Technology firms that avoid transnational investments miss out on opportunities to share knowledge generated elsewhere and risk isolation and failure in the long run, says new research from economic geographers at the University of Toronto.
The study shows that a firm increases its viability when it spreads investment among strategic locations around the world with clusters of similar or related industries, creating a global cluster network.
“By neglecting to build knowledge pipelines to industry hotspots around the world and tapping into local knowledge and talent pools, they forgo growth opportunities and higher growth potential,” says Harald Bathelt, Canada Research Chair in Innovation and Governance at the University of Toronto and co-author of “Global cluster networks – Foreign direct investment flows from Canada to China”, published in the January issue of the Journal of Economic Geography.
Bathelt and co-author Peng-Fei Li, a Banting Postdoctoral Fellow, analyzed 300 cases of investments by Canadian firms in China from 2006 to 2010 and found the emergence of global cluster networks as a new architectural framework for globalized learning. They also discovered that whether or not a Canadian firm was located in a cluster region domestically influenced the type of location where it chose to forge a link internationally.
Firms from industrial clusters in Canada were five times more likely to invest in similar Chinese clusters than firms from Canadian non-clusters. Clusters as distinctive local industrial communities can be both places of opportunities and areas of challenges. Innovation-oriented firms often originate from successful clusters and already know how to interact in a creative environment; they will likely invest in similar clusters located elsewhere to benefit from the local learning milieu of these areas. On the contrary, cost-squeezing firms may view clusters as places full of competitors which drive up costs and risks of unintended knowledge spillovers, and consequently try to avoid such places.
Bathelt and Li warn that although many innovative technologies have local origins, it is crucial not to rely solely on localized learning networks in a community, no matter how successful they may have been in the past. The researchers say it is more important to search for, mobilize and integrate new ideas, technologies and knowledge on a global scale.
“This doesn’t imply that entrepreneurs need to be located everywhere because in each field, knowledge pools are distributed very unevenly,” says Li. “Think Hollywood for movies, Paris or Milan for fashion, and New York and London for finance. Among tech industries, a small world of innovative clusters exists, which continuously improves existing technologies and sporadically generates innovations that redefine the rules of the game in a global context.”
To illustrate the importance of looking beyond local knowledge networks, Bathelt and Li compare and contrast the experiences of Waterloo, Canada and Shenzhen, China – both viewed as their country’s Silicon Valley – and the firms of Blackberry and Huawei in particular.
Though very successful internationally, Blackberry has always been a very local firm with research and production facilities concentrated around its Waterloo headquarters region. It was not deemed crucial to find new talent and ideas outside the local community as the supply of local talent from one of Canada’s leading tech universities was endless. The researchers say that the firm’s isolation and resulting ignorance of fundamental changes in the smartphone industry combined with a growing bureaucracy contributed to its decline.
Conversely, Shenzhen is an information technology cluster with a relatively weak local knowledge base and no leading research institution nearby. Local firm Huawei overcame this apparent disadvantage and adopted a global innovation strategy by establishing research centres in many countries and tapping into varied knowledge pools, mostly located in innovative clusters – including 20 years in Silicon Valley, 15 years in Bangalore and Dallas, and more than four years in Ottawa.
“By being in major places of innovative ideas in the telecom world, Huawei has built a strong global knowledge network that constitutes its success now and into the future,” says Bathelt. “Canadian firms would do well to look further afield and engage systematically in crucial knowledge exchange in order to compete successfully in the global economy.”