The Impact of the Location on Innovation

Not only internal, but also external factors are strong drivers of innovation. Why have, for instance, some places emerged as “hot spots” for innovation? The impact of the location on innovation is the second in a series of five articles by Gunjan Bhardwaj, head of Ernst & Young´s Global Business Performance Think-tank. The topics of the other articles are: Disruptive Innovation; Innovation in Networks; Social Innovation; and Business Model Innovation.

Introduction

Where does innovation come from? What are its main drivers? Of course innovation is driven by some internal factors, such as a firm’s capabilities, its processes, its values, or its resources. However, these internal factors only partially drive innovation. External factors are also important drivers of innovation. The external environment, through strong links between institutions of higher education and industry, for instance, can trigger innovation as well. Some locations have thus emerged as “hot spots” for innovation. These fertile locations in fact vary across sectors and industries (Porter & Stern, 2001: 28). Since innovation is one of the most significant factors of economic competitiveness, countries or regions are trying hard to establish innovative structures (Pohlmann, 2005: 9).

How does the location affect innovation?

Regional Innovativeness

the socio-economic environment of a location … has a strong impact on the companies located in this area with regards to their innovativeness

According to the Regional Innovation Systems (RIS), the socio-economic environment of a location, such as human capital, or the existence of certain institutions, has a strong impact on the companies located in this area with regards to their innovativeness. However in the literature there is no commonly accepted definition of the RIS’s components and several studies introduce different regional factors as crucial for a firm’s innovativeness.

A study of the Max Planck Institute of Economics carried out in among German firms shows a strong impact of economic agglomeration, extramural science institutions and human capital, especially the graduates at technical colleges, on regional innovativeness (Brökel & Brenner, 2006).

National Innovativeness

According to Porter and Stern, the innovativeness of a location is determined by national innovative capacity, which is the potential of a country to produce commercially valuable innovations. Thus, the authors have developed the national innovative capacity framework, comprising the common innovation infrastructure, the cluster-specific environment for innovation, and the quality of the linkages between these 2 components, as 3 main elements.

The cluster-specific environment also plays an important role, since innovation and the marketing of new products essentially takes place in these locations

The first element, the so-called common innovation infrastructure, includes all factors encouraging innovation throughout the economy as a whole. These can be the total human and financial resources the country is devoting to research, or important policies such as the protection of intellectual property or incentives for innovation.

A cluster can be defined as a geographic concentration of inter-related firms and institutions working in a specific field.

The cluster-specific environment also plays an important role, since innovation and the marketing of new products essentially takes place in these locations. A cluster can be defined as a geographic concentration of inter-related firms and institutions working in a specific field.

The quality of the cluster innovation environment can be measured by Porter’s Diamond framework, which includes local demand conditions, strategy, structure and rivalry (Porter, 1998: 131-179).  Finally, the linkages between the common innovation infrastructure and the clusters have to be strong to allow for a reciprocal relationship. Actually strong clusters should contribute to the common infrastructure, but also take advantage of it (Porter & Stern, 2001).

Examples

Silicon Valley, USA

Silicon ValleySilicon Valley is well known for being a “learning region”, where a successful innovation system has been implemented (Doloreux, 2003: 69). Silicon Valley’s business model, in which ideas, capital, and talent freely move and mix to create innovation and wealth, really makes the difference.

Silicon Valley’s business model, in which ideas, capital, and talent freely move and mix to create innovation and wealth, really makes the difference

At the centre of this way of doing business, 3 interdependent markets meet: a market for ideas, a market for capital, and a market for talent. It is at their crossroad that wealth is created. The absence of bureaucracy, which would slow down or even paralyse innovation, helps the circulation of ideas, capital, and talent.

In addition, decision-making power in Silicon Valley is very diffuse, and workers are not afraid of changing companies. Silicon Valley works on a resource attraction basis, meaning that only if an idea is worth something will it attract capital and talent (Hamel, 2000: 3-4).

Stuttgart, Germany

StuttgartThe emergence of a knowledge based economy has had significant effects on the existing comparative advantages of innovation systems in metropolitan areas and has brought along some important challenges. One of them has been the adjustment of these cities to this new landscape, especially cities in mature industrial sectors. Actually this was the case of Stuttgart.

The comparative innovation strength of Stuttgart mainly came from the technology based knowledge production and diffusion

The comparative innovation strength of Stuttgart mainly came from the technology based knowledge production and diffusion. Thus the institutional structures, by privileging the industrial sector, had prevented the metropolitan city from adjusting to new forms of knowledge production and diffusion.

However Stuttgart has now managed to adapt. Since the mid 1990s several measures have been taken to adjust the organisation of innovation and learning processes in the region. Initiatives now focus on technological, but also organisational and service innovation. Moreover regional knowledge concentration as well as international relationships now benefit from a powerful support (Strambach, 2002).

Beauce

Innovation is nevertheless not restricted to the famous “learning regions” or to metropolitan areas. Innovation activities can also be significant in peripheral areas, such as the Beauce, in Québec, Canada, for instance. The economic vitality of the region comes from endogenous collective entrepreneurship and from co-operations. In fact, the region’s entrepreneurship finds profuse historical evidence.

Innovation in the region is mainly driven by inter-firm relations and the fierce industry competition

However the uniqueness of the region comes from the fact that on the one hand it is characterised by an important entrepreneurial spirit and several entrepreneurial initiatives, but on the other hand it is characterised by unqualified and inexpensive labour. There are a lot of SMEs in the region, mostly focusing on low value-added technology sectors.

Based on surveys of firms in non-metropolitan areas, the results of innovativeness of the Beauce region are significantly higher than results elsewhere in Canada, although links to research institutions or related public organisations are quite weak. Innovation in the region is mainly driven by inter-firm relations and the fierce industry competition (Doloreux, 2003).

Conclusion

The choice of R&D locations should not be driven by labour costs, or taxes. Companies should rather choose the most fertile locations in terms of innovation. By locating R&D facilities in countries with favourable common innovation infrastructures and powerful clusters in their sector, companies can indeed get better opportunities to develop new products or processes.

The choice of R&D locations should not be driven by labour costs, or taxes

However to reach this potential, firms must not only set up R&D facilities, but also proactively access the strengths of their local environment, and maybe even enhance the local innovative capacity, in order to make it more favourable to innovation (Porter & Stern, 2001).

About the author

Gunjan Bhardwaj is coordinator of the Global Business Performance Think-tank of Ernst&Young. He is also the solution champion for Pricing strategy and effectiveness as well as Innovation management in the advisory services of Ernst & Young with a focus on Pharmaceutical and FMCG sector.

Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences

Gunjan Bhardwaj graduated from Indian Institute of Technology Bombay, India in Metallurgical Engineering and Material Sciences and then did his MBA in International Management and Marketing in Pforzheim University, Germany on a DAAD Scholarship.

Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.

References

Brökel, T. & Brenner, T. (2006) Local factors and innovativeness – an empirical analysis of German patents for five industries. Max Planck Institute of Economics.

Doloreux, D. (2003) Regional innovation system in the periphery: the case of the Beauce in Québec (Canada). International Journal of Innovation Management, 7:1, pp.67-94.

Hamel, G. (2000) Resource attraction. Executive Excellence, August, pp. 3-4.

Pohlmann, M. (2005) The evolution of innovation: cultural backgrounds and the use of innovation models. Technology Analysis & Strategic Management, 17:1, pp. 9-19.

Porter, M.E. (1998) The Competitive Advantage of Nations. MacMillan.

Porter, M.E. & Stern, S. (2001) Innovation: location matters. MIT Sloan Management Review, Summer, pp. 28-36.

Strambach, S. (2002) Change in the innovation process: new knowledge production and competitive cities – the case of Stuttgart. European Planning Studies, 10:2, pp. 215-231.

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