In the past decade, high-tech clusters have attracted more than $472bn in FDI and created 1.4 million jobs, according to data from greenfield investment monitor fDi Markets. Moreover, investments into sectors such as life sciences, software and IT, and ICT not only create new, well-paid jobs, but they are also seen to bring with them a certain cachet.
It is unsurprising, therefore, that thousands of locations are competing to become the next Silicon Valley. Sensing this growing trend, Cardiff-based app development start-up Tradebox Media developed its own three-step 'manual' for building a tech hub – which suggested mapping the area to pinpoint existing tech companies, creating a recognisable brand and associating the cluster with a well-known landmark. Yet the real question is not how to create a tech hub, but how to create one that brings capital, jobs and the Facebooks and Apples of the future.
“Calling yourself a tech hub is not going to make you a tech hub. Neither will opening up a high-tech park or a business incubator,” says Nick Smillie, associate director at AED International, a company that specialises in advanced science and technology park development.
To find out what makes a successful tech cluster, AED recently conducted a study on Silicon Valley, the Massachusetts Route 128 area and Cambridge in the UK, all of which are considered successful blue-chip clusters. “What appeared to be crucial, especially at the initial stages of cluster development, was the existence of world-class universities and government spending in the form of public procurement,” says Mr Smillie.
While the former is not surprising – innovation hubs need research institutions – the latter might be, as it implies that public spending can make or break a high-tech cluster. Mr Smillie cites two examples of companies that have kick-started tech clusters in their respective areas – Fairchild Semiconductor International in San Jose, California, and Acorn Computers in Cambridge – and says that the fact that both received generous government support proves that “this type of funding can create critical mass”.
Of course, the sheer existence of academic institutions in a region, even the best ones and even if paired with public funding, does not automatically turn it into a tech cluster.
“In many cities, local governments are funding programmes that attempt to jump-start innovation. While well intended, these initiatives often inappropriately allocate capital and resources by trying to manage or direct where ideas should be born and shared,” says Drew Clark, director of strategy for the venture capital arm of IBM.
Olof Zetterberg, president of Stockholm Business Region, Stockholm's investment promotion agency, shares a similar opinion. “Government funding can be essential in early stages where there is little or no private capital available. However, an oversupply of public money can be hurtful as companies need to be very commercial and customer focused from day one and too much money can take that focus away,” he says. As much as high-tech clusters cannot be artificially created by local governments, Mr Zetterberg says that they can be helped by standardisation, deregulation and a good IT infrastructure.
Stockholm itself has proved that a location does not have to be big or spend big to establish itself as a successful innovation hub. With a population of just 885,000, Stockholm is not only one of the leading destinations for crossborder investments into software and IT, but is also the birthplace of Spotify, a music streaming service, valued at an estimated $3bn and one of the biggest success stories among European start-ups.
Chattanooga in Tennessee might not have the same clout in the tech community as Stockholm but, according to Dominic Basalto, a contributor to the Washington Post's tech blog, the city is one example of a place where governmental initiatives seem to be helping the development of a tech hub. “The city rebranded itself as 'gig city' and has been promoting its ultra-fast broadband connections,” says Mr Basalto.
Its efforts to attract high-tech talent suggest that the city also has ambitions to become a 'geek city'. In 2012, Chattanooga started offering a $10,000 forgivable mortgage and $1250 in relocation expenses to tech professionals moving to the city, through its aptly named 'geek move' programme. Offering relocation incentives to individuals rather than big corporations might seem unorthodox, but Chattanooga's officials believe that it will bring entrepreneurial types and spur the number of start-ups.
According to IBM's Mr Clark, supporting start-ups rather than corporate giants is a good way to establish high-tech clusters, especially if the area lacks a tradition of innovation and major research centres.
“The majority of recent up-and-coming regions – for example, Nairobi [Kenya], Santiago [Chile] and Boulder [Colorado] – are focusing on the idea of start-up communities, which is a very bottom-up, entrepreneur-led, organic phenomenon. Linked together, the combination of tech clusters or hubs and start-up communities can form a powerful innovation ecosystem,” says Mr Clark.
Thinkers and spenders
Start-ups cannot sustain their growth, however, if they are only fuelled by programmes funded by city coffers; that is where venture capital steps in. But, what if a city or region lacks big venture capital firms? Can it establish a thriving tech cluster regardless?
“Yes, but it is extremely challenging, and it means that the companies within it can only go so far,” says Elizabeth Varley, CEO and co-founder of Tech Hub, a London-based start-up community. “What can really help start-ups grow is the really early-stage angel funding and venture funding."
Funding is less of a concern for Ari Huczkowski, the CEO of Otaniemi Marketing, the promotional company behind Otaniemi Technology Hub, a tech campus located outside of Helsinki and the home of Rovio, the highly successful video game franchise behind the Angry Birds game. He believes that as long as a tech community is built on strong fundamentals and generates new ideas, funding will find its way.
“Great ideas and innovations come first, and money will follow. Not the other way around,” says Mr Huczkowski. “In Finland, more than 50% of venture capital comes from abroad. Money is hungry for innovation, and it will always find its way to the best ideas."
The best ideas, experts agree, can only develop by bringing smart people together and facilitating knowledge exchange between them. “When a 60-year-old Japanese physicist meets an Argentinian designer in her 30s or an aspiring Australian entrepreneur, that is when they can create something totally new and unheard of,” says Mr Huczkowski. This, he says, was the philosophy behind Start-Up Sauna, an Otaniemi-backed business incubator.
A similar philosophy is being employed in the Dutch city of Eindhoven, which, in 2011, was named the world's smartest region by New York-based think tank the Intelligent Community Forum. Eindhoven's High-Tech Campus is built around the concept of open innovation, and more than 8000 researchers working for companies such as Philips, ABB and Intel are encouraged to exchange creative concepts.
AED's study of technology clusters lends further weight to the significance of a collaborative environment. Mr Smillie says that an open environment, which enables the free flow of new ideas, ranked along with funding and academic institutions as one of the key characteristics of successful tech clusters.
“Formal and informal networking is essential and the conditions that foster creative thinking and risk taking are crucial,” says Mr Smillie. “Silicon Valley is known for big thinkers and technological risk takers.” After all, big ideas and cutting-edge products, not a catchy name, are what tech hubs should be all about.
High-tech hives of activity
If the success of life sciences, ICT, electronics and creative clusters are measured by how expansive companies based within these hubs are, then Silicon Valley still shines bright. According to data from fDi Markets, between 2003 and 2012, Silicon Valley-based firms launched 336 foreign and intra-state US projects into these clusters, compared with 198 by New York-based firms and 196 by Tokyo-based companies.
The top 20 destination cities for these companies includes large financial centres such as London and Paris, which have large pools of venture capital, but also cities such as Amsterdam, Munich, Espoo (Finland), Stockholm and Dublin, which rely heavily on external sources of venture capital.
In the past decade, the most active companies were those in the software publishing, pharmaceuticals, medical equipment and semiconductor sectors, with such firms creating a total of more than 113,000 new jobs and investing $57.4bn. The most active investors were Hewlett-Packard, Verizon Communications and IBM, which between 2003 and 2012, launched 57, 50 and 46 new projects, respectively.