How Important Are Industry Clusters To Startups?

If I suggested a way for your clean energy startup to set-up shop near a bunch of companies involved in things like renewable technology and the smartgrid, what would you say? If I sweetened the deal and told you the list of companies included a few of the Fortune 500 and a slew of established mid-market companies, you’d probably say, “sign me up!”
 
So goes part of the argument for industry clusters, a term that Harvard Professor Michael Porter explored in the late 1990’s. And with the economy in somewhat of a rebound, there’s more discussion around how industry clusters can spark regional growth. But there’s obviously more to it than filling up business parks with like-minded corporations in similar verticals. Or is there?
 
A recent Forbes piece highlighted an industry cluster in the Midwest, where a smaller startup was able to ramp up operations because of its alliance with a larger, more established company.
 

Vadxx Energy has gained a lot of value from being part of an active cluster of advanced energy companies and organizations. In fact, one of the big reasons our partnership with Rockwell Automation occurred was because of Vadxx’s participation in Northeast Ohio’s advanced energy cluster. Joining forces with a credible, multinational company has helped us accelerate our commercialization activities, raise additional capital, and attract new customers.”

But proximity and a burgeoning market only guarantee so much. It starts with human capital, driven by the innovators and risk-takers that comprise much of the entrepreneurial community. That’s where I see the bridge to Austin’s community, as well as its strength.

Washington Post columnist Vivek Wadhwa amplified that point.

“A recent analysis of 1,604 companies in the five largest Norwegian cities underscores what’s missing from this prescription for a knowledge economy: people. The prerequisite for a regional innovation system is knowledgeable people who have the motivation and ability to start ventures. To succeed, these people need to be connected to one another by information-sharing networks. Basic infrastructure is always needed, but fancy science parks and big industry are just nice to have.”

Now granted, Norway (and other Scandinavian countries) isn’t the most culturally heterogeneous region by any stretch. But more importantly, its leaders are committed to maintaining global ties and welcoming new ideas and inputs — outside of their regional comfort zones. Without that, as the study concludes, regional and national clusters are mostly “irrelevant” to innovation.

Whatever the results, Austin is a classic fit for much of the positives associated with clusters. When you add in the emphasis on human capital, strong industry segments, and access to a top-tier university, it’s hard to see how doubling down on the idea doesn’t make sense.

NYT had a piece this morning on manufacturing, but I was more interested in this stat on where most of the R&D activity in the US takes place.

“American multinational companies that account for about 84 percent of all private-sector (non-bank) business R.&D. in the United States still place about 84 percent of their R.&D. activities in the United States, often in clusters around research universities..”

Again, manufacturing aside, that’s a big percentage of spending that hovers around clusters. And Austin’s familiar with the scenario, especially with Austin Technology Incubator’s alignment with the University of Texas and the fact that accelerators are moving closer to downtown hotbeds of startup activity. And that R&D spending? It’s companies like Dell, Facebook, Samsung and others spending those dollars.

So whether or not you buy into the cluster concept, here’s an excerpt from a recent ITIF report on cities and innovation I’ll leave you with.

“One reason why technology industries drive income growth is that average wages in high-tech clusters are $63,970 versus $43,180 in non-high tech traded clusters. One key factor that appears to drive higher incomes in a region is a higher share of employment in knowledge-based industries.States with higher concentrations of knowledge-based industries, including professional services and high-tech manufacturing, have higher incomes.”

About George Dearing

George Dearing writes about technology, startups, and sustainability.
He advises clients on strategy and communications. You can follow him on Twitter here

Comments

  1. Great piece! If Austin can overcome increasingly difficult infrastructure issues, it seems like the future will be this kind of industry cluster growth.

  2. Thanks Aaron..and if we figure in other metros (Houston, San Antonio, Dallas) the argument is even more attractive I think. It’s a bottom-up, regional strategy with strong clusters. Thanks for the comment.

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