator in
the 1970s and 1980s, the number of spin-offs and the results of a social
network analysis (Xu, 2003) indicate that the degree of knowledge transfer
through new firm formation has declined subsequently. Although the
University remains central to the continuing development of the cluster, its
primary contribution is no longer through the process of new firm formation.
Relatively fewer firms have spun out directly since the late 1980s and the post-
2000 slump in the demand for high-tech products and services resulted in a
noticeable decrease in the availability of financing for start-ups and spin-
offs. While the post-2000 downturn in the ICT sector has clearly had a
negative impact on the regional economy, on the whole, it has much fared
better than some of the other high-tech clusters in Ontario, such as the
Ottawa-Gatineau region.
Success factors
The University of Waterloo continues to play three critical roles in the
development of the regions ICT cluster. As a major research university, it is at
the forefront of knowledge creation in a variety of fields. It also generates a
key supply of talent that has contributed to the growth of a thick labour
market in the local economy. Finally, through the process of knowledge
creation and its strong support for entrepreneurship, the university has spun
off several prominent firms in the area. While all three roles have had
important effects on the shape of the cluster today, the one which attracts the
most obvious attention to the local cluster is its role in spinning off high-tech
firms. University or public research organisation spin-offs have long been a
key goal of public policy makers and economic development officials. For one,
they indicate the presence and creation of commercially viable research
within a publicly funded institution and are therefore a mark of institutional
success as well as a potentially positive return on public investment.
Several aspects characterise the nature of interaction between local high-
tech firms and the University of Waterloo. First, while there are many formal
relationships such as research contracts and funding of research chairs, much
of the knowledge exchange is more informal than formal. Interviewees cite
the University not only as an important source of tech transfer and specialised
skills, but also as providing both international cachet to the region, and simple
social/professional networks; I contact my friends there if I have a problem.
This informal approach underscores the embeddedness of the University in
the local community, and many people emphasise the organic nature of the
impact that the University has on the local community through the
interaction effect between the various roles of the University R&D transfer,
skills provision, international cachet, and informal knowledge networks.
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There is, however, a distinct division between those firms that interact
with the University and those that do not. For those with linkages to the
University, there is a range in the depth and breadth of interaction. Larger
firms tend to have more robust partnering relationships, often involving the
funding of research chairs, long-term collaborative research projects,
university faculty working within the firm, and full-time staff occupied with
university and government interaction. Smaller firms, in contrast, tend to
engage in short-term, problem-focused research projects. One of the primary
reasons cited for not becoming more involved in university research is the
amount of time required for commercialisation; while university research
project horizons might be two to three years, firms often need to work on
things that need to be commercialised in 6-18 months. Others reported
difficulty in accessing what was available, not feeling in the loop, or had a
perception that the research efforts at the University were focused on larger
companies. Regardless of involvement with the University on an R&D level,
however, almost every firm cited its critical importance as a provider of highly
skilled and specialised talent.
The case of the Waterloo ICT cluster confirms that the presence of a
robust local talent pool or thick labour market is indeed a central factor in
the internal dynamics of the local cluster, and that the local college and
universities have been the key actors in its development. A key explanation
that firms provided for why they are located in Waterloo is that they have
come to rely on such advantages as the local labour pool and the international
cachet that the area carries in tech circles. They stress the interdependence of
several key factors; the most often cited are the presence of the local
universities, and the quality of the local talent pool. Most firms indicated that
it was a distinct advantage to be located in Waterloo because it provided a
ready supply of smart and competitively priced engineers and because the
University of Waterloo is one of the best universities in the world for
computer engineering. In terms of the relative cost of building software in
India, the US, Europe and Canada, Canada, and specifically Waterloo, is seen
to be one of the best locations because of the quality and productivity of the
local talent pool relative to its cost. The presence of large software and
technology-intensive firms in the area, serves as a magnet and an anchor for
the highly specialised labour pool. Firms stay in the area because they have
invested in the local talent pool through in-house training which has
generated tacit knowledge that is difficult to relocate. Some smaller firms
indicated that it is important to be close to [large anchor] companies that are
leading edge because they deepen the labour pool, and smaller firms can hire
people that used to work at RIM Descartes MKS, and others.
The University of Waterloo is considered to be the premier educational
and research institution in the cluster, but it is only one of the post-secondary
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institutions in the region that feeds graduates into the local talent pool. The
majority of local high-tech firms require university educated employees, and
in many cases, most of the staff has at least a B.Sc., many have M.Sc.s, and a
large number of firms have several staff members with a Ph.D., many in
software engineering. While Waterloo is cited most often as the primary
source of new hires, especially out of the software engineering programme,
Wilfred Laurier University is regularly mentioned as a source for junior
marketing and management people. Many firms, in both ICT manufacturing
and software, have a mix of university-educated engineers and college-
educated technicians, and report that they actively recruit from the local
community college, Conestoga College, for their technical staff.
The influence of the local post-secondary institutions on the supply of
highly educated and skilled workers in the labour force is identified
consistently as a critical factor that drives the growth of the Waterloo cluster.
Central to the education and training role that the University plays in the local
economy is the co-operative educational programme that dates from the
origins of the University. The University has the largest co-operative education
programme in the world, with over 11 000 students (60 per cent of the student
body) and 3 000 employers, 281 of them local, involved in the programme each
year. Co-op programme offerings are extensive and are available in all
faculties and departments, and over 100 different programmes. Many of the
larger Waterloo firms, as well as global ones, have deep and enduring links
with the co-op programme. At Sybase, an enterprise software company that
spun-off from the original WATCOM Corporation, with over 250 employees in
its Waterloo campus alone, 15 per cent of its current employees is Waterloo
co-op students, and more than half of their Waterloo staff is former co-op
students. Sybase also actively supports co-op activities at the high school
level, and employees speak at local high schools, colleges, and universities
about co-op education.
Three key benefits of the co-op programme were reported. First and
foremost, it acts as a steady source of new hires, because firms know that the
students have work experience, and they get the opportunity to evaluate them
in the workplace before hiring them. Second, co-op students act as an
important source of knowledge transfer; because they are exposed to new
ideas in their courses and bring these ideas to their placements, a lot of the
students are on the cutting edge of the products that were working on, so we
definitely get the benefit from that. Finally, Waterloo co-op students have an
international reputation for being of high quality, and as a result, local firms
have to compete with global ones to attract the best students, though they
retain the benefit of location. The growing international reputation of the
University is reflected in the recently staged corporate recruiting drives by
both Microsoft and Google, part of a broader upsurge in hiring within the
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region. A recent survey of 173 CEOs completed by Communitech reported that
80 per cent of the local firms are currently hiring, with more than half
expecting to add 20 per cent to their workforces in the next year.
The multiple roles of local universities and colleges as R&D and tech
transfer facilities, as well as suppliers of highly skilled talent, underscores the
idea of the embeddedness of the local educational institutions in the
Waterloo cluster. Regardless of whether firms had formal or informal links to
the University, most of them cited the existence of local universities and
colleges as a critical element of the clusters dynamics. Some firms that are
heavily networked with a local university describe a deeply synergistic
relationship that has emerged and endures as a result of the university being
located in Waterloo. Even firms with tangential or no ties to the university
for example, those who only hire co-op students or who comment simply on
the international cachet of the University of Waterloo cite the presence of
the university as a critical factor.
Most of the firms in the Waterloo high-tech cluster are engaged in R&D.
The Waterloo Tech Industry Profile reported that 76 per cent of the firms have
R&D staff located in the region totalling 2 300 people. Large firms accounted for
51 per cent of the total number of R&D staff. In addition to in-house staff, 22 per
cent of the firms reported that they also use external sources for R&D
(Communitech, 2005, 11). However, there is a wide disparity in the R&D
capabilities of large and small firms. Large firms typically have robust in-house
R&D units, although even the small ones typically have some type of in-house
development group that either focuses on a core idea to get it market ready, or
engages in small, limited one-off collaborative projects, or skunk works.
The firms in the region indicate that they are typically more focused on
product development than exploratory research. The emphasis is
predominantly on solutions-focused, incremental innovations rather than
research-intensive, first generation innovations. Product and process
improvements are intended to make the product faster, smaller, cheaper
and often involve development activities such as the modification of existing
software platforms, product updates and new releases, applying the core
technology to different applications within the same factory, or making
software web accessible. This emphasis on performance improvement and
fine-tuning reflects the trend toward what one observer labelled little R, big
D. However, there was also evidence of robust R&D capacity reflected in the
strategic decisions of large multinational firms, which often choose to
augment their R&D or other technological capacity through the acquisition of
local firms. Of particular interest is the fact that, while several large local firms
have acquired foreign (primarily European) firms, several large foreign
multinationals have acquired indigenous Waterloo firms Google being
among the most recent to augment their R&D capabilities.
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Large, global firms that collaborate with the University on long-term, core
research projects, report that the primary benefit of their collaboration is
getting the first look at research results. They want to keep abreast of what
is happening at the research level, even though they know they will not have
any proprietary access to the intellectual property (IP). Long-term research is
by nature exploratory and speculative, and if they see it being directly relevant
to the firms business strategy, they prefer to keep the project within the
company to avoid a potential conflict over ownership of IP. Ongoing
involvement in university-based research also gives them an inside eye on
developing university graduates who they may want to hire. Firms also report
the benefit of research collaboration with the University as increasing their
global reach and perspective by magnifying your insight into the global
marketplace, because research professors are usually part of global networks
of expertise in their particular research areas. The majority of firms, both large
and small, that report R&D linkages with a local university indicate that it is
primarily for short-term research, usually of a couple months duration, on a
project by project basis as needed and that the primary benefit of
collaboration is the ability to do problem-focused research and small co-
development projects that allow them access to university expertise and lab
facilities.
In contrast to the line of theorising about clusters that emphasises the
importance of dense networking relationships among local firms, it is readily
apparent from talking to software and ICT manufacturing firms in the
Waterloo cluster that the amount of inter-firm collaboration in the form of key
customer or supplier relationships is relatively low. The focus of most
economic activity key customers, sources of supply, competitors, and
important strategic partnerships for the vast majority of firms occurs at the
continental and/or global level. While larger firms tend to be more focused on
the global level, smaller firms, regardless of whether their key customers are
currently in Canada, also have a growing global reach, or continental or global
aspirations.
Many of the firms in the cluster describe co-location with customers,
suppliers, or strategic partners as either unimportant or irrelevant. Of the
firms for which proximity to customers is important, only very few have key
local customers with whom they are in regular contact, and many firms treat
local and non-local customers much the same, communicating primarily by
phone or e-mail regardless of proximity. One firm commented that the
distinction between local and global is very artificial. Most local firms have an
explicitly global focus because for many, even their largest customer
contributes only a small percentage of total revenue. This means that they
have to compete locally on a global basis, and find that they have to establish
some type of local customer interface capabilities to serve their global
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customers. Customer relations both marketing and support occur at a
virtual level. With the Internet as the great equaliser, customers from all
over the world can visit company websites to extract required downloads and
access 24/7 customer support. Firms can choose to visit customers on site to
deal with crises or complex issues, so proximity to customers is not a huge
factor. Supplier relationships evince similar patterns as the vast majority of
firms indicated that co-location with suppliers was not particularly important.
Manufacturing firms tend to buy ready-made components, primarily from the
US. While some firms do have local suppliers, they were not typically for key
components, and when it was for a key component, the reason they sourced
supplies locally was because the type of technology they provide is more
critical for us.
Role of SMEs
While there are some extremely large players in the area Research in
Motion (RIM), COM DEV, Open Text, AGFA, MKS, and Descartes Systems being
the best known examples most of the high-tech firms fall into the micro and
small-sized enterprise category. Almost 70 per cent of high-tech firms in the
Waterloo region employ between one and nine individuals, 20 per cent have
10-49 employees, and around 6 per cent fall into the 50-199 employee range.
Only 3.6 per cent of the firms in the region employ over 200 people. Even more
striking is the size distribution of establishments in both the ICT clusters
with 71 per cent of the establishments ranked as micro and small in
manufacturing and 76 per cent ranked as micro in services. Unlike other
concentrations of high-tech activity in Canada, the economy of the Waterloo
region is not dominated by one particular sector, such as telecommunications
or Internet-based firms. This diversity has enabled the regional economy to
weather economic shocks such as the post-2000 dot-com meltdown that
devastated employment in other leading ICT clusters across the country.
While firms may have some local partners who integrate their technology
(or whose technology they integrate) into their product, key strategic
partnerships, especially for larger firms, tend to occur overwhelmingly at the
non-local level, and most often in the US and Europe. Key partnerships are
often with a key customer or a key supplier because your clients typically
become your partners your best sources of innovative ideas. Local
partnerships, both formal and informal, tend to be rather weak and take the
form of short, project-oriented collaborations, often on a contracting-out
basis, with key local customers. These linkages tend to be more relationships
than formal alliances. From an analytical perspective, firm conceptions of
what constitute a strategic partnership are inconsistent and the distinction
between key suppliers or customers and strategic partners with whom they
share common ownership or IP is not always clear, indicating that these
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relationships are perhaps more fluid than is frequently understood. Local
partnerships tend to occur primarily between smaller firms. Thus, the
primary role of the SMEs in the cluster does not include the classical role of
forming part of the supply base or architecture for the larger more globally
oriented firms. The SMEs in the Waterloo cluster are typically outward looking
themselves and although there is some evidence of sub-clustering at the local
level, the relationships among SMEs are typically soft and informal.
It is rare, but there is some evidence of robust partnering activity between
large globally oriented local firms and smaller ones. The relationships are both
formal and informal, focused on taking up useful solutions that are generated
by small local software firms, and are often initiated through common
customers. One firm identified this as a key strength of the local cluster: one
of the values of being located here is that you have a lot of entrepreneurial
small companies who are coming up with interesting solutions that we can
attach to our offerings to round them out and bring them to market.
Impact of the cluster on entrepreneurship and employment
Since 1976, the number of high-technology enterprises in the area has
grown to a critical mass, starting with a flurry of new firm formation that
included a combination of spin-offs from the university, in-migration of firms
from outside the region and independent start-ups. Of these sources,
university spin-offs have had the greatest impact on the local economy. The
University of Waterloo is among the best performing universities in Canada in
terms of the number of spin-off companies it has produced. Since 1973, the
University of Waterloo has spun off 59 individual high-technology firms,
28 per cent of the total number of high-tech firms born in the cluster
(Xu, 2003). Some of the most notable spin-offs include Waterloo Maple Inc
(1988), Open Text (1989), Virtek Vision Corp. (1986), Dalsa (1980) and Northern
Digital Inc (1981). The University of Waterloos Technology Transfer and
Licensing Office identified 106 spin-off companies employing over 2000
people by the mid-1990s.
Using a somewhat different definition that included the transfer of
intellectual resources, the PriceWaterhouseCoopers study of regional
economic benefits identified over 250 spin-off companies from the university
(2001). Independent start-ups and second and third generation spin-offs also
contributed greatly to the high-tech growth in this period. The recent
Waterloo Region Tech Industry Profile reported that 52 per cent of executive
respondents were alumni of local colleges or universities, with the majority
coming from the University of Waterloo. In addition, 70 per cent were the
founders of their own companies, with 31 per cent of these being serial
entrepreneurs who had created and sold a number of companies
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(Communitech, 2005, p. 13). Much of the universitys commercialisation and
spin-off success is attributed to its IP policy, which allows ownership of IP to
rest with the creator, thus encouraging the individual (faculty or student) to
commercialise the idea.
The Waterloo ICT cluster is thus distinguished from some of the leading
ICT clusters in North America by the relative predominance of its small and
medium-sized enterprises. However, the growth of the cluster can be
attributed to the rapid expansion of some of its leading firms, particularly
Research in Motion, as well as the slow, but steady increase in the number of
smaller new firms. One minor, but significant issue for the cluster is balancing
the needs and demands of the leading firms, for office and manufacturing
space as well as personnel, while ensuring the adequacy of supply for the
smaller firms that have less market power.
The promotion of entrepreneurship among the SMEs has not historically
been a central focus of policy at either the national or provincial level.
However, a number of more clearly local factors have contributed to
enhancing the entrepreneurial skills and capacity of local SME owners and
managers. The region is home to a relatively dense network of local business
and industry associations that have demonstrated the ability to work together
to promote the interests of the local cluster and provide a strong degree of
mutual support to each other. The regional culture in the region is
characterised by a robust entrepreneurial spirit supported by a small and
transparent business community and well-developed business associations,
as well as a vibrant social network and sense of community. This type of
associational activity is evident in the growth of regional associations in the
Waterloo high-tech community focused on facilitating the regions economic
competitiveness and sustainability. Canadas Technology Triangle (CTT), the
Communitech Technology Association, the local Accelerate Network (now
part of Communitech) and the Waterloo Region Prosperity Council all play
important roles in supporting regional economic development. Communitech,
formed in the late 1990s to lobby the government in the interests of high-
technology business, has been an important addition to the institutional
infrastructure of the cluster in the Waterloo region. It was created as an
initiative of a group of high-tech entrepreneurs with the specific purpose of
establishing cutting edge infrastructure to support regional high-tech
prosperity, expansion and global competitiveness. An often-cited benefit of
Communitech membership is access to a pool of shared experiences and
support through seminars, Peer2Peer sessions, networking events, and
conferences. More recently, CTT, Communitech, the Greater Kitchener-
Waterloo Chamber of Commerce and the Cambridge Chamber of Commerce
have come together as the Prosperity Council of Waterloo region to collectively
create an environment that supports opportunities for prosperity in Waterloo
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region. Together they represent more than 3 000 businesses in Waterloo
region. Prosperity, for the purposes of the Council, involves initiatives and
policies that support wealth creation, supporting the objectives of enhancing
the standard of living and overall quality of life in the region.
The University of Waterloo is also active in its support of entrepreneurial
education and activities. The mandate of the recently established Centre for
Business, Entrepreneurship and Technology (CBET) is to co-ordinate, develop, and
support the several strands of UWs entrepreneurship activities, all of which are
intended to facilitate the development of UW as an Entrepreneurial University.
More specifically, CBET is intended to research issues such as how an
entrepreneurial culture is created within a university, how faculty members
commercialise their technology, issues of the relationship between academic
researchers and the business community and issues relating to the impediments
of facilitating a transfer of technology between those two communities. In terms
of educational programmes, it has recently launched the Master of Business,
Entrepreneurship and Technology (MBET), which attracts potential entrepreneurs
from around the world, and teaches business skills critical to identifying,
exploiting, and establishing new commercial opportunities, with an emphasis on
innovative technologies. Undergraduate students can also participate in the
Enterprise Co-op programme where they commercialise a business venture of
their own rather than work for an existing firm.* Innovate Inc. is a department
within the university that provides resources and counselling to faculty and
student entrepreneurs, and aims to facilitate the commercialisation of
knowledge created within the institution. Finally, the Institute for Innovation
Research, affiliated with the Faculty of Engineering, is dedicated to the generation
and dissemination of applied interdisciplinary research that advances
understanding of entrepreneurship in technology-based enterprises, and to
promoting entrepreneurship within universities.
Barriers to cluster development
Although the cluster in particular, and the Waterloo region more
generally, are currently viewed as doing quite well, informed observers
acknowledge that the region faces a number of critical challenges. One of the
key challenges identified by a number of insiders is the fact that many of the
leading firms today were founded in the late 1970s or 1980s, but that the pace
of new firm formation has fallen off significantly in the past decade and a half.
* According to a university official, in the Enterprise Co-op Program, a small number
of students are encouraged to start their own companies during co-op work terms
and we take about 10% a year of those people who think theyve got it and we give
them a very rough screening process where we explain to them that this will be the
toughest co-op term that they ever have had. We give them a small amount of
funding, somewhere between CAD 6 000 and CAD 8 000, and then we mentor them.
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This has raised concerns within the cluster about its internal ability to continue
to grow and expand. Closely related to this is the prominent role played by several
leading firms in the cluster, such as RIM or Open Text that specialise in particular
niche markets. While these firms are currently enjoying great success RIM with
the recent launch of the Blackberry Pearl device and Open Text with the
acquisition of one of its leading competitors, Toronto-based Hummingbird, they
are vulnerable to sudden shifts in market demand or the emergence of new,
unanticipated competitors. To date, this has not occurred and the future of the
cluster looks secure, but it is a potential source of concern.
Another challenge that reflects the opposite side of the coin is coping
with the clusters current level of success. In a recent interview with the local
high-tech association, the major issue that was identified was a looming
shortage of software engineers due to the high projected level of hiring by
cluster-based firms. The recent establishment of a major research facility by
Google within the Waterloo region and their announced plans for future
hiring, the continuing expansion of RIM within the Waterloo region and the
fact that Microsoft views the Waterloo region, and the University of Waterloo
in particular, as a major source of recruiting for its Redmond, Washington
operations are placing considerable pressure on the ability of both the local
post-secondary institutions to meet the demand for highly qualified
personnel. The ability of the cluster to satisfy this increasing demand for
personnel will be critical for its continued success; as noted above, the
strength and thickness of the local labour market has been a key driver of its
competitive success to date.
Somewhat less threatening, but still of concern, are a number of
infrastructural issues that hover in the background of the cluster. While
Waterloo is a major urban centre in southern Ontario, it does not enjoy direct
transportation connections, especially by air, on it is own. It is located less than
an hours drive west of the Toronto (Pearson) International Airport, upon which
it relies for international flight connections. However, the highway corridor
connecting the Greater Toronto Area with the Waterloo region (Highway 401) is
also the major transportation route for Ontarios substantial trade, especially in
automobiles and auto parts, with the US Midwest. Traffic congestion in this
corridor is becoming an increasing problem for the entire southern Ontario
economy and represents a growing issue for firms based in the Waterloo region.
This is a major challenge faced by the region in general, and the ICT cluster in
particular, arising from the substantial urban sprawl occurring in the larger
Greater Toronto Area and the spillover effect it has on the Waterloo region.
A final issue concerns the lack of political integration among the various
municipalities that comprise the Waterloo region particularly, Cambridge,
Kitchener, Waterloo and Guelph. A province-wide process of amalgamating
local municipalities in the late 1990s encountered major opposition in this
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region and the proposed amalgamation was not imposed on the area. In
addition to the four local municipal governments, there exist a number of
county administrations in the rural area surrounding the municipalities, as
well as a regional level of government superimposed on the municipal ones.
The result is a certain fragmentation of administrative responsibility for
issues such as region-wide transportation planning or local economic
development and business attraction. It also results in a certain amount of
duplication of government offices across the many separate jurisdictions in
the region. Many of the business leaders in the cluster recognise this political
fragmentation as a drawback for the region, but believe that the continuing
strength and vitality of the local economy has generated sufficient positive
feeling in the region to encourage the local governments to co-operate and
work effectively together on common interests.
Role of policy
The case of the Waterloo ICT cluster demonstrates the long-term impact
of expanding research infrastructure on the development of local clusters.
However, it is important to recognise that, to a large extent, the cluster
emerged as an indirect, and partly unintended, consequence of policies that
were directed towards meeting other goals and objectives. The cluster concept
has only become of interest to policy makers at all levels of government since
the early 1990s. As the preceding narrative makes clear, the roots of the cluster
lie more than forty years in the past, long before the current period of interest
in this phenomenon as a policy instrument.
The case study also raises another issue that confuses many analyses of
the origins of clusters namely, the respective role of different scales of political
jurisdiction in the genesis of clusters. While clusters are primarily seen as key
features of local and regional economies, and most of the literature and case
studies highlight the contribution made by local factors and industrial
dynamics, the presence of the senior levels of government lurks in the
background. A number of studies highlight the relationship between the cluster
concept and others used to analyse the innovative capacity of regional and
national economies, principally the innovation systems approach. The concept
of nested scales describes the interacting set of effects that different levels of
government exert on firms operating in a specific geographic location. From this
perspective, clusters are seen as nested within, and impacted by, other spatial
scales of governance, including regional and national innovation systems, each
of which adds an important dimension, or layer, to the economic structures and
government policies that impact firms within the cluster.
Various elements of each of these spatial scales may have significant effects
on the innovation process and competitive dynamics within the cluster. For
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instance, the national innovation system may play a preponderant role in
establishing the broad framework for research and innovation policies, in
providing a national system of research organisations, in establishing the rules of
corporate governance that influence firm behaviour, in setting the rules of
operation for the financial system that determine the availability of different
sources of financing and time horizons for new and established firms, and finally,
for setting the broad framework for the industrial relations, employment and
training systems that influence job paths, inter-firm mobility and skill levels for
the labour force. Levels of regional specialisation as encompassed in the concept
of regional innovation systems play an important role in affecting cluster
performance through the provision of the regional/state/provincial research
infrastructure, specialised training systems, the broad education system, policies
for physical infrastructure and the investment attraction function. At the local
level, high levels of civic associationalism, particularly the business-higher
education link, can exert a strong influence over cluster development. The local
level also plays an important role in the provision of infrastructure, such as roads
and communication links, as well as in the governance of the primary and
secondary education system, which are significant factors for cluster-based firms
in the attraction and retention of managerial talent.
In the case of the Waterloo cluster, the policies that exerted the greatest
impact on the development of the cluster have been federal and provincial
policies in support of post-secondary education more generally, and research
funding, in particular. In Canada the provinces exercise primary responsibility
for funding post-secondary education, but there have been broad cost-sharing
agreements in place with the federal government since the 1960s. The precise
mechanisms used to provide for the cost sharing blend elements of both
revenue and expenditure policy instruments. In addition, the federal
government has primary responsibility for funding and supporting post-
secondary research in Canada through the three federal granting councils, but
since the 1980s, this funding support has been augmented and reinforced by a
growing number of provincial programmes. In the late 1990s the federal
government created the Canada Foundation for Innovation (CFI) to fund the
updating of research infrastructure at post-secondary institutions across the
country, as well as the Canada Research Chairs (CRC) programme to
create 2000 federally funded research chairs at universities (Wolfe, 2005). The
increased focus of the province on providing direct support for research was
underlined with the creation of a distinct Ministry of Research and Innovation
in 2005, with the Premier of the Province as its Minister.
In addition, both the federal and provincial governments offer a wide array
of other policies of benefit to individual firms in the cluster. The federal
Scientific Research and Expenditure Development (SR&ED) Tax Credit,
combined with provincial R&D incentives, offers one of the most generous tax
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jurisdictions in North America for the conduct of research. Other federal
programmes, such as Technology Partnerships Canada (recently suspended by
the new federal government) have provided direct subsidies to firms conducting
innovative research. One of the most widely accessed federal programmes is the
technology adoption support provided through the Industrial Research
Assistance Program (IRAP), administered by the National Research Council. The
local IRAP representatives, or Industrial Technology Advisors (ITAs), in Waterloo
work closely with the regional high-technology association, with their offices
co-located with Communitech and the Accelerator. The provincial government,
both prior to and continuing with the establishment of the Ministry of Research
and Innovation has dramatically expanded its support for research funding over
the course of the past decade partly to provide matching funding for
some of the federal programmes. More recently it introduced a number
of key programmes and initiatives designed to accelerate technology
commercialisation across the province with a focus around the new MaRS
commercialisation centre located in the heart of the university and research
hospital district of downtown Toronto (Wolfe, 2006).
Policy adaptations over time
As the preceding discussion of the evolutionary path of the Waterloo ICT
cluster suggests, the origins of the cluster owe much more to the broad
framework of federal and provincial policies supporting research and
education than it does to the direct effect of policies explicitly designed to
stimulate cluster development. None of these federal or provincial
programmes were specifically designated as cluster initiatives or targeted at
cluster promotion. The positive contribution they make to clustering at the
local and regional level is a welcome, but indirect, and sometimes even
unintended, consequence of their explicit programme goals or objectives
(Wolfe and Gertler, 2006).
However, as the cluster has grown and developed, a number of recent
initiatives have been directed at providing increased support for the firms in
the cluster, as well as accelerating the pace of technology commercialisation
and new firm spin-offs from the local universities. Both the federal and
provincial governments have adopted limited cluster policy initiatives over
the course of the past decade. Canadas National Research Council (NRC) has
pursued an explicit strategy of developing clusters around several of its
research institutes since the late 1990s. The strategy involves the deliberate
effort to transfer technology out of its newly established research institutes
and promote the growth of a cluster of related firms in the regional economy
around the institute (OECD, 2007). The strategy has been applied to fourteen
NRC institutes across the country, but there is no NRC institute in Waterloo
and therefore the cluster development strategy has not been implemented in
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this region. In its Innovation Strategy, released in 2002, the federal
government expanded on this approach in announcing the objective of
developing ten internationally competitive clusters across the country, but
this strategy was never fully implemented and the objective has not been
endorsed by the current federal government.
A more recent policy initiative launched by the Ontario government, the
Biotechnology Clusters Innovation Program (BCIP) was directed towards the
explicit goal of cluster promotion. The provincial Minister of Innovation
launched Ontarios Biotechnology Strategy in June 2002. As part of that
strategy, the government announced a new programme initiative: the
Biotechnology Cluster Innovation Program (BCIP) with the goal of accelerating
the development of Ontarios biotechnology clusters by supporting the
commercialisation of infrastructure projects and the diffusion of
biotechnology-related innovations into knowledge-based or traditional
industry sectors. The programme consisted of two distinct phases. In the first
phase, the government supported the development of plans that address the
innovation capacity of Ontarios regional biotechnology clusters. The
programme provided funding up to a maximum of CAD 200 000 on a matching
basis, to regional consortia for the development of a Biotechnology Cluster
Innovation Plan, including one in the Waterloo region. The second phase of
the programme was designed to support the development of infrastructure
such as commercialisation centres, research parks and other regional
initiatives that promote entrepreneurship and innovation. Eleven regional
consortia developed regional innovation profiles and corresponding regional
cluster strategies in the first phase of the programme. Between late 2003 and
early 2005, provincial officials held a series of seminars with representatives
of the eleven consortia, as well as separate meetings with the individual
groups. The original BCIP strategy developed for the Waterloo Region had little
direct involvement from the ICT cluster or significance for it, given that the
overwhelming focus of the initiative was on biotechnology. However, this
changed in 2005 with the refocusing of the programme on a broader cross-
section of industrial sectors and clusters.
In the provincial budget of May, 2005, the government launched the follow
on phase of the programme in the form of a series of regional innovation
networks (RIN). These are described as multi-stake holder, regional
development organisations established with provincial funding that support
partnerships among business, institutions and local governments to promote
innovation. The regional innovation networks are mandated to expand beyond
their original focus on the life sciences to include other areas of innovation
excellence, such as information technology, energy conservation and advanced
materials, depending on their local strengths and opportunities. The networks
are also described as constituting part of a multilayer commercialisation
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network that includes the province, multiregional groups focused on key
technology areas or industrial sectors and the original regional consortia,
described above. The constituent parts of the network are to support two
complementary sets of activities those that build on and connect the
components of the network and those that contribute to a more effective
alignment of existing federal, provincial and local research infrastructure and
related innovation assets. A key function of the networks is to increase the
knowledge flow and build linkages between existing research institutions and
firms in order to build industrial capacity for the uptake and adoption of new
research and technology. The overriding goal of the RINs is to increase regional
innovation capacity by addressing commercialisation gaps in the existing level
of support for small and medium-sized enterprises in regional networks across
the province in innovation-intensive sectors and clusters, including Waterloo.
The programme also aims to develop strong networks that can increase the
accessibility of the public research infrastructure and resources for firms
(Wolfe, 2006). While the transition from the earlier BCIP programme to the RINs
is still in its early stages, overall, the programme displays many of the positive
features of bottom-up strategic planning. In the Waterloo context, the local RIN
is building upon the clusters past success, the existing strength of the post-
secondary research infrastructure and recent new initiatives, such as the
Waterloo Research and Technology Park (see below), to accelerate the
commercialisation of new research results and sustain the process of new firm
formation and growth within the cluster.
A related initiative designed specifically for the Waterloo region has been
the establishment and marketing of the new Research and Technology Park.
Support for the Research Park has taken the form of a partnership between the
University of Waterloo, the Government of Canada, Province of Ontario, the
Region of Waterloo, the City of Waterloo, and Communitech. The new
Research Park is located on the northern boundary of the University of
Waterloo and is already the site of several new buildings, one of which houses
Communitech, the Accelerator Centre, the local IRAP offices, legal offices and
other support functions directed towards the promotion of local firms in the
cluster. Other buildings, both completed and currently under construction,
will house some of the leading firms in the cluster or provide space for
growing firms to expand into, as well as a number of amenities deemed to be
attractive to employees in high-tech firms. The co-operative role played by all
major levels of government plus the key cluster actors in designing, financing
and developing the new Research and Technology Park is strong testament to
the importance they all attach to the further growth of the cluster. A number
of strategic planning exercises launched through the Prosperity Council and
involving the key industry associations in the region are also directed towards
supporting the growth of the cluster.
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Future policy challenges
The crucial implications to be drawn from the preceding analysis are the
necessity of developing a rich and thick labour market in the skills required to
build the industries and technologies in the cluster, then to support the
interaction within the cluster through the nurturing of strong social networks
among government partners and industrial leaders, thus building a sense of
civic engagement. This has worked well to date largely through the unplanned
but highly effective interaction between the federal and provincial
governments, strong support for building the local post-secondary research
infrastructure in the region and providing increased research funding over the
past ten years to those institutions.
The cluster as it is currently constituted faces a number of critical policy
challenges. As noted above, the rapid pace of new firm formation in the region
was stronger in the 1980s and early 1990s than it has been over the past decade
and a half. Despite the increase in the number of experienced entrepreneurs in
the region, some of whom devote considerable time to acting as angel investors
and mentors to new firms, many key civic and business leaders in the region
express concern over this recent decline in the pace of new firm formation.
Given that the preceding pace of firm formation was largely unplanned, it is not
clear that this deficiency can be remedied purely by policy measures. The recent
expansion of the University of Waterloos efforts in promoting entrepreneurship
teaching and research, and the activities of initiatives such as the Enterprise Co-
op programme and Innovate, Inc. within the university may help remedy this
deficiency but it is still too early to tell. In addition, as noted above, one of the
most effective mechanisms for providing these kinds of supports are through
the peer to peer mentoring networks established and maintained by the local
high-technology industry association, Communitech. Government policy could
be designed to provide more direct and explicit support for these initiatives
than it has in the past. There is also considerable scope for more effectively
integrating the activities of the various local industry associations, discussed
above, into the activities of the Waterloo Region RIN.
Another current policy challenge facing the cluster is the recent shortage
of a sufficient number of graduates to meet the perceived demand for future
hiring, both as a consequence of the internal expansion of leading firms, such
as RIM, as well as the inward location of global firms, such as Google.
Expansion of university programmes in the areas of high demand would
appear to be the most obvious solution. This was done in the late 1990s
through the provincial Access to Opportunities Program that aimed to create
51 000 new graduates in computer-related programmes, but there is some
concern that recruitment of sufficient applicants into such programmes might
prove more challenging than it was a decade ago.
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Lessons for other clusters
The factors which contribute to the emergence of clusters in the first
place and sustain the dynamism and growth of cluster-based firms remain of
critical interest. The case of the Waterloo ICT cluster sheds light on several key
issues related to the core question of location: if co-location with other firms
is not a main driver of local economic growth and innovation, what accounts
for the resilience or stickiness of the cluster? Local economic growth in the
Waterloo cluster is a result of the interaction between location, institutions
and a regional entrepreneurial culture. Whereas purely locational factors,
based on demanding local customers, suppliers and competitors, do not fully
account for the emergence or growth of the Waterloo cluster, the presence of
key local institutions primarily the University of Waterloo and a dense
network of local civic associations provide the glue that retains and sustains
innovative high-tech firms.
The case of Waterloo Regions ICT cluster also provides support for the
argument about the long-term impact of expanding research infrastructure on
the development of local clusters. In the Waterloo case, the mobilisation by
local business leaders to secure a charter for a new university, financed with
federal and provincial funding, and their foresightedness in structuring a
curriculum around math, sciences and engineering and creating a pioneering
programme of co-operative education, all laid the groundwork for the future
emergence of a dynamic and growing information technology cluster.
However, one should not overlook the supportive role played by the senior
levels of government whose expansion of support for the post-secondary
education system in the 1960s made possible the establishment of a new
university. It was the specific pattern of interaction between dynamic,
visionary leaders at the community level with the increase in federal and
provincial funding that created the local antecedents essential for the
emergence of the information technology cluster (Wolfe and Gertler, 2006).
Whether intentional or inadvertent, one of the most effective public policies
for seeding cluster development is a sound investment in building the research
and skilled labour base in a region. The establishment of a strong local talent pool
of highly skilled and knowledgeable workers both feeds the growth of the local
firms in the cluster as increasing returns begin to take hold, and attracts outside
firms to locate in the cluster in order to gain access to the local knowledge-base
and the skills embedded in the local labour market. However, the presence of a
strong local research infrastructure and a thick local labour market may not be
sufficient on their own to spur the formation of a local cluster. The Waterloo ICT
cluster owes its current success to the effective intersection of a strong sense of
civic engagement with the rich knowledge resources afforded by its strong
research infrastructure and talented local labour market.
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The findings from this case study in Waterloo echo the findings from
cluster studies in other regions and economic sectors across Canada, and
suggest a different conception of what factors really matter in cluster
formation and sustenance than some of the dominant theories in the
literature. Concerning the dynamic relationship between local firms in the
cluster, the findings indicate that for many of the most successful clusters the
most important end-user markets and knowledge networks are continental or
global (Wolfe, Davis and Lucas, 2005). The most significant local factor is a
thick labour market that provides a steady supply of the highly skilled
personnel for firms to draw upon. This factor combined with the development
of strong social networks and a strong sense of civic engagement is crucial.
References
Canadas Technology Triangle (2004), Community and Statistical Profile, Waterloo.
Communitech Technology Association (2005), Waterloo Region and Guelph Tech Industry
Profile: 2005 Survey Results, Waterloo, Ontario.
Gertler, Meric S. and David A. Wolfe (2004), Local Social Knowledge Management:
Community Actors, Institutions and Multilevel Governance in Regional Foresight
Exercises, Futures, Vol. 36, No. 1 (February), pp. 45-65.
OECD (2007), Competitive Regional Clusters: National Policy Approaches, OECD reviews of
Regional Innovation, OECD, Paris.
PriceWaterhouseCoopers (2001), University of Waterloo: Regional Economic Benefits Study,
Waterloo.
Wolfe, David A. (2005), Innovation and Research Funding: The Role of Government
Support, in F. Iacobucci and C. Tuohy (eds.), Taking Public Universities Seriously,
University of Toronto Press, Toronto.
Wolfe, David A. (2006), The Role of Higher Education and New Forms of Governance
in Economic Development: The Ontario Case, in How Universities Can Promote
Growth, Shahid Yusuf (ed.), The World Bank, Washington, D.C.
Wolfe, David A., Charles Davis and Matthew Lucas (2005), Global Networks and Local
Linkages: an Introduction, in David A. Wolfe and Matthew Lucas (eds.), Global
Networks and Local Linkages: The Paradox of Cluster Development in an Open Economy,
McGill-Queens University Press, Montreal and Kingston.
Wolfe, David A. and Meric S. Gertler (2006), Local Antecedents and Trigger Events:
Policy Implications of Path Dependence for Cluster Formation, in P. Braunerheim
and M. Feldman (eds.), Cluster Genesis: The Emergence of Technology Clusters,
University Press, Oxford.
Xu, Stephen Xingang (2003), Knowledge Transfer, Interfirm Networking and
Collective Learning in High Technology Cluster Evolution: A Network Analysis of
Canadas Technology Triangle, Master of Applied Science (Management Science)
dissertation, University of Waterloo.
ISBN 978-92-64-04442-5
Clusters, Innovation and Entrepreneurship
OECD 2009
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Chapter 9
Conclusions and Recommendations
by
Gabriela Miranda and Jonathan Potter
Centre for Entrepreneurship, SMEs and Local Development, OECD
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This chapter aims to identify key messages from the book for the definition
of economic development and job creation policies suited to the context of
geographical concentrations of related industries or clusters, drawing on the
experience of already validated strategies and practical models.
The chapter outlines the factors which explain the development of
successful clusters and the challenges to be faced in their development. In the
second part, we present recommendations to support and strengthen the
economic impact of clusters. These recommendations apply to all the players
who have an influence on the cluster at national, regional and local levels, both
in the private and public sector. In the last part, we show how these
recommendations have been implemented by the various players in the
clusters studied. We are talking here of good practice that can be adopted by
other clusters elsewhere. For ease of reading and understanding, the
recommendations and good practices are reproduced in the form of tables at
the end of the chapter.
Clusters in the global knowledge economy
To boost economi c development and respond to ever keener
international competition, the governments of OECD member countries need
to pursue entrepreneurship and innovation policies that reflect not just their
own national institutional and economic environments but also the
distinctive needs of local entreprise, research and training clusters. These
clusters create an environment conducive to productivity gains, which are a
key factor of growth, and so form structures that help meet the challenges of
international competition. Nevertheless, public policy can often play an
important role in strengthening clusters.
The case studies analysed showed the different approaches and
initiatives adopted both nationally and at regional or local level. Even if the
development of clusters and their local conditions (geographical area, society,
environment, etc.) cannot be generalised, we present here a list of conditions
which seem more generally to foster or hinder the development of clusters
and the scope of their economic impact.
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Key factors in cluster success
Networks, innovation and the supply chain
Clusters are often associated with a strong fabric of small and medium-
sized enterprises (SMEs), which often draw on collaborations with a few key
large enterprises and/or universities and research organisations for their
innovation and competitiveness. These collaborations range from simple
participation in supply chains to intensive co-operation on innovation projects.
Such networking provides the opportunities for identifying customers and
sharing information, thus helping build supply chains. Although these are
private transactions and strong collaborative environments often arise without
public intervention, the public sector has also played a role in creating the
conditions for collaboration in certain cases, particularly through financing of
collaborative research and development initiatives. However, governments
could do more to stimulate bottom-up networks. In particular, public, private or
part public part private cluster management structures can play an important
role in promoting collaboration and the creation of formal networks both within
and external to the cluster.
Leading enterprises
The data presented for several of the case study clusters indicate a
considerable growth in the number of new and small firms and employment.
The effect partly involves the emergence and growth of high-tech and other
leading enterprises in the clusters but it is also partly indirect, through linkage
and multiplier effects resulting from the purchases of firms and employees in
the core enterprises of the clusters, stimulating growth in a range of suppliers
to producers and consumers. Often, a few key enterprises account for the bulk
of the expansion of high-tech enterprises in the cluster.
Strong universities and research centres
Another element essential for the emergence and growth of clusters is
the presence of universities and research centres of international repute.
Leading universities in their specialist fields and top research centres create
knowledge that can be transferred to other actors in the local economy
through spin-out companies, research collaborations, consultancy and
informal contacts. They also create a critical mass of human capital, the
cornerstone of the development of clusters.
Investment by the public sector
Public actors have often played a critical role in defining and
implementing programmes or initiatives in support of successful clusters and
this works best when there are strong mechanisms for partnerships between
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the State, regional authorities, business support agencies and local firms and
research organisations. National, and sometimes regional and local, actors
have played a significant role in the development of successful clusters
through lending support to the financing of research infrastructure and
research projects in particular as well as supporting universities and public
research institutes. This support needs to be sustained over time and
responsive to changes in markets and technologies. Many other initiatives and
programmes developed by a range of business support organisations are also
important, such as inward investment attraction, small firm support and
training policies.
Quality of life
A strong critical mass of highly skilled and entrepreneurial labour is at
the heart of the emergence and development of successful clusters. This in
turn is related to the provision of a favourable environment such that the
human capital stays in the area and grows. Social networks, people-oriented
services, communications and infrastructure are just some of the elements
which have an impact on the attraction and retention of the highly skilled
population. A high quality of life is thus an essential factor in ensuring that
the area is attractive and in encouraging the development of clusters.
Social capital
Finally, a factor which can be seen as fundamental in all the clusters
analysed is the presence in the area of a strong social fabric. Social capital is
recognised as a key factor in exchanges of ideas and innovation and, therefore,
for clusters. Social networks and trust bring about the emergence and
development of innovation by creating an environment open to exchange of
information (formal or informal), capacities and knowledge which create
value within the cluster and thus enhance its size and standing on the
international scene.
Obstacles to the development of clusters and innovation
We have seen a brief overview of the conditions which seem to have a
positive impact on the emergence and development of successful clusters. A
strong case can be made that policies should seek to reinforce or replicate
these factors in other clusters. However, in order to support clusters better and
target that support effectively, a clear vision of the obstacles to be overcome is
also needed. In this part, we present the obstacles to the further growth and
development of the seven clusters studied. We concentrate on those which are
faced by several of the clusters and that may affect cluster development more
generally. This will allow us subsequently to put forward pertinent
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recommendations on how to overcome the obstacles which can be adopted by
other clusters in other OECD countries and elsewhere.
Inadequate incentives to the commercialisation of public research
Much of the capacity for the continued successful evolution of
established clusters lies in their capacity to create new enterprises based on
new technologies, products and markets. Public research organisations are a
major potential source of such start-ups. However, it has been found that spin-
outs from universities are not always easy, even in established and successful
clusters. There are often institutional barriers to researchers and academics to
create enterprises. A weak culture of entrepreneurship is also often present in
public research, which does not encourage those with ideas to leave and
create their own enterprise. In addition, public support mechanisms for the
expansion and creation of start-ups are often no stronger in the clusters than
in the country as a whole, although it can be argued that stronger and more
tailored start-up support should be available in these places. The problem of
inadequate incentives for research commercialisation also concerns
incentives for engaging in other types of commercialisation activities,
including consultancy and collaborative research for industry. Although the
issue appears to be primarily one of academic and research cultures that are
unfriendly to entrepreneurial engagement, further problems lie in the low
weight given to collaboration with industry in researcher performance
assessments of researchers, unfavourable regulations governing the rights of
researchers to use the intellectual property they help develop and difficulties
for researchers to return to their jobs following periods spent in business.
Commercialisation is also hindered by limited capacity of the public research
sector to promote the products of innovation in the market. However,
universities can play an important role in marketing if they have an active
intellectual property policy.
Maintaining a critical mass of qualified labour
An important issue for several clusters concerns the training of qualified
staff capable of anticipating and responding to changes in markets and
technologies, covering not just the highly skilled such as researchers and
professionals, but also skilled staff, for example laboratory assistants and
operators of sophisticated machinery. To ensure the growth of clusters in the
long-term, it is necessary to create mechanisms such that the human capital
constantly adjusts to the new needs. This is particularly important in occupations
and sectors with expanding demand. Several of the clusters face skills shortages
in new activities. This requires both adequate training programmes, which may
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need to be co-ordinated or supported by the public sector and an infrastructure
and quality of life to attract labour from other areas.
Lack of seed capital
Many of the chapters highlight the need for seed capital to support the
development of innovative products and new and small enterprises. However,
in the majority of the cases analysed, one of the chief problems is the lack of
venture capital and other sources of private or mixed financing to meet the
needs of advanced technology development, especially at the start-up phase
and until production is under way.
Lack of a co-ordinated policy strategy for the cluster
A large number of public organisations typically have a role to play in
various aspects of the development of the clusters studied. However, often
their activities are not well co-ordinated leading to problems in developing a
comprehensive and forward-looking strategy bringing to bear the resources of
all the available actors in addressing current and future problems in cluster
development. The need for improvements in policy co-ordination concern not
just the range of actors involved in the local area but also the need for greater
involvement of national governments in providing sufficient and tailored
support for the evolution and growth of major clusters, which of course have
economic benefits not just for the local area but also for the nation as a whole.
As well as effective coordination of public policies based on a common
strategy it is important to strengthen public-private partnerships and involve
the private sector in initiatives to develop clusters, both in terms of their
knowledge of cluster needs and in terms of the financial and other resources
they can offer the development process.
Congestion
The rapid recent economic growth of the studied clusters has in some
cases led to significant problems of congestion in their host agglomerations
that may impede further growth, particularly where the cluster dominates its
agglomeration and there is little capacity to expand the agglomeration
because of planning or physical constraints. Strong growth in constrained
agglomerations is associated with rising land and property prices, rising wage
costs, increasing commuting times and transport problems that may reduce
the attractiveness of the cluster to firms and labour and hence the ability of
the cluster to generate further agglomeration benefits.
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Risk of social divisions
The growth of clusters may also give rise to an increase in internal social
inequalities within agglomerations between high-tech employees and other
strata of the population. This can stem not only from disparities in incomes and
levels of activity of the various groups in the labour market, but also from
increases in the cost of living caused by the spending power of the new arrivals.
Social divisions could undermine support for the cluster by local authorities.
Ethical objections
A further issue that has arisen in some clusters is that of ethical objections
by members of the public to the nature of the research being undertaken the
ethics of the practices used and the applications the research results could be
put to. Opposition has been encountered for example to research activities in
the fields of nanotechnology and life sciences. It comes in the form of
demonstrations, direct action and opposition by political parties. This may put
into question public investment and policy support for cluster activities.
Recommendations
The above conclusions and analyses are an attempt to give a general
overview of the dynamics of clusters and the challenges they face. Actors in the
policy system that supports clusters have an important role to play, both in
building strengths and addressing obstacles. All the players who support clusters,
nationally and in regions, and in the public and private sectors, are concerned. To
guide policy development, a series of recommendations on policies and
initiatives is presented in Box 9.1. These recommendations are not exhaustive
but they already offer a starting point for appropriate reforms. Each of the
recommendations is discussed in more detail below. In addition, Table 9.1 gives
examples of programmes undertaken in the case study clusters that illustrate
how recommendations can be implemented in practice.
Encouraging entrepreneurship
Supporting spin-outs
Familiarising researchers with creation. Enterprise creation or merely bringing
researchers closer to the world of industry can be a very positive step. Courses
in business plans aimed specifically at researchers and similar programmes
could be run in universities to encourage spin-outs, as is the case of Vienna.
Financing areas of incubation and spin-outs. It would be worthwhile to create
areas of incubation with advice and assistance at regional level specifically to
the academic world on ways of converting a good idea into a viable enterprise.
Two examples are the initiatives taken at Medicon Valley (Bioincubator) and
Madison (URP).
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Establishing formal collaboration projects. Clusters can encourage spin-outs
and lead to considerable filtering down of technology to SMEs through
collaboration between large enterprises, research institutions and SMEs,
especially through relations with suppliers and subcontractors. Even though
such technology transfers can occur spontaneously, in some cases, such as
Vienna and Waterloo, they were encouraged by formal collaboration projects.
Box 9.1. Summary of recommendations
Encouraging entrepreneurship
G Supporting spin-outs.
G Leading a transition to the entrepreneurial university.
G Supporting the launch and growth of start-ups.
Stimulating innovation and collaboration
G Fostering SME-research collaboration.
G Encouraging collaboration: within the cluster and between clusters.
G Encouraging enterprise networks.
G Better marketing of products.
Coordinating public polices and regional initiatives
G Strengthening public-public and public-private partnerships.
G Encouraging evolution in cluster activities.
Ensuring quality human capital
G Updating education and training to meet the requirements of the cluster.
G Ensuring availability of talent locally.
G Ensuring the appeal of the area and a good quality of life.
Facilitating access to financing
G Encouraging private investment.
G Facilitating access to public funding.
G Creating forums to seek financing.
Reducing congestion and social divisions
G Addressing congestion and social inequalities resulting from the emergence
of the cluster.
G Creating mechanisms to inform the community about the activities of the
cluster.
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Leading a transition to the entrepreneurial university
Promoti ng entrepreneuri al educati on. It is important to promote
entrepreneurship in universities across a wide range of subjects, researchers
and students. The entrepreneurial university must therefore be promoted,
laying emphasis on issues relating to the capacity to create and market
innovations, including teaching of key skills such as identifying, exploiting and
creating new opportunities.
Supporting the launch and growth of start-ups
Encouraging the launch of start-ups. The creation and growth of high-tech
enterprises can be encouraged by promoting a culture of entrepreneurship in
clusters and fostering the emergence of a skills pool (managers, financial
advisers, patent and intellectual property consultants, etc.) to support and
work with these enterprises.
Creating public funds ring-fenced for SMEs. Another tool is the use of public
procurement processes to encourage research projects in SMEs. This could
involve earmarking a proportion of government funds for research in small
enterprises and thus financing the launch and development of start-up
technologies.
Providing financing and advice. To encourage the creation of new
enterprises, specific programmes to finance enterprising projects have had
positive impacts. The particular case of the Austrian LISA programme, which
supports new enterprises through financing and advice, is a good illustration
of this approach.
Stimulating innovation and collaboration
Fostering SME-research collaboration
Encouraging technology transfers. Closer collaboration between research
bodies, universities and SMEs could generate a greater economic impact in the
cluster. Start-ups and SMEs can play an important role in the development
and transfer of technologies within the cluster, for example through the
production and marketing of products and services which complement the
technologies resulting from research. It would be worthwhile encouraging
collaboration by providing structures and initiatives which encourage such
exchanges.
Fostering collaboration by neutral agencies or networks. It is very important to
facilitate collaboration between the players in a cluster, in particular co-
operation between research organisations and enterprises (including start-
ups and SMEs). Using neutral agencies or networks which serve as brokers can
facilitate such dialogue.
9. CONCLUSIONS AND RECOMMENDATIONS
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226
Promoting people mobility. The creation of formal programmes to encourage
mobility among professionals between industry and the academic world can
be an important means of promoting knowledge-sharing and strengthening
collaboration. Recurrent secondments of researchers for a given length of time
to enterprises can also be a good way of familiarising researchers with the
needs of industry.
Encouraging collaboration: within the cluster and between clusters
Encouraging a local innovation policy. Interactions between the players in
one or more clusters in the same geographical area can be considerably
reinforced by developing a local innovation policy. The importance of this
approach is underlined in Medicon Valley, where public actions are designed
to enhance the connection capacities between the players of the triple helix
(government, industry, research).
Creating formal projects for collaboration between clusters. The initiative of the
Oxfordshire and Cambridge clusters is a good example of the benefits which
can be drawn from this approach. With the Oxford-Cambridge Arc, the aim
is to link the networks in the two clusters and weave new relations in the
emerging technologies to create a stronger critical mass. The UK-Medicon
Valley Challenge Programme is another good example of such projects.
Involving the non-members in the core activities of the cluster. The SMEs and
very small and medium-sized enterprises (VSMEs) of more traditional sectors
can often contribute to some of the clusters core projects with their know-
how. The coordinating agencies of these enterprises, such as chambers of
commerce and chambers of arts and crafts, can help formalise targeted
collaboration projects with enterprises outside the cluster core. A good
example of this approach is illustrated by the Metis project in Grenoble.
Communicating the benefits of collaboration. It is not unimportant to use
open communication mechanisms to send the message of the positive
advantages of co-operation. The Vienna cluster has organised a number of
calls for proposals in order to generate a demonstration effect by
highlighting winners who explain the factors behind their success. The
Vienna cluster also shows the need to mix a variety of policy actions to help
SMEs to overcome barriers to co-operation.
Encouraging enterprise networks
Developing specifically technological enterprise networks. The inclusion of
SMEs in formal networks helps to create a climate of trust between members
of clusters which encourages collaboration. The creation of enterprise
networks can be supported by financial contributions from government at
national, regional and local level in order to unlock the development of the
9. CONCLUSIONS AND RECOMMENDATIONS
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227
private sector. It is not so much the number of networks which is important as
the way in which they take shape and the quality of the geographical and
sectoral coverage.
Creating meeting spaces. Informal exchanges are just as important as those
which take place around a working table. The provision of social meeting
spaces to generate a cafeteria effect is worthwhile. Nevertheless, other more
formal meeting spaces should also be provided such as workshops to share
knowledge, and seminars and conferences to encourage dialogue.
Better marketing of products
Allowing creators to keep intellectual property. By creating policies so that
creators in the university possess intellectual property rights over the
results of research. This would encourage researchers to get involved in
spin-offs or sell their ideas on the market.
Establish a marketing centre. Establishing a marketing centre for products
resulting from academic research located in the very heart of university is an
innovative approach recently tried in Toronto. The centre can serve as a public
relations bureau by linking the economic reality of the results of academic
research and vice-versa, so as better to identify a potential market.
Coordinating public polices and regional initiatives
Strengthening public-public and public-private partnerships
Creating strong partnerships. It is important to have solid partnerships
comprising key enterprises, local government authorities, university institutions
and the business community. That would facilitate the implementation of
economic development projects and the definition of common initiatives and
types of support from which the clusters could benefit.
Developing a joint strategy for the cluster. It is necessary, in partnership with key
national and local players (public and private) involved in the cluster, to create a
strategy for a clear vision of the way in which the cluster should evolve. This is
necessary to meet priority needs, especially investment in infrastructure.
Encouraging evolution in cluster activities
Encouraging new activities. The achievement of competitive excellence in
the globalised world is only attained if innovations evolve at the same pace as
knowledge. It is therefore important to create policies which encourage the
emergence of new activities in complementary knowledge sectors to the
existing base of the cluster. The cases of Oxfordshire and Medicon Valley show
how diversification is seen as a priority and is encouraged by the provision of
9. CONCLUSIONS AND RECOMMENDATIONS
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228
new infrastructure, new networks and the development of new enterprise
formation.
Ensuring quality human capital
Updating education and training to meet the requirements of the cluster
Adaptation of university programmes. University courses find themselves
forced to evolve to meet the needs of clusters. To that end, it is essential to
establish a continual dialogue between industry and universities so as better
to understand those needs. Establishing a formal collaboration programme
would be useful in adapting university courses in the light of identified
industrial needs. The Waterloo Co-op programme is a good example.
Creating databases to anticipate skills needs. In order to improve skills levels
in the clusters new activities, it would be useful to create trend databases and
produce forecasts of skills needs. This approach was successfully adopted in
Medicon Valley.
Ensuring availability of talent locally
Attracting talent from abroad. Future demand for qualified workers, once
identified, must be satisfied early on to avoid any slowdown in the activity of
the cluster or discouraging a new player from setting up in the region for fear
of a shortage of human capital. The implementation of programmes which
target foreigners (as in Dunedin) or expatriates (as in Vienna) to come and
work in the cluster can have positive results.
Ensuring the appeal of the area and a good quality of life
Maintaining the quality of the environment. In order to maintain the appeal
of the region to attract talent, measures to improve road traffic must be taken
to reduce congestion. The creation of free car parks on the outskirts of town is
one of the various initiatives taken in Oxfordshire which seem to have had
good results.
Facilitating access to financing
Encouraging private investment
Involving private investors in the activities of the cluster. Involving a venture
capitalist as a member of a cluster governance organisation is a mechanism
which can prove useful not only to link financing to the heart of the cluster but
also to allow a better understanding of the market from the investors point of
view. The Minalogic cluster in Grenoble recently implemented such an initiative.
Establishing a technology transfer bureau. Supported by a policy which
allows public research institutions to claim the commercial rights on
9. CONCLUSIONS AND RECOMMENDATIONS
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229
inventions of their own employees, a technology transfer bureau could be
established to create a bridge between innovations from the design phase and
the market. Denmark has adopted a policy of this kind.
Improving access to finance. Mechanisms to encourage private financing
(venture capital and business angels) need to be reinforced, both by improving
the sophistication of entrepreneurs in their demand and search for finance
and by increasing the supply of investor funds to clusters. In order to
encourage private investors to finance innovation, it may be useful to create
tax incentives specifically for funds placed in an innovation project in the
cluster, with a predefined ceiling. The Wisconsin Angel Tax Credit serves as an
inspiration for this approach.
Facilitating access to public funding
Improving access to financing for innovating SMEs. To increase the
contribution of innovating SMEs to the development of clusters, it is important
to ensure easy and rapid access to financing. To do this, it would be useful to
create and publicise the existence of a one stop shop for SMEs. This would
help in granting public funds with a minimum of delay and a minimum of
administrative formalities and signposting to private sources of finance.
Creating forums to seek financing
Organising recurrent events. Isolated events do not have any long-term
impact. It is therefore desirable to encourage the organisation of recurrent
events which serve as platforms for investors and entrepreneurs to meet. The
Venturefest fair in Oxfordshire and the Forum 4i in Grenoble are two
inspirational examples.
Reducing congestion and social divisions
Addressing congestion and social inequalities resulting from the
emergence of the cluster
Offering technical training programmes. The development of clusters may
lead to a problem of social cohesion since it tends to increase demand for
highly qualified staff without necessarily having a major impact on unskilled
or low-skilled workers or the unemployed, except through general multiplier
effects. Few unskilled jobs are offered while the major traditional employers
are shedding jobs. Short technical training programmes can draw on the
capacities of the less skilled and steer them towards new employment niches
in the core of the cluster.
Investment in social housing. The growth in high-skilled jobs tends to
increase housing costs and sidelines the less well paid. Greater investment in
9. CONCLUSIONS AND RECOMMENDATIONS
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230
social housing could be suggested to respond to the problems of social
cohesion.
Local planning policies and investment in transport infrastructure. Increased
investment in local communications infrastructure and public transport may
alleviate road congestion problems. Planning policies that disperse activity
out of the more congested parts of the agglomeration would also help.
Inspiration is provided by the efforts of Oxfordshire in these two areas.
Creating mechanisms to inform the community about the activities
of the cluster
Writing and distributing newsletters to the general public. A strategy of direct
and simple communication should be established in the clusters, in particular
where there may be social and ethical concerns about cluster development.
These newsletters to the general public must be regular and open a debate on
the policies surrounding the activities of the cluster and the implications for
the population.
Inform the SMEs and VSMEs about the activities of the cluster. SMEs and
VSMEs outside the cluster can play a role as suppliers of goods and services to
the enterprises and employees of the clusters core. These enterprises help to
boost the clusters growth and ensure a better multiplier effect by creating jobs
throughout a larger area. Better communication by the cluster governance
with small firm representatives and support organisations, such as chambers
of trade and chambers of commerce, could help in conveying information
about needs and economic opportunities to be exploited (e.g. in terms of
adjusting working time, products required by members of the cluster, etc.).
International models of good practice
To complement the recommendations set out above, we present a table with
a series of practices and initiatives adopted to address the challenges of the
clusters analysed in the book. The approaches used and the players participating
in these initiatives vary from one region to another. Nevertheless, it is hoped that
these practical models will serve to illustrate the recommendations in order to
give a better idea of their implementation in a given context.
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231
Table 9.1. Synthesis of good practices identified in the clusters analysed
Recommendation Programme (cluster) Approach
Encouraging entrepreneurship
Supporting spin-outs Best of Biotech BOB (Vienna) BOB is a business plan competition promoting
the entrepreneurial activity of researchers in bioscience
related fields. Its goal is to increase the number of young
life science firms by stimulating researchers to translate
their ideas into business plans.
Supporting spin-outs Bioincubator (Medicon Valley) The Biomedical Centre (BMC) houses this unit which
aims to incubate new enterprises specialised in the areas
of the cluster.
Leading a transition to the
entrepreneurial university
Centre for Business,
Entrepreneurship and Technology
CBET (Waterloo)
This unit co-ordinates the activities related
to entrepreneurship: the education programmes,
the teaching of key competences on business creation
and exploitation, etc.
Supporting the launch and growth of
start-ups
Wisconsin Alumni Research
Foundation WARF (Madison)
This independent organisation provides logistic support
on the patents, put scientists in contact with other actors
and engages in the Universitys start-ups to facilitate
their access to venture capital.
Supporting the launch and growth of
start-ups
One stop shop LISA VR (Vienna) LISA VR provides cluster management services to
the local biotech industry. Its services include
consulting, pre-seed financing, education and mediation
of incubation space.
Supporting the launch and growth of
start-ups
Small Business Innovation Research
Programme (United States, Madison)
The SBIR funds substitute for early stage venture capital.
It has a good impact on entrepreneurship in the cluster.
Stimulating innovation and collaboration
Fostering SME-research-university
collaboration
Co-op Program (Waterloo) The programme offers formal exchanges of students
in regional enterprises. This facilitates the technology
transfers and the forecast of skills needs of the industry.
Encouraging collaboration UK Medicon Valley Challenge
Programme (Medicon Valley)
This collaboration programme aims to link up with
other global biotech megacenters. It promotes
research exchange and interaction between
organisations.
Encouraging collaboration Oxford-Cambridge Arc (Oxfordshire) This initiative seeks to bring closer the two clusters
and to build relations in the fields of new technologies
in order to create a stronger critical mass in the region.
Encouraging collaboration Metis (Grenoble) Metis mobilises leading innovative enterprises
of the textile and paper industries to participate
in collaborative projects with the Minalogic cluster.
Targeting specialisation in the cluster
by encouraging its development
Initiative Vinnvxt (Medicon Valley) This initiative promotes a diversification process
through the support of research in biotechnology
in the food sector.
Encouraging enterprise networks Oxfordshire Bioscience Network,
DiagNox, OXIT (Oxfordshire)
These networks have benefited from the financial
support of the central government and the regional
development agencies
Better marketing of products Wisconsin Alumni Research
Foundation WARF (Madison)
The WARF plays a key role in the commercialisation
of new technologies in the University of Wisconsin
and in the promotion of spin-offs and licences.
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232
Better marketing of products Intellectual Property (IP) policy at the
University (Waterloo)
The University allows students and researchers to keep
entirely the rights of their IP. The innovators are
encouraged to seek market opportunities
to commercialise their idea.
Better marketing of products The Bayh-Dole Act (tats-Unis et
Madison)
Universities and SMEs keep their property rights
of their innovations with the support of public funds
from the Federal government. This encourages
the researchers to seek market opportunities.
Coordinating public polices and regional initiatives
Strengthening public-public
partnerships
AplusB Programme (Vienna) This national programme has the task to support regions
to establish centres that focus on the stimulation of new
firm formation.
Strengthening public-private
partnerships
Oxfordshire Economic Partnership
and Oxford Trust Networks
(Oxfordshire)
These two partnerships gather members of the business
sector, universities, research institutes and policy
makers. They carry out specific projects to support
the cluster.
Ensuring quality human capital
Updating education and training to
meet the requirements of the cluster
Waterloo Plan (Waterloo) This co-operative education programme proposes a new
type of education to be offered on a co-operative basis
with industry. The University shares the burden
of technical training with industry and benefits
from funding from the private sector.
Ensuring availability of talent locally Database/directory of competencies
(Dunedin)
A directory of competencies is made available
in hard copy and on the website to demonstrate
the capacity of critical mass.
Ensuring availability of talent locally Brain Power Austria (Vienna) This programme aims to attract talented Austrian
scientist from abroad. The main activities include
the provision of financial support, relocation services,
coaching, and promotion of Austrian job opportunities.
Ensuring the appeal of the area and a
good quality of life
Subsidise housing (Oxfordshire) Housing is subsidised by the public sector
for key workers.
Ensuring the appeal of the area and a
good quality of life
Grow Wisconsin Initiative (Madison) This initiative aims to create an environment that
encourages business development by creating
a competitive business climate, investing
and reforming regulations.
Facilitating access to financing
Encouraging private investment Wisconsin Angel Tax Credit
(Madison)
This is a tax credit proposed by the regional government
to business angels willing to invest in local enterprises.
Encouraging private investment Minalogic (Grenoble) The first venture capitalists became members
of the Minalogic cluster.
Encouraging private investment Oxfordshire Investment Opportunity
Network OION (Oxfordshire)
OION is a business angel network that links prospective
investors with entrepreneurs seeking the early stage
funding.
Encouraging private investment Office of Corporate Relation
(Madison)
This office behaves as an interpreter of and liaison
between the support programmes and the businesses.
It also connects new, start-up companies with
the outside world.
Table 9.1. Synthesis of good practices identified in the clusters analysed (cont.)
Recommendation Programme (cluster) Approach
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233
Facilitating access to public funding uni:venture (Vienna) It provides venture capital to academic spin-offs.
Companies can receive up to EUR 1.1 million for
a period of ten years.
Creating forums to seek financing Venturefest (Oxfordshire) This international entrepreneurs fair is the annual
flagship event of the cluster that aims at proposing
a place to meet for entrepreneurs that seek business
partners or investment.
Creating forums to seek financing Forum 4i (Grenoble) This Forum provides a platform to activate venture
capital for innovative enterprises by bringing together
investors and entrepreneurs.
Reducing congestion and social divisions
Addressing congestion resulting from
the emergence of the cluster
Smart Growth (Oxfordshire) The traffic congestion has been reduced with the
establishment of the park and ride scheme
whereby car parks are built on the outskirts of the city
and served by regular bus services to the city centre.
Creating mechanisms to inform the
community about the activities of the
cluster
Communication on the Universitys
activities (Oxfordshire)
To face ethical objections against the animal testing
facility in the science area in Oxford University,
the University introduced internal ethical review,
information dissemination and legal injunctions
which determine the conduct of demonstrations.
Table 9.1. Synthesis of good practices identified in the clusters analysed (cont.)
Recommendation Programme (cluster) Approach
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84 2009 06 1 P
Clusters, Innovation and Entrepreneurship
Edited by Jonathan Potter and Gabriela Miranda
This publication explores the success of major innovation and entrepreneurship clusters
in OECD countries, the challenges they now face in sustaining their positions and the
lessons for other places seeking to build successful clusters. What are the key factors for
cluster success? What problems are emerging on the horizon? Which is the appropriate
role of the public sector in supporting the expansion of clusters and overcoming the
obstacles?
The book addresses these and other issues, analysing seven internationally reputed
clusters in depth: Grenoble in France, Vienna in Austria, Waterloo in Canada, Dunedin
in New Zealand, Medicon Valley in Scandinavia, Oxfordshire in the United Kingdom,
and Madison, Wisconsin, in the United States. For each cluster, it looks at the factors
that have contributed to its growth, the impact of the cluster on local entrepreneurship
performance, and the challenges faced for further expansion. It also puts forward a set of
policy recommendations geared to the broader context of cluster development.
This publication is essential reading for policy makers, practitioners and academics
wishing to obtain good practices in cluster development and guidance on how to
enhance the economic impact of clusters.
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Clusters, Innovation
and Entrepreneurship
Edited by Jonathan Potter
and Gabriela Miranda
842009061cov.indd 1 22-Jul-2009 12:30:57 PM