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Tech Clusters Need The Right People

What makes for a successful technology cluster? Beyond incentives and inducements, regions aspiring to be the next Silicon Valley must start with the basics – the people factor. A look at three emerging technology clusters.

For politicians and policy-makers seeking a route out of the lingering global recession, tech clusters are attractive. Geographically-defined ecosystems drawing on the synergies created by an interlaced network of companies, clusters are a fertile environment for entrepreneurship. The most successful clusters embody the value they create: direct investment, jobs, infrastructural development, and the "halo" effect of radiated prosperity. For increasingly global-oriented economies, the aggregation of human, economic and knowledge capital that clusters create gives economic regions a distinct competitive edge.

But fledgling clusters need a core to orient around. One theory suggests that first-tier companies – established MNCs and market leaders – are needed to create this gravitational pull. To this end, some governments offer financial incentives to firms to relocate in their regions, such as tax breaks and subsidies; others invest in the infrastructural framework that will, they hope, attract and nurture entrepreneurship.

But this is not enough to turn an emerging tech cluster into the next Silicon Valley. Crucial to a strong ecosystem is sustainability – the capacity to independently guarantee its own growth and development. In a skills-dependent industry, it is increasingly becoming clear that proximity to a competent, ideas-rich workforce is key.  Rajneesh Narula, professor of International Business Regulation at the United Kingdom's Henley Business School, points out that this fundamental is often overlooked. "Politicians often think that the success of a cluster is region specific – if they build it, then the companies and the investment will come." But this optimism often overlooks key needs for both growing and established companies.

Unfulfilled Potential

Bangalore, India's leading technology cluster, is a good example. Despite relative longevity – it dates back to the creation of an "Electronics City" in 1976 – and home-grown champions like Tata Consultancy and Infosys, Bangalore is yet to reach its full potential. Venture capital investment stood at $300m in 2012, a fraction of Silicon Valley's $11bn. Innovation is also relatively thin on the ground. Tata, India's largest software firm, filed 443 U.S. patents in 2013-14. By way of comparison, IBM had almost 7,000 patents granted in the same period.

Anantha Narayan is a Director in the equity research team at Credit Suisse in India, specialising in the Indian IT sector.  Cultural factors, he points out, can indirectly inhibit growth. There is a highly trained workforce, but a rigid educational system placing emphasis on linear learning rather than creative knowledge application embeds a strong disinclination towards taking risks – the lifeblood of tech entrepreneurship.

The challenge for Bangalore is shaking off its "outward facing" mindset as a cluster providing cost-effective service for MNCs rather than creating domestic value. "The key is people," Narula notes. "Companies will go anywhere if they can get highly qualified people." Narayan agrees, pointing out that whilst institutions like the Indian Institute of Management do produce graduates endowed with the qualities needed to champion entrepreneurship, this is still rare.

R&D Needs People

Still, the people and ideas factor can be integrated into cluster creation from the start. One example is China's biotech industry. Structural factors – a drive to create a viable medical insurance system for the country, for instance – present opportunities for multinational pharmaceutical companies considering expansion into China. However, this did not necessarily come with a concomitant investment in domestic R&D, more so because the Chinese drugs market has long over-relied on generic hand-me-down drugs domestically rather than biotech innovation.

But the Chinese government has attempted to circumvent these factors through an industry strategy underpinned by investing in biotech clusters, located near existing R&D and other structural facilities. The Chengdu cluster, in Sichuan province in southwestern China, is a case in point. More than 400 bioscience companies have been drawn to the region, more than half with an annual primary business revenue over CNY 10m. The region has more than 50 colleges and universities, including the Sichuan University School of Medicine, a leading medical school and home to four clinical research bases. Also, as a leading regional economic centre, Chengdu's location lends the cluster another layer of cross-enterprise synergy. Eleven countries, including the United States, Germany and Israel, have consulates in the city.

There are other challenges though. China's investment in human capital and innovation needs to be shored up with robust intellectual protection and technology transfer regulations. Melody Peng, part of the organising team for Biotech China – China's largest biopharmaceutical event – acknowledges that this is an area that needs to be strengthened. "Frankly speaking, China is a developing country and our biotech industry is developing in both technology and regulations," she observes. A 10-year National Patent Development Strategy will consolidate intellectual property and patent rights; but the transfer of intellectual property rights outside China is subject to government approval. This could dis-incentivise foreign direct investments and cross-country partnerships, crucial for the R&D innovation.

"Setting The Table"

Rather than seeking to conjure up innovation, it may be that the best role for governments in encouraging emerging clusters might be to "set the table" – to provide the essentials and allow entrepreneurship to evolve organically.

Take Nairobi. This East African city, already a regional trading hub, began to actively position itself as an emerging tech cluster at the end of the last decade. Three undersea internet cables laid in 2009 opened up new data and internet possibilities; in 2013, the Kenyan government announced plans for Konza Technology City, a $14.5bn project framed as a technology hub for software development and business process outsourcing.

Nairobi's potential was already manifest though, characterised by distinctly home-grown and independent innovation. Ushahidi, an influential non-profit organisation that develops open-source software, started off as a platform to aggregate and report incidents of political violence during Kenya's 2007 presidential election. M-Pesa, a money transfer system and micro financing service, started off by piggy-backing on airtime credits for mobile telephones.

Josiah Mugambi, executive director of iHub, a Nairobi-based innovation hub and incubator, insists there is no substitute for investing in people and relationships. "Ensuring that we maintain a large pool of diverse world class talented people is hugely important," he notes. This can start early: iHub, for instance, runs a yearly experience club for 10-15 year olds each year, giving programming and hardware-hacking exposure and experience to teenagers.. "The greatest asset for any entrepreneurial ecosystem is its people, and I think the highest investment should be made here," he points out. Government investment is best put into encouraging people. "Many Kenyans are enterprising…and they only need the rocket fuel that propels to their destinations faster. Our job is to help them get there fast."