TCS Daily


Cluster Flunk

By Christian Sandstrom - May 5, 2006 12:00 AM

Nearly everyone has heard of Silicon Valley, but what about Silicon Fen? Silicon Glen? Or the Côte du Silicon? Back in the 1990s, cities across Europe tried to replicate the Northern California techno success story by creating clusters where business and science could meet and generate innovation. But the results, in Cambridge, England; Glasgow, Scotland; and Sophia Antipolis, France; have been mixed.

Today, those nicknames are usually mentioned as jokes. Many of the initiatives to create innovative clusters failed completely. Consequently, Europe is lagging behind the United States in emerging technologies. Apart from the telecom industry, European economies are struggling to compete in new innovative industries such as IT and Biotechnology. Why has Europe had such trouble creating its own version of Silicon Valley?

Competence in basic research is one of the key determinants for creating a successful cluster. Silicon Valley has a close cooperation with Stanford University. Silicon Fen, one of the most promising clusters in Europe, has grown up around the University of Cambridge. But in general, the lack of world-class universities on the continent may be one explanation to why clusters are not forming. However, the Cambridge cluster is still only one sixth of the size of Silicon Valley in terms of geography, number of start-ups and venture-capital funding.

Easy access to venture capital (VC) is another important condition for establishing a cluster. Though it is rising, European early-stage VC-funding is a fraction of what's available to American start-ups. The lack of a common financial market in Europe makes it even more difficult for European start-ups to find seed money.

Furthermore, the European social model decreases the incentives to start new companies and take great risks. High taxes and an excessive regulatory burden mean that the reward for an entrepreneur is lower in Europe than in the United States. Moreover, low labor mobility makes it difficult to find the right people at the right time.

To be fair, there area few success stories in Europe. North of Munich an innovative cluster in biotechnology has been established. The Stockholm region has also been doing well, mainly in the mobile technology sector. What distinguishes these successful clusters in both Stockholm and Munich is that they are the product of organic growth rather than government central planning. This has made them more adaptive and able to incorporate new technologies. The same holds for Cambridge, which has managed to find synergies between sectors such as Biotechnology and medicine. Many of the planned ones, such as Sophia Antipolis in France, floundered after the dotcom bubble burst.

Sometimes heavy government investments in "tech-education" can help establish innovative clusters. This is why a country like Ireland has been so dominant in the European technology sector during the last ten years. The significant tax cuts and deregulations that have taken place in Ireland have also improved the conditions for clusters to prosper. Overall, Britain and Ireland have been more successful than the continent in the creation of technology clusters.

And then there is the example of Skype, a peer-to-peer Internet telephony company. Its founders were from the Nordic welfare states of Denmark and Sweden and had worked with several projects in Estonia since the late 1990s. All the research and development behind Skype was done in Estonia. Instead of operating in the rigid, old European economies, the founders chose a country that could offer a freer and more dynamic environment. Last year, Skype was sold to eBay for $2.6 billion.

Over the years a whole network of knowledge-intensive companies has emerged in Estonia. One of them, Playtech, is about to release an IPO worth about $1 billion on the London Stock Exchange. The New York Times last December called Estonia "a sort of Silicon Valley on the Baltic Sea".

So all hope is not lost; there are some positive examples for Europe to follow if it wants to create more innovation clusters. Obviously, more venture capital is needed and the incentives to entrepreneurship must be improved. But more importantly, high-tech clusters must emerge spontaneously rather than being centrally planned by the government.

Old Europe can learn a lot from New Europe and from the United States. In doing so, it can regain lost ground in emerging technologies such as IT and biotechnology. But if it continues on its current path, Old Europe will find itself once again with clusters that are at best unknown, at worst regarded as jokes.

The author is a Fellow at the Swedish free market think tank Captus (www.captus.nu).

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2 Comments

Great piece
Super piece. I agree that Western Europeans have overlooked the more dynamic environments of Eastern Europe.

In addition to being a TCS contributor, I have written on this very subject as well:

http://veritasanalytics.com/blog/?p=8

Jealousy and control freaks
It is the culture of taxing anyone who propers and bureaucrats who feel they have to control everything. Europe is not the only place so plagued, just the most advanced. It is too bad other places are not learning from their mistakes.

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