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Tuesday, December 7, 2010

Clusters are no blusters unless set up by busters

Prof. Daniel Isenberg from the U.S.’ Babson College challenges governments’ drive for innovation clusters by saying top-down cluster strategies "may perversely dull the entrepreneurial spirit rather than sharpening it" (http://ideas.economist.com/blog/cluster-bluster). I found his viewpoint interesting to dwell upon—and pretty arguable, too.

In today’s modern economy it’s absolutely clear that any country that wants to succeed should push itself forward towards being driven by innovation and creativity.

In this environment many different countries and cultures, it seems to me, have tried to replicate Silicon Valley. But repeating the success of the famous cluster is very hard to do because Silicon Valley is as much a philosophy of life and the reflection of a culture as it is a simply successful structure of innovation.

So it’s not possible to just recreate an innovation culture through infrastructure. Many countries and regions have tried and failed in this effort. Why?

I think it’s hard to follow Mr. Isenberg generalizing about whether creating an innovation cluster is good for the economy or not. One has to look at an individual culture and its approaches to economic modernization.

Talking specifically about Russia, I think this culture requires a top-down strategy to lead the people and to motivate the nation to modernize. Russian business culture, in my opinion, expects some initiative from the top coming down, and I think, for the Russian government to simply be passive would be incorrect. I think Russia in particular needs this type of leadership, more so than other countries that have a much longer history of self-starting entrepreneurship.

In a situation like Russia’s leaving the initiative to create an innovation economy to the free market will take too much time.

Opportunities come and go in Russia; Russia has a habit of opening and closing, like in a pendulum. And over the last 20 years I’ve seen several cycles of this. Right now we’re in a very positive open cycle. If this cycle is able to generate enough interest and attract enough people it could propel the process forward to the next 20-30 years, which really could result in a critical mass of people being involved in a diversified, innovation-driven economy.

For this there should be a strategy: how to link together different segments of very different geographical and industrial locations in Russia. For example, in Nizhny Novgorod there’s a strong automotive sector—should this be a basis for an automotive cluster? I’m not sure, but it should definitely be a basis for a manufacturing cluster that could make automotive components and sell them across Russia. Are there any strong institutions in this region which can contribute to creating a new generation of auto components? Yes. But the different factors need to work together. If these different players are not brought together and given an opportunity to work in a collaborative way, they might not do that on their own.

How can any regional government do that? It can create infrastructure like special economic zones; it can alter tax structures; it can encourage private investors to risk their money on hi-tech investments; it can encourage academic institutions in a Russian region to be more market-driven and therefore attract students from across the country that are excited about being involved in innovation. So there are concrete steps a government can do to encourage the right type of people to come to the region and develop their businesses and lives there.

I understand Mr. Isenberg’s concern; there’s a risk of having cluster residents lulled into a false sense of financial security, which will be a disincentive to their development as they may view government, which pulls all triggers, as a safety net and an insurance against their business failures.

That’s true, but a lot hinges on how a cluster is formed. As far as I understand, the innovation cluster in Skolkovo, Moscow, for example, is driven by a public-private partnership between the RF government and a privately owned company, Renova, the investor in the development of the Skolkovo Foundation. The government seeks to reduce risks for private investors and ensure start-ups; however, once investors accept the risks and develop their business the government gives no guarantee that the businesses that are to be set up there will be subsidized indefinitely. The market will choose its winners and its losers. Companies entering the cluster will have to survive under market conditions.

Prof. Isenberg may or may not know the Russian realities but in my view, the role of the government here in promoting an innovation economy is absolutely essential. I believe as these initiatives are implemented, this will have a profound impact on Russia’s entrepreneurs and business owners who will feel greater and greater incentive to invest in themselves, and innovation clusters will develop based on each region’s individual strengths.

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