Dissertation abstract

Now that the dissertation draft is complete, I feel it's time to put my abstract online for those people who want a bit more than my "elevator spiel" about what I actually wrote. Find it here thanks to Google Docs.

Innovation has a long way to go in Bangalore

As the headlines proclaim Bangalore to be the next Silicon Valley, more critical voices are often drowned out. This one will hopefully fare better. NASSCOM and BCG recently published a report on the innovation ecosystem for the Indian IT system. The following graphic from the report basically sums up their conclusions: India has a long, long way to go.



In addition, the authors found that the willingness and initiative of Indian IT firms to invest in firm-level innovation could use a massive increase.

The Indian innovation system has a lot of potential for improvement. Given that the the Bangalore IT cluster developed in response to foreign (not domestic) demand, one could ask whether other elements could also be "imported" into the local innovation system. For example, it appears that much of the more fundamental research in Bangalore's corporate R&D labs is being conducted by US-trained researchers. On the one hand, the knowledge and relationships that these researchers bring with them may help accelerate the development of Bangalore's innovation system. On the other hand, relying on foreign research training is definitely not sustainable.

Argonauts, ethnic scientific communities

AnnaLee Saxenian, The New Argonauts, Harvard University Press, 2006
William Kerr, Ethnic Scientific Communities and International Technology Diffusion, HBS Working Paper 06-022, 2006
Ajay Agrawal, Devesh Kapur, John McHale, Defying Distance: Examining the Influence of the Diaspora on Scientific Knowledge Flows, Working Paper 2004

Entrepreneurial networks carry regional advantage across distance

AnnaLee Saxenian has long been a follower of localized firm and professional networks in the hi-tech industry, highlighting their superiority over corporate hierarchies in her book "Regional Advantage." More recently, in "The New Argonauts," she has turned to ethnic professional networks in Silicon Valley, especially in the Indian, Chinese and Israeli communities. These networks, originally founded for social purposes, evolved to become professional networks for advice, capital and know-how for immigrant entrepreneurs. As immigrant entrepreneurs in Silicon Valley identified business opportunities in their home countries, the networks extended to support these new ventures. They also tied into their home-countries' networks through alumni associations and family ties.

Thus, organizations that were once highly localized began to reach across continents - and their benefits with them. Access to tacit knowledge (technical and managerial), a common understanding of entrepreneurship, shared language and culture have all been considered factors that are bound by geography and contribute to the success of regional economies. Now, they are transcending vast distances thanks to the kinds of networks described by Saxenian. New "Argonauts" (people who work in two or more regions, shuttling back and forth several times per month) literally carry market and technological knowledge, contacts, business models and capital around the world.

As a result:
Silicon Valley, once the uncontested technology leader, is now integrated into a dynamic network of specialized and complementary regional economies.
These new technology regions are not replicas of Silicon Valley, nor are they becoming new Silicon Valleys [...] Even as the returnees seek to use their experience in Silicon Valley to reshape these institutions, distinctive regional and national histories ensure that the identities and technology trajectories of these regions are unlikely to converge.

Some quantitative evidence

Ajay Agrawal, Devesh Kapur and John McHale analyzed patent citations within the Indian diaspora. They found that co-ethnicity increases the likelihood of knowledge flows. Diaspora membership is also found to substitute for co-location as a conduit for knowledge flows.

In a similar study, William Kerr has found quantitative evidence for the power of ethnic networks in a patent citation study. By linking patent data with an ethnic name-database, he was able to analyze ethnic scientific communities in the United States and the communities' home countries. He found that ethnic communities contribute significantly to technology adoption within the first five years of a new technology being developed.

Kerr also found tangible benefits for the home countries using a factor productivity approach: Greater integration with the US technology frontier contributed to an increase in manufacturing output in these countries. In more advanced economies the effect was due to productivity increases; in less advanced countries, productivity increases combined with a reallocation of labor from agriculture to manufacturing.

Taiwan-India, China-India linkages

Anyone following AnnaLee Saxenian's work is aware of the close connections between the semiconductor industries in Silicon Valley, Taiwan, and - more recently - Shanghai. I have been wondering for a while whether India had the potential to become the next node in this evolving network.

While the semiconductor industry is still quite small in India, there have been some interesting developments. Silicon Valley firms already do some of their chip design work to Bangalore, Hyderabad etc. Plans for Fab City in Hyderabad appear to be firming up after much bickering and speculation. Now, a panel discussion between the Taiwan Semiconductor Industry Association (TSIA) and its Indian counterpart, ISA, is being heralded. It's a small step: TSIA's discussions revolved around partnering with India for chip design and embedded software.

During a panel discussion in STMicroelectronics campus in Greater Noida, between TSIA and the India Semiconductor Association (ISA) on "Opportunities and areas of cooperation between India and Taiwan," TSIA was quite clear that in the absence of an ecosystem and industry infrastructure for setting up manufacturing units, including fabs in India, Taiwanese firms would be ready to tap the IC design and embedded software development skills of Indian engineers for innovating and developing new technologies and products.

"Taiwan is an established manufacturing hub in the semiconductor industry, and we see a great potential to outsource a host of requirements ranging from chip design, testing, packaging and embedded software to developing IPs from our Indian counterparts," said, Paul Chiang, VP, Nanya Technology.

James P. M. Chen, VP, Sales center, Winbond Electronics, a leading Taiwanese semiconductor said his company would be willing to invest in India or collaborate with Indian firms to build a R&D facility as there is no dearth of quality designers in India.

"Voice&Data" seem to have a particular interest in tracking the India-China story...

Krugman's spatial economics

Development, Geography, and Economic Theory, Paul Krugman, 1995

More from Krugman. He gives a particularly good summary of various economic theories of agglomeration.

Germanic geometry
1. Weberian location theory:
Alfred Weber and his followers ... analyzed the location decision of a firm serving one or more markets and relying on one or more sources of supply, with the total number of such relevant points not less than three. The problem was that this was essentially geometry and didn't take into account who was making the decisions and how; there was no mention of competitors, pricing etc.; and there was no explanation why there should be only one production site.

2. Central-place theory (Loesch, Christaller)
This analyzed the location and roles of manufacturing/marketing/ect. centers serving a hypothetical evenly spread agricultural population. In this tradition, Loesch had the big geometric insight -- that market areas should be hexagonal -- while Christaller produced the empirically fruitful idea that tere should be a hierarchy of central places, with nested market areas. ... the trade-off between economies of scale and transportation leads producers to cluster together into a hierarchy of cities serving nested, hexagonal market areas. But on closer inspection it becomes unclear exactly what is supposed to be going on. Who is making location decisions? There is also no clear description of market structures.

Central-place theory implies that we are in a world in which there are unexhausted economies of scale, and thus in a world of imperfect competition. You can't tell a story about central-place formation unless you are prepared to offer some description, however stylized, of that imperfectly competitive market structure. And that, until relatively recently, was something economists felt unable to do.

Social physics
This is economic geography done by analogy to physics: working with the problem of balancing several discrete forces of attraction and developing new theories to explain empirical regularities (e.g. Zipf's law of city size distribution).
In the 1950s American geographers came up with the idea that firms tend, other things equal, to choose locations of maximum "market potential," where the market potential of a site was defined as some index of its access to markets, involving both the purchasing power of all the markets to which it might sell and the distance to those markets. However, it is completely unclear what is being maximized when a firm chooses a point of maximum market potential. Again, market structure is the problem. Firms cannot exhibit constant returns to scale -- otherwise one would simply establish a facility to serve every market, ... nor can they be producing goods that are perfect substitutes.

Cumulative causation
One immediately obvious implication of the market potential analysis is the possibility of circularity. Firms want to locate where market potential is high, that is, where lots of firms locate. So one is led naturally to a consideration of the possibility of self-reinforcing regional growth or decline. This line of thinking follows the "Big Push" model of high development theory. While Big Push-type stories may be implausible for the economy as a whole (since they assume perfectly elastic supply of labor), they may make perfectly good sense for a particular region since the supply of factors to any specific region will typically be very elastic because they can come from somewhere else.

Some of the authors of the classic high development tracts seem to have realized this. ... The explicit application of high development concepts to region growth, however, is something one usually associates with Alan Pred (1966). Pred's story is essentially a variant on the Big Push. Suppose that a regional economy grows to the critical point at which it becomes profitable to replace imports of some good subject to scale economies with local production. This import substitution will expand regional employment, drawing in workders from other regions; and in so doing will further expand the local market. This market expansion may, in turn, provide the market size necessary to induce a second round of import substitution, and son on -- a cascade of growth reflecting the circular relationship between market size and the range of industries that a region possesses.

(I find that this resonates very much with Jane Jacobs' ideas about how the earliest cities formed.)

Local external economies
The idea that clustering of producers in a particular lcation yields advantages, and that these advantages in turn explain such clustering, is an old one. ... Indeed, to those who imagine that increasing returns are something only recently discovered, it is startling to see how much attention is given in Marshall's 'Principles' to local externalities. They are emphasized both for their intrinsic importance and for the way they exemplify his concept of external economies in general.

What Marshall meant by an external economy was not exactly what later authors meant. In the 1940s and 1950s economists came to make a clear distinction between technological external economies -- pure spillovers -- and pecuniary externalities mediated through the market. In a world of constant returns at the level of the firm and perfect competition, pecuniary externalities don't have any particular importance, so onl technological spillovers matter. Marshall, however, did not make this distinction. ... In the light of current theory, of cours, he was right to do so. We now understand that the sharp distinction between technological and pecuniary external economies holds only in a contant-returns world; in general market-size external economies are just as real as technological spillovers. ...

Suppose that we think of positive local external economies, which tend to promote concentration of production, as being opposed by other effects -- congestion or land costs -- that tend to promote dispersal. Then we are on our way toward a story about both the optimal size of cities and, if we are prepared to make some assumptions about the process of city formation, a theory of the actual size and number of cities. (cf. Vernon Henderson, 1974).

Land rent and land use
The analysis of land rent and land use derives directly from von Thuenen's Isolated State. He envisaged an agricultural plain supplying a variety of products to an isolated central city; and he realized that one could think of the simultaneous determination of a land rent gradient declining from the center to an outer limit of cultivation, and of a series of rings in which different crops would be clutivated and/or different farming methods adopted. Thus the high-rent land near the center would be reserved for crops with high costs of transportation and/or crops yielding high value per acre; the outermost ring would consist of either land-intensive or cheaply transported crops. This model conforms surprisingly well to neo-classical economics in that it includes the idea of an equilibrium and the idea that 'value' is an emergent consequence of a market process, goods and factor prices, and efficient outcomes of markets. Unfortunately, it simply assumes the thing you want to understand: the existence of a central urban market. Indeed, the whole thrust of the model is to understand the forces that spread economic activity away from that center, the "centrifugal" forces if you will. About the "centripetal" forces that create centers, that pull economic activity together, it can and does say nothing.

The "new urban economics," which deals mainly with central business districts followed in this tradition in the late 1960s and early 1970s.

Krugman's model
In Krugman's own words: I imagine an economy with a number of separate locations. There are two sectors: agriculture, which is geographically immobile, and manufacturing, which is mobile over time. The geographic reallocation of manufacturing is, however, not instantaneous. ...

Manufacturing consists of many firms producing differentiated products; increasing returns ensure that not all potential goods are produced, and thus that each plant produces a unique good ... . The monopolistic competition assumption neatly, if implausibly, disposes of problems like strategic behavior. All that firms need to do is choose an optimal location, taking into account the spatial distribution of demand and the transportation costs they must pay. ...

The most important thing I learned is that all of my first four traditions in spatial analysis ... make perfectly good sense in terms of a rigorous economic model. ... Moreover, it turns out that all four traditions are really different aspects of the same story.

Factors of cluster success

'Old Economy' Inputs for 'New Economy' Outcomes: Cluster Formation in the New Silicon Valleys, Timothy Bresnahan, Alfonso Gambardella, Annalee Saxenian, 2001

While looking for links between old and new hi-tech clusters, I came across this paper. It ties in with a series of studies conducted a while back in Ireland, India, Israel, Taiwan etc.

The authors argue that the factors that start a cluster are very different from those that keep it going/growing. (E.g. "success breeds success" isn't useful in founding a cluster). Starting a cluster involves much higher risks for firm founders, especially since they must bet on future technology trajectories.

They focus on the following factors of cluster success in their analysis:
- unemployed skilled technical labor (or skilled labor with low opportunity cost)
- managerial labor
- new firm foundation and firm growth (large firms attract more specialized supply, invest in larger projects, connect to world markets)
- connection to markets
- complementarity to leading/existing clusters rather than head-to-head competition. Strong links as people and ideas flow back and forth
- physical/supply-side restrictions on existing clusters support growth in new clusters
- policy of "benign neglect" and/or investment in education, encouraging multinationals, tolerating/encouraging brain drain, and - if possible - fostering sizable demand (e.g. national policies of adopting the GSM standard uniformly increased market size for telecoms suppliers)

Interestingly, (telecoms) infrastructure is not mentioned, even though at least some of the clusters in question (think outsourcing of services to Ireland and India) were greatly aided by the availability of excess bandwidth. Communications links also supported the 'strong links as people and ideas flow back and forth.'

Here's the paper abstract:

This paper discusses the results of a two-year research project on the sources of success in regional clusters of entrepreneurship and innovation like Silicon Valley. Our project has studied a number of locations, most of which have shown spectacular rates of growth of information and communcations technology-related activities during the 1990s. Our case studies comprise some emerging regions, notably in Ireland, India, Israel and Taiwan, along with more advanced areas like Northern Virginia in the US, Cambridge, UK, the Scandinavian countries and the Silicon Valley 40 years ago by way of the memory of one of its 'father founders', Gordon Moore. Through visits, interviews and other materials, we uncovered some regularities about the determinants of success of these entrepreneurial-led models of economic growth. We find that the economic factors that give rise to the start of a cluster can be very different from those that keep it going. Agglomeration economies, external effects and 'social increasing returns' of any sort arise almost naturally after a cluster has taken off. But the most difficult and risky part is to get the new clusters started. At that stage, 'old economy' factors like firm-building capabilities, managerial skills, a substantial supply of skilled labor and connection to markets were crucial for the take off of these 'new economy' clusters (including Silicon Valley 40 years ago).

The Bioeconomy and what it means for regional economies

Prospects for a Bioeconomy: The Biomedical Industry and Economic Development, Cinda Herndon-King and Richard S. Seline, 2000

Without many too many facts to fall back on, I have proposed that hi-tech industry industries are moving away from a pure cluster model towards a 'network of competing and cooperating clusters.' This report backs me up as far as the biomedical industry is concerned. There's more on networks of innovation and regions collaborating to compete at the website of New Economy Strategies.

Cinda Herndon-King and Richard Seline analyzed 28 regions in the United States, with a special emphasis on the 4 most important clusters: Boston, San Diego, the Bay Area and Seattle. At the time the report was written, biotech was poised to pick up investments and momentum from the slacking internet bubble economy.

Herndon-King and Seline provide a comprehensive overview of the biomedical industry. They point out the enormous market potential of the health care industry in the U.S., mainly due to a population with a higher life expectancy that is aging overall. However, much of the potential also arises from the fact that genomic pharmaceuticals allow much more personalized healthcare and a much vaster scope of treatments - beginning with highly targeted preventive care.

They cite Mark Dibner and list 7 factors which distinguish the biomedical industry from other high tech sectors:
1. Financing: The start-up costs of business are high, and generally not financed by the entrepreneur
2. Reliance on research base: Most (55%) of biotechnology companies engage in activities which are in the research and development phase only.
3. Time to market: Typically, between five to twelve years is required. Return on investment for early investors is not based on product sales but from increasing valuation of the company, realized upon exit.
4. Regulatory environment: The cost of the the drug development and approval process is estimated at an average of $300 to $500 million per drug. The time required for approvals can be highly variable, and can often depend on factors outside the control of the submitting company.
5. Dependence on patent issues: Attracting investment requires a strong global intellectual property position.
6. Alliances and outsourcing: Due to the high costs of doing business, biotechnology firms extensively leverage outside skills, technology and capital through alliances. Reliance on academic innovation has emerged as the primary factor affecting biotechnology industry cluster devlopment.
7. Influence of public perception and environment.

Two major trends that form a recurring theme throughout the report are:
1. the interrelationship of tools and enabling technology with basic scientific discovery. The distinction between providing equipment or software and conducting basic research is blurred since so much discovery depends on the development of specialized or custom-made new tools.
2. the requirement for interdisciplinary approaches to biomedical research, bioinformatics being a case in point for both trends.

The authors go on to describe 2 phases of the industry:

The first wave business model centered on the 'full integrated pharmaceutical company' that licensed, financed, managed, and fought the federal regulatory labyrinth around (typically) a university patent or paper. This fully-integrated model housed the research, the testing, the manufaturing, and the distribution and sales for all aspects of bringing a drug or product to the market.

The second wave of the biotech industry is best defined by the reliance upon outsourcing and business networks rather than the integration model. Simply, the biotech and life science industry has found alliances, networks among researchers-vendors-suppliers, and a more concentrated and accelerated focus of both the science and the economics to be not just valuable but competitive propositions.

This has implications for regional economies that focus on biotech/biomed:

The Second Wave therefore is permeating regional strategies: proximity is no longer a value proposition in all elements of the lifecycle. Proximity to new ideas, to faculty, to research facilities promises greater innovation (defined as a social process among inputs of the science and outputs of entrepreneurial formation), but as firms mature the proximity demand within a region is challenged. Seattle for instance found in the late 1980s that no strategic marketing firms existed in their region and thus turned to Los Angeles and New York for assistance. Over a three year period, enough demand was created in Seattle that approximately 30 firms were established to serve the growing strategic marketing and sales requirements – many were outpost from Los Angeles and New York, others were home-grown. Currently San Diego has exceeded its manufacturing capacity – land is in short supply and costly; an initiative is underway to partner with border cities in Mexico and communities outside of California for non-essential manufacturing services.

There is a shift from self-contained regional clusters to specialized networked regions (see graph on page 44 of the report).

This is a reflection of changes in the industry itself as it moved from full vertical integration within one firm to a greater reliance on networks and alliances.

Proximity matters but not as it once did - like a fully-integrated company, regions believed that they must manage or control all aspects of the product cycle. With the determination that not every region has all the critical ingredients, more and more expectations arise for networking with other institutions, knowledge, talent and entrepreneurs beyond the local community. Proximity matters because innovation is a social process but not all aspects of the product testing and development must rely on the capacity to 'rub shoulders' with the testing, trials, and manufacturing aspects of the industry.

But the question remains: Which aspects require shoulder rubbing, and which don't?