How Tech Clusters Form

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Silicon Valley is recognized globally as the birthplace of some of today’s most popular and iconic technologies. Many of its startups have a particular dynamic to thank for their success: the formation of clusters, or groups of companies and organizations that congregate in a region around a particular field. Brett Gilbert, an associate professor in Rutgers Business School’s department of management and global business (and @ProfGilbert on Twitter), studies the formation and influence of these clusters. When a prominent university or a powerhouse company draws other, smaller organizations to its region, a tech cluster forms, supporting entrepreneurs as they develop their own breakthroughs. This model has been observed for decades in the United States. Now, emerging markets such as South Africa are seeing nascent cluster formation. And the success of these nations in the global economy may depend, at least in part, on their ability to make clusters work. Gilbert, who has a Ph.D. in entrepreneurship from Indiana University and served a gubernatorial appointment as an advisory committee member for the Texas Emerging Technology Fund from 2008 to 2010, recently spoke with strategy+business about her research in the U.S. and abroad.

strategy+business
ISSUE 80 AUTUMN 2015
REPRINT 00349
BY CHRISTIE RIZK
How Tech Clusters Form
Rutgers professor Brett Gilbert describes the development of
entrepreneurial communities, from Silicon Valley to Johannesburg.
leadingideas
How Tech
Clusters
Form
Rutgers professor Brett
Gilbert describes the
development of entre-
preneurial communi-
ties, from Silicon Valley
to Johannesburg.
by Christie Rizk
Silicon Valley is recognized
globally as the birthplace
of some of today’s most
popular and iconic technologies.
Many of its startups have a particu-
lar dynamic to thank for their suc-
cess: the formation of clusters, or
groups of companies and organiza-
tions that congregate in a region
around a particular field.
Brett Gilbert, an associate pro-
fessor in Rutgers Business School’s
department of management and
global business (and @ProfGilbert
on Twitter), studies the formation
and influence of
these clusters.
When a promi-
nent university
or a powerhouse
company draws
other, smaller organizations to its
region, a tech cluster forms, sup-
porting entrepreneurs as they de-
velop their own breakthroughs.
This model has been observed for
decades in the United States. Now,
emerging markets such as South
Africa are seeing nascent cluster
formation. And the success of these
nations in the global economy may
depend, at least in part, on their
ability to make clusters work.
Gilbert, who has a Ph.D. in en-
trepreneurship from Indiana Uni-
versity and served a gubernatorial
appointment as an advisory com-
mittee member for the Texas Emerg-
ing Technology Fund from 2008
to 2010, recently spoke with
strategy+business about her research
in the U.S. and abroad. She says
South Africa is on the right track to-
ward building its own vibrant tech
community, though it will face
challenges unique to the country’s
history and economy. Gilbert also
explains why clean-energy tech
companies looking to form clusters
may not find themselves with the
same support other technology-
focused communities have.
S+B: How do tech clusters form?
GILBERT: Technology companies
tend to group and develop in the
same location. Some clusters have
emerged from the work of a univer-
sity: Stanford was very instrumental
in the development of Silicon Valley,
for example. A cluster can also start
with a company. Consider Seattle,
which has a somewhat small, but
very influential, software develop-
ment and information technology
cluster. Microsoft had an important
role in spawning that cluster, and
most of the firms located there tend
to develop products that largely
build on or support Microsoft offer-
ings. They essentially position them-
selves within the value chain of the
dominant firm.
Recently, I’ve started looking at
how clusters form in emerging mar-
kets, with a focus on South Africa.
The government is in the process
of trying to develop a cluster of IT
firms in Johannesburg in hopes of
spurring more economic growth
and development. It’s still in the
very early stages, and at this point
much of the effort has been in estab-
lishing tech incubators [enterprises
that assist startups with office space,
guidance, and services].
The South African government
has some tools at its disposal. For ex-
ample, it has laws mandating that
multinationals operating in the
country contribute back to the econ-
omy. They are required to help de-
velop small and medium-sized en-
terprises, and to contribute a certain
percentage of their profits to em-
ployee development. Thus far, such
rules have mostly been used by the
government to support entrepre-
neurial firms, rather than as a delib-
erate attempt to forge clusters. How-
ever, the city of Johannesburg now
11
Brett Gilbert
PhotographcourtesyofBrettGilbert
“When you have a cluster with a single dominant
firm, the other companies often tend to
service that larger firm rather than focus on
breakthrough innovations of their own.”
2
leadingideas
has an official who is responsible for
supporting cluster development, so
it’s moving in that direction.
S+B: Do new clusters tend to
emerge near venture capital money,
or does money come to the cluster?
GILBERT: They coevolve to a cer-
tain extent. Silicon Valley, for ex-
ample, didn’t necessarily have ven-
ture capitalists first — the U.S.
government funded early research
in the 1950s that led to the found-
ing of many Silicon Valley compa-
nies. That said, I think there’s still a
tendency for venture capital to con-
centrate in certain areas in the same
way that firms tend to concentrate
in certain areas. And venture capi-
talists, of course, tend to have a pref-
erence for financing companies that
are within their geographic region,
or at least within a certain distance,
so they are able to get to the compa-
nies for mentoring and other activi-
ties. I think a viable cluster requires
a little bit of private- or public-sector
funding early on, along with a
steady stream of self-generated en-
trepreneurship. Once those two
things feed off each other, we begin
to see more investment happening
within clusters and more venture
capital being attracted to the area.
S+B: How are clusters in emerging
markets such as South Africa
different from those in more
established countries?
GILBERT: In emerging markets,
other factors are often at play. For
example, many multinational tech-
nology companies are operating in
Johannesburg, but they may actu-
ally be a hindrance to seeing a tech-
nology cluster emerge there. Many
people would rather have the stable
job with a large multinational, as
opposed to venturing out on their
own. Under the current government
system, if you are a white South Af-
rican, it’s risky to leave a job. The
country’s post-apartheid employ-
ment policies ensure that a percent-
age of jobs go to black South Afri-
cans, which means that leaving a
job increases the risk for a white
South African that he or she may
not get another one down the road.
Black South Africans, meanwhile,
having been shut out from the econ-
omy for so long, are now able to en-
joy a middle-class lifestyle. Walking
away from this life to start a busi-
ness isn’t easy for many to do.
However, although having
large, multinational corporations in
the country isn’t necessarily help-
ing an entrepreneurial community
emerge, I think it’s still fairly early
in terms of the long-term impact. I
know that Microsoft, in particular,
has been actively involved with try-
ing to help grow the cluster in Jo-
hannesburg. But from what I can
tell, as far as the company’s interac-
tion with the entrepreneurial com-
munity goes, a lot of it is focused on
building technologies using Micro-
soft products.
S+B: What are the advantages and
disadvantages of being in a cluster?
GILBERT: In the United States, clus-
ters do tend to be very beneficial for
startups in the early stages, primar-
ily because if the startups survive,
they have access to resources,
knowledge about industry trends,
and maybe even technological de-
velopments that are useful for them
in terms of developing their own
concepts. And whether they form
around a university or a company,
clusters can ultimately result in both
job creation and wealth creation in
a region.
One thing I’ve found, however,
is that startups that are founded in
clusters have a tendency to over-
emphasize their existing products.
I think what happens within the
cluster is that, because they’re con-
stantly learning about what other
firms are doing, they’re taking that
knowledge and incorporating it into
their current portfolio, as opposed
to using it to develop new products.
For example, when you have a clus-
ter with a single dominant firm, the
other companies often tend to
service that larger firm rather than
focus on breakthrough innovations
of their own. And if you have a lot
of companies that are thoroughly
dependent on one dominant firm,
they’re vulnerable to changes to that
firm’s economic state.
It’s still very early to speculate
on whether we’ll see these same ad-
vantages and disadvantages in South
Africa. But African culture is very
relational and communal in nature.
Given that clusters require strong
knowledge-sharing and a level of
“African culture is very relational and communal.
Given that clusters require strong knowledge-
sharing and a level of trust between actors, I see
no reason they wouldn’t thrive in South Africa.”
: Meet the next generation of business thought leaders
at strategy-business.com/youngprofs.
3
leadingideas
strategy+businessissue80
trust between actors, I see no reason
they wouldn’t thrive in South Afri-
ca. In fact, Kenya started down this
path a few years back and is seeing
strong success with the development
of a tech hub near Nairobi [dubbed
“the Silicon Savannah”]. Moreover,
in a developing country context,
some of the disadvantages of clusters
in established markets — such as
firms being overly focused on their
existing products and technologies
— may not be a disadvantage when
the business environment has so
much room for improvement.
I also think that multinationals
realize that they can’t move into
emerging markets without adapt-
ing to the local culture. This pres-
ents a unique opportunity for start-
ups in clusters: They can learn what
they need from the larger corpora-
tions, in terms of developing tech-
nologies, and then learn what
unique offering they can bring to
the market that the corporation
hasn’t thought of.
It’s also worth noting that there
are regional clusters that actually
discourage the emergence of new
technological paradigms. In my re-
search on clean-energy technology,
for example, I found that universi-
ties have been instrumental in the
development of some newer tech-
nologies, such as fuel cells [technol-
ogy that converts a fuel such as hy-
drogen into electricity to power a
vehicle]. However, in regions where
established industries may slow or
even prevent the development of
innovative technology — as the oil
and gas industry might do for a fuel-
cell company in the United States,
for example — universities haven’t
been as involved. Just because there’s
an energy cluster doesn’t mean that
it’ll be good for all types of energy
tech companies.
S+B: What does that mean for
clean-tech clusters?
GILBERT: Clean-tech clusters are
harder to form because these types
of companies have more challenges
to deal with than a software com-
pany might. I’ve found that incum-
bent technologies are dominant in
the minds of a lot of stakeholders.
As entrepreneurs are trying to bring
green technologies to the market-
place, they have to compete not
only against one another, but also
against the existing energy systems.
Fuel-cell technology companies, for
example, are having a difficult time
even being able to make their value
proposition in the marketplace.
They came after solar and wind,
and many people don’t necessarily
see the need for any other options.
There are also other complica-
tions: If we’re going to have fuel-cell
cars, for example, changes will be
required within the automotive in-
dustry and related infrastructure.
Fuel-cell cars are designed to run on
hydrogen fuel, which means you
need hydrogen fueling stations in
places where people can access
them. It’s kind of a chicken-and-egg
situation, in which the automotive
manufacturers would like to see the
energy companies investing in hy-
drogen fueling stations, and the en-
ergy companies would like to see
the automotive manufacturers put
these cars on the road before they
make the investment in the fueling
stations. As a result, they’re at a bit
of a standstill. +
Reprint No. 00349
Christie Rizk
christie.rizk@strategyand.pwc.com
is associate editor of strategy+business.
33
strategy+business magazine
is published by certain members of the
PwC network.
To subscribe, visit strategy-business.com
or call 1-855-869-4862.
For more information about Strategy&,
visit strategyand.pwc.com
• strategy-business.com
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Articles published in strategy+business do not necessarily represent the views of the member firms of the
PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement
or recommendation for purchase.
© 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms,
each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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How Tech Clusters Form

  • 1. strategy+business ISSUE 80 AUTUMN 2015 REPRINT 00349 BY CHRISTIE RIZK How Tech Clusters Form Rutgers professor Brett Gilbert describes the development of entrepreneurial communities, from Silicon Valley to Johannesburg.
  • 2. leadingideas How Tech Clusters Form Rutgers professor Brett Gilbert describes the development of entre- preneurial communi- ties, from Silicon Valley to Johannesburg. by Christie Rizk Silicon Valley is recognized globally as the birthplace of some of today’s most popular and iconic technologies. Many of its startups have a particu- lar dynamic to thank for their suc- cess: the formation of clusters, or groups of companies and organiza- tions that congregate in a region around a particular field. Brett Gilbert, an associate pro- fessor in Rutgers Business School’s department of management and global business (and @ProfGilbert on Twitter), studies the formation and influence of these clusters. When a promi- nent university or a powerhouse company draws other, smaller organizations to its region, a tech cluster forms, sup- porting entrepreneurs as they de- velop their own breakthroughs. This model has been observed for decades in the United States. Now, emerging markets such as South Africa are seeing nascent cluster formation. And the success of these nations in the global economy may depend, at least in part, on their ability to make clusters work. Gilbert, who has a Ph.D. in en- trepreneurship from Indiana Uni- versity and served a gubernatorial appointment as an advisory com- mittee member for the Texas Emerg- ing Technology Fund from 2008 to 2010, recently spoke with strategy+business about her research in the U.S. and abroad. She says South Africa is on the right track to- ward building its own vibrant tech community, though it will face challenges unique to the country’s history and economy. Gilbert also explains why clean-energy tech companies looking to form clusters may not find themselves with the same support other technology- focused communities have. S+B: How do tech clusters form? GILBERT: Technology companies tend to group and develop in the same location. Some clusters have emerged from the work of a univer- sity: Stanford was very instrumental in the development of Silicon Valley, for example. A cluster can also start with a company. Consider Seattle, which has a somewhat small, but very influential, software develop- ment and information technology cluster. Microsoft had an important role in spawning that cluster, and most of the firms located there tend to develop products that largely build on or support Microsoft offer- ings. They essentially position them- selves within the value chain of the dominant firm. Recently, I’ve started looking at how clusters form in emerging mar- kets, with a focus on South Africa. The government is in the process of trying to develop a cluster of IT firms in Johannesburg in hopes of spurring more economic growth and development. It’s still in the very early stages, and at this point much of the effort has been in estab- lishing tech incubators [enterprises that assist startups with office space, guidance, and services]. The South African government has some tools at its disposal. For ex- ample, it has laws mandating that multinationals operating in the country contribute back to the econ- omy. They are required to help de- velop small and medium-sized en- terprises, and to contribute a certain percentage of their profits to em- ployee development. Thus far, such rules have mostly been used by the government to support entrepre- neurial firms, rather than as a delib- erate attempt to forge clusters. How- ever, the city of Johannesburg now 11 Brett Gilbert PhotographcourtesyofBrettGilbert “When you have a cluster with a single dominant firm, the other companies often tend to service that larger firm rather than focus on breakthrough innovations of their own.”
  • 3. 2 leadingideas has an official who is responsible for supporting cluster development, so it’s moving in that direction. S+B: Do new clusters tend to emerge near venture capital money, or does money come to the cluster? GILBERT: They coevolve to a cer- tain extent. Silicon Valley, for ex- ample, didn’t necessarily have ven- ture capitalists first — the U.S. government funded early research in the 1950s that led to the found- ing of many Silicon Valley compa- nies. That said, I think there’s still a tendency for venture capital to con- centrate in certain areas in the same way that firms tend to concentrate in certain areas. And venture capi- talists, of course, tend to have a pref- erence for financing companies that are within their geographic region, or at least within a certain distance, so they are able to get to the compa- nies for mentoring and other activi- ties. I think a viable cluster requires a little bit of private- or public-sector funding early on, along with a steady stream of self-generated en- trepreneurship. Once those two things feed off each other, we begin to see more investment happening within clusters and more venture capital being attracted to the area. S+B: How are clusters in emerging markets such as South Africa different from those in more established countries? GILBERT: In emerging markets, other factors are often at play. For example, many multinational tech- nology companies are operating in Johannesburg, but they may actu- ally be a hindrance to seeing a tech- nology cluster emerge there. Many people would rather have the stable job with a large multinational, as opposed to venturing out on their own. Under the current government system, if you are a white South Af- rican, it’s risky to leave a job. The country’s post-apartheid employ- ment policies ensure that a percent- age of jobs go to black South Afri- cans, which means that leaving a job increases the risk for a white South African that he or she may not get another one down the road. Black South Africans, meanwhile, having been shut out from the econ- omy for so long, are now able to en- joy a middle-class lifestyle. Walking away from this life to start a busi- ness isn’t easy for many to do. However, although having large, multinational corporations in the country isn’t necessarily help- ing an entrepreneurial community emerge, I think it’s still fairly early in terms of the long-term impact. I know that Microsoft, in particular, has been actively involved with try- ing to help grow the cluster in Jo- hannesburg. But from what I can tell, as far as the company’s interac- tion with the entrepreneurial com- munity goes, a lot of it is focused on building technologies using Micro- soft products. S+B: What are the advantages and disadvantages of being in a cluster? GILBERT: In the United States, clus- ters do tend to be very beneficial for startups in the early stages, primar- ily because if the startups survive, they have access to resources, knowledge about industry trends, and maybe even technological de- velopments that are useful for them in terms of developing their own concepts. And whether they form around a university or a company, clusters can ultimately result in both job creation and wealth creation in a region. One thing I’ve found, however, is that startups that are founded in clusters have a tendency to over- emphasize their existing products. I think what happens within the cluster is that, because they’re con- stantly learning about what other firms are doing, they’re taking that knowledge and incorporating it into their current portfolio, as opposed to using it to develop new products. For example, when you have a clus- ter with a single dominant firm, the other companies often tend to service that larger firm rather than focus on breakthrough innovations of their own. And if you have a lot of companies that are thoroughly dependent on one dominant firm, they’re vulnerable to changes to that firm’s economic state. It’s still very early to speculate on whether we’ll see these same ad- vantages and disadvantages in South Africa. But African culture is very relational and communal in nature. Given that clusters require strong knowledge-sharing and a level of “African culture is very relational and communal. Given that clusters require strong knowledge- sharing and a level of trust between actors, I see no reason they wouldn’t thrive in South Africa.” : Meet the next generation of business thought leaders at strategy-business.com/youngprofs.
  • 4. 3 leadingideas strategy+businessissue80 trust between actors, I see no reason they wouldn’t thrive in South Afri- ca. In fact, Kenya started down this path a few years back and is seeing strong success with the development of a tech hub near Nairobi [dubbed “the Silicon Savannah”]. Moreover, in a developing country context, some of the disadvantages of clusters in established markets — such as firms being overly focused on their existing products and technologies — may not be a disadvantage when the business environment has so much room for improvement. I also think that multinationals realize that they can’t move into emerging markets without adapt- ing to the local culture. This pres- ents a unique opportunity for start- ups in clusters: They can learn what they need from the larger corpora- tions, in terms of developing tech- nologies, and then learn what unique offering they can bring to the market that the corporation hasn’t thought of. It’s also worth noting that there are regional clusters that actually discourage the emergence of new technological paradigms. In my re- search on clean-energy technology, for example, I found that universi- ties have been instrumental in the development of some newer tech- nologies, such as fuel cells [technol- ogy that converts a fuel such as hy- drogen into electricity to power a vehicle]. However, in regions where established industries may slow or even prevent the development of innovative technology — as the oil and gas industry might do for a fuel- cell company in the United States, for example — universities haven’t been as involved. Just because there’s an energy cluster doesn’t mean that it’ll be good for all types of energy tech companies. S+B: What does that mean for clean-tech clusters? GILBERT: Clean-tech clusters are harder to form because these types of companies have more challenges to deal with than a software com- pany might. I’ve found that incum- bent technologies are dominant in the minds of a lot of stakeholders. As entrepreneurs are trying to bring green technologies to the market- place, they have to compete not only against one another, but also against the existing energy systems. Fuel-cell technology companies, for example, are having a difficult time even being able to make their value proposition in the marketplace. They came after solar and wind, and many people don’t necessarily see the need for any other options. There are also other complica- tions: If we’re going to have fuel-cell cars, for example, changes will be required within the automotive in- dustry and related infrastructure. Fuel-cell cars are designed to run on hydrogen fuel, which means you need hydrogen fueling stations in places where people can access them. It’s kind of a chicken-and-egg situation, in which the automotive manufacturers would like to see the energy companies investing in hy- drogen fueling stations, and the en- ergy companies would like to see the automotive manufacturers put these cars on the road before they make the investment in the fueling stations. As a result, they’re at a bit of a standstill. + Reprint No. 00349 Christie Rizk christie.rizk@strategyand.pwc.com is associate editor of strategy+business. 33
  • 5. strategy+business magazine is published by certain members of the PwC network. To subscribe, visit strategy-business.com or call 1-855-869-4862. For more information about Strategy&, visit strategyand.pwc.com • strategy-business.com • facebook.com/strategybusiness • twitter.com/stratandbiz Articles published in strategy+business do not necessarily represent the views of the member firms of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase. © 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.