In response to the Great Depression of the 1930s, economically depressed jurisdictions used an approach, termed as “smokestack chasing”. Regional governments recruited industrial firms to enhance job creation by providing them with tax incentives, land use privileges and loans.
Society was transformed. From being primarily agricultural, many regions quickly reorganized into manufacturing and resource extraction economies.
The “smokestack chasing” process redistributed economic opportunity from “losing” to “winning” regions. To save jobs, local governments began to offer retention incentives to industrial firms to prevent them from relocating.
Rapid globalization and unprecedented human connectivity eventually intensified the worldwide competition for recruiting and retaining industrial firms. This weakened both the chasing and retention approaches. They demanded far larger long term commitments and promised distant payoffs, which troubled many taxpayers and governments.
Consequently, the focus of pro-growth public policy moved to the knowledge economy that is based on the higher productivity of the knowledge worker, a term introduced by Peter Drucker more than a half century ago. The availability and retention of skilled human capital is now considered as important an ingredient for commerce as is investment capital.
Evidence for the knowledge economy is typically provided through examinations of the locations of vibrant technology clusters, which generally lie adjacent to globally recognized universities. The combination of Silicon Valley and the San Francisco Bay Area, containing at least two world leading universities, is offered as the quintessential example.
The dependence of a region on a single large firm is now considered a liability by policy experts and business leaders in a post company town world. It is also widely accepted that clusters around universities drive innovation, which promotes entrepreneurship through a multitude of firms, leading to jobs, revenue, investment and wealth.
The penalty for a company to leave such a cluster is steep, since it must relinquish access to human capital and an innovation network. Thus, by default, a knowledge–based cluster has become both a job multiplier as well as a job retainer.
Dynamic clusters contain a robust mix of large and small firms, including startups. Examples show that, in isolation outside of innovation clusters, big companies become insular.
An entrepreneurial culture is equally important for the economic well being of a region. A stronger entreprenuerial culture is presumed to have benefited Silicon Valley and Stanford University in contrast to a relatively weaker culture in Boston – to the detriment of MIT. As a result, semiconductor manufacturing relocated from Boston to the Valley over the last half of the previous century.
Due to the stronger such culture in Israel, about twice as many university graduates become IT entrepreneurs or join startups as in the United States. Thus, through the dynamic of Silicon Wadi, particularly around Tel Aviv, more Israeli companies are listed on the NASDAQ stock exchange with a USD $70 billion market cap than any other country outside the U.S.
Universities have a long tradition of working with industry but, overall, their role in facilitating startups has become (almost) as noteworthy only over the past two decades. This shift is being fuelled by models provided by successful world leading universities that have helped catalyze innovation clusters, and a greater recognition that innovation and commercial activity are natural outcomes of translational research.
Forward thinking universities have recognized the importance of the intersection of innovation with entrepreneurial culture. They continue to use external, typically government–provided, research funds to facilitate entrepreneurship, but now also promote an entrepreneurial culture among their graduates and faculty through policies and educational programs.
Nevertheless, a more complete transition from predominantly curiosity driven university research to a mix that includes relevant translational research that drives innovation of the sort that routinely produces new startups will take time. It is fair to say that, while celebrating entrepreneurial alumni, most universities remain conflicted about the role of entrepreneurship pursued by students during their studies and the activities of their faculty members.
Today, Silicon Valley is not only a local innovation cluster. It is a preeminent hub of a global network that includes the outposts of multinational companies, regional and local government agencies and universities, all of which seek to access the knowledge and practices that the Valley has to provide. Thus, by attracting outside talent and interest, Silicon Valley has become an even greater jobs multiplier.
Outside of the Valley, regions that seek to be globally competitive must strive to develop equivalent innovation clusters. The appropriate composition of such a successful cluster should consist of a mix of large firms, startups, and also innovation–minded universities willing to promote an entrepreneurial culture.
Such a cluster, initiated through industry–government–university partnerships must be able to catalyze and foster entrepreneurship through firms of various sizes, including startups. It must be able to aggregate and grow these companies into sustainable larger firms that might leave and seed other clusters in other locations. Finally, the cluster should be capable of rejuvenating itself through spinoff companies that commercialize new processes and technologies.
When outsiders become interested enough to establish outposts to learn from the cluster’s collective knowledge and practices, this will be the external evidence of success.