EIU_InnovationClusters_Final-1

Innovation Clusters:
Understanding Life Cycles
Commisioned by:
BRIEFING PAPER
A BRIEFING PAPER FROM THE ECONOMIST INTELLIGENCE UNIT

© The Economist Intelligence Unit Limited 2015 Innovation Clusters: Understanding Life Cycles 2
ABOUT THIS REPORT
Innovation clusters: Understanding life cycles was written by The Economist Intelli-
gence Unit. It examines the life cycles of five innovation clusters and the factors that
determine success. The report is based on desk research and ten expert interviews.
The case studies have been selected to cover both established and emerging mar-
kets, and to explore a range of cluster success factors such as demographics and
talent; infrastructure; quality of life; policy; and geography. The report was written
by Michael Martins. The editor was Adam Green. The study was commissioned by
Dubai Tourism.
The Economist Intelligence Unit would like to thank the following individuals (listed
alphabetically) for sharing their insights and expertise during the research for
this paper.
Professor Erkko Autio - Chair in Technology Venturing and Entrepreneurship, and
Director of the Doctoral Programme at Imperial College London Business School
Dr Cristina Chaminade - Professor in Innovation Studies at Lund University
Dr Andrew Corbett - Professor of Entrepreneurship and Faculty Director for the John
E. & Alice L. Butler Venture Accelerator, Babson College
Dr Riccardo Crescenzi - Associate Professor of Economic Geography at the London
School of Economics
Dr Luisa Gagliardi - Fellow in the London School of Economics Department of
Geography and Environment, and Research Affiliate at Bocconi University
Clif Harald - Executive Director at Boulder Economic Council
Charlotte Holloway - Director of Policy, techUK
Professor Florian Täube - Emile Bernheim Chair of Entrepreneurship in a Global
Context at Université Libre de Bruxelles
Professor Tony Venables - BP Professor of Economics, Oxford University
Professor Poh Kam Wong - Director of National University of Singapore’s
Entrepreneurship Centre

Chapter One: Innovation clusters: Why companies are better together
Chapter Two: Silicon Roundabout, London
Chapter Three: Bangalore: Emerging market-makers?
Chapter Four: From zero to hero, with a little help from government: Estonia and
Singapore
Chapter Five: Boulder, Colorado: Delivering on Quality of Life
Conclusion: Innovation clusters: The ‘big 6’ success factors
Innovation clusters: Understanding life cycles
Innovation clusters are like the companies they host: they can grow
rapidly at inception, peak, and eventually – if they do not adapt
– they stagnate or die. There are thousands of clusters around the
world, but many struggle to achieve sustainability or scalability.
Sometimes, the very factors that made them successful, cause them
to fail later on.
What allows clusters to combine the innovative spirit of start-ups with
the resilience of established conglomerates, to extend their life cycle?
Through case study evidence across five countries, and an expert
interview program, the Economist Intelligence Unit explores ‘cluster life
cycles’ in Silicon Roundabout (UK), Bangalore (India), Boulder (United
States), Singapore, and Estonia and draws out key lessons from their
experiences.

Chapter 1: Innovation clusters: Why companies are better together
Innovation is often associated with triumphant lone inventors. The likes of Thomas
Edison, Louis Pasteur or Bill Gates are the central characters in this narrative. But all
innovators spring out of a specific context. The environments that foster their individ-
ual and collective success are very often ‘innovation clusters’: ecosystems
that appear to have a magical ability to nurture the best ideas and attract the
brightest talents.
Clusters emerge when a network of companies co-exists within a geographic loca-
tion, allowing each of them to collaborate – and compete – in a way which delivers
greater productivity gains than they would achieve in isolation. Silicon Valley is the
most famous, but there are countless others, from Russia to Chile.
Clusters attract innovative people. They network, leading to the cross-pollination
of ideas. Companies benefit from each other’s success: What one invents, rivals
can access – think of a productivity-boosting tool like Dropbox. And what one firm
invents, others can build on. Think of the ‘sharing economy’, led by trailblazers Uber
and Airbnb, in turn giving rise to an army of start-ups taking the same idea to new
applications.
Yet for all their benefits, innovation clusters are not straightforward to build – and
many do not last. To prosper, clusters need six key success factors: skills and talent,
accommodating policy frameworks, infrastructure, low costs (especially in the early
stages), a good lifestyle offering to draw talent, and finally - good luck, whether ge-
ography (proximity to key markets), historical accidents or even serendipity.
These six factors are necessary conditions, although they are not sufficient. Many
places in the world lay claim to these six, but never give rise to a successful cluster.
These factors are best seen as the necessary conditions for clusters, but not – on
their own – sufficient. Cluster success depends both on individual factors, but also
the interplay between them. Good universities are little use if there is no connectivity
with industry. A high standard of living is not helpful if immigration policies prevent
global talent from moving to the cluster. This paper explores the six success factors,
and assesses how they change over the life cycle of a cluster.

Chapter 2: ‘Silicon Roundabout’, London
London’s Silicon Roundabout is located between ‘the City’, a centre of global
finance, and Hackney, one of the poorest areas of London. In its early stages, it ben-
efitted from several favourable conditions. The area is accessible to central London
via public transport, allowing companies to travel around the city easily. Rents were
low, and many entrepreneurs from Hackney could access the area via bicycle.
There were already artists, media professionals and technology entrepreneurs in the
area. Many specialised in financial services, and had linkages with the UK’s national
broadcaster, the BBC. This fluid exchange of knowledge and ideas between tech-
nology, finance and media communities was stimulated by the UK’s open immigra-
tion policy in the late-2000s. The area attracted a large community of Americans
who studied at London universities and started working in the city thereafter. Others
came directly to Silicon Roundabout from San Francisco and Silicon Valley. These
factors came together to create a knowledge-sharing ecosystem. Success soon fol-
lowed. Live.fm and TweetDeck were early start-ups, bought by CBS for $280 million
in 2007 and Twitter for $40 million in 2011, respectively.
However, as Silicon Roundabout’s star ascended, two factors that helped drive
success – low rent and the UK’s open immigration policies – both changed. Rents
doubled in 5 years, pushing smaller firms and start-ups out. Developers acquired
properties, and enforced larger security deposits and more stringent credit checks
that prevented entry for smaller firms. They gradually moved on and out, to other
areas of London like Whitechapel and Aldgate.
The second shift was the tightening of immigration policy: non-EU worker visas are
now capped at 21,700 and recent non-EU graduates of UK universities are required
to find a job within 3 months of graduating, sponsored by their employer (at a cost
of £1,476), earning a minimum of £20,800. Some firms can absorb these costs. Oth-
ers, especially fragile and cash-poor start-ups, cannot.
Enabling starting conditions Growth challenges
Low rents
Rising rent with stringent
leasing controls
Excellent location
Larger scale commercial
developers
Open immigration policy
Restrictive visas and
immigration controls
Figure 1: Silicon Roundabout

The second shift was the tightening of immigration policy: non-EU worker visas are
now capped at 21,700 and recent non-EU graduates of UK universities are required
to find a job within 3 months of graduating, sponsored by their employer (at a cost
of £1,476), earning a minimum of £20,800. Some firms can absorb these costs. Oth-
ers, especially fragile and cash-poor start-ups, cannot.
“If high growth firms cannot meet their talent needs through domestic or local
talent, they need to be looking globally,” says Charlotte Holloway, Head of Policy
at techUK, a technology industry association. “To be a global hub for technology,
we really need to be a global hub for talent and that involves getting the best into
our cluster,” she says. The new immigration policies, and other proposals currently
in play, are concerning. “The industry has certainly felt a change of tone in recent
times,” says Ms Holloway. In particular, she warns against visa rules making it harder
for graduates to stay on in the country. “Our universities are fundamental drivers of
growth and we need that talent to be retained.”
Figure 2: Silicon Roundabout Timeline
2007: Live.fm, a Silicon
Roundabout start-up,
is bought by CBS
for $280 million
2010-2015: The price of a flat in Old
Street increased by 29.6% between
2010 and 2015, according the British
property website Zoopla
2008: 15 Tech firms located
in Silicon roundabout
2010: Prime Minister David
Cameron announces plans
to accelerate growth of
the cluster
2011: TweetDeck, a Silicon
Roundabout start-up, is bought
by Twitter for $40 million in 2011
2012: Google opens Old Street
Roundabout office to host speaker
series, hackathons, training work-
shops and product demonstrations
2014: Just under 1500 tech
firms located in the area
according to Tech City Map
2011-2015: The price
of property per square
foot increased from £15
in 2011 to £40 in 2013 to
£55 in 2015, according
to the FT and CityAM/
Colliers International

Chapter Three: Bangalore - Emerging market-makers?
Innovation clusters are often associated with developed economies such as the UK
and US, but some emerging markets are also players. Such countries have challeng
es – from underdeveloped infrastructure to bureaucratic legislations and unstruc
tured business environments – but they also have unique advantages such as lower
talent acquisition costs and ready availability of an educated and globally compet-
itive workforce. Bangalore’s ICT cluster, in southern India, is among the most striking
examples of an ecosystem that has combated the challenges of a developing
economy, while leveraging its human capital advantage effectively.
Bangalore emerged as one of the largest and fastest growing innovation clusters
outside of the US in the 1990s, and is the engineering, research & development cen-
tre of India. In 2008, it was home to 65% of the world’s IT services offshoring business,
and in 2013, accounted for nearly 40% of the country’s technology and software
development industry1
. Microsoft, IBM, Adobe, and Intel all have roots in Bangalore,
alongside more than 800 domestic firms offering back-and-middle office tasks, and
a wide range of analytics services to the global market.
1
Chaminade and Vang (2008) ‘Globalisation of knowledge production and regional innovation policy:
Supporting specialized hubs in the Bangalore software industry’, Research Policy 2008: 1684-1696
Highly educated population
Rise of cut-throat price competition
among smaller firms, reducing
incentives to undertake risky
innovation
Milder climate than most of India
Loose IP policy which led to US
firms’ reluctance to outsource R&D
Introduction of specialised
technology parks
Rising wages
Immigration caps in US,
encouraging outsourcing to India
Increased traffic congestion
US-friendly time zone difference Infrastructure bottlenecks
Figure 3: Bangalore

Education was one of the foundational success factors. Bangalore is home to some
of India’s and the world’s top ranked educational institutions for graduate and
post-graduate studies, creating access to a strong pool of highly skilled workers at
relatively low costs for global corporations. Bangalore was also innovative in lever-
aging its 9.5 to 12.5 hour time difference to the US. It offered a value proposition
based on providing operational back-end technological services support that did
not need to be co-located with front-line business and could be carried out on a
24/7 rotating shift basis.
According to Professor Florian Täube, Emile Berheim Chair of Entrepreneurship at the
Université Libre de Bruxelles, Bangalore also has a “pleasant climate, similar to North-
ern California. It is dry with moderate amounts of rain, which proved a good loca-
tion for hardware-based technology firms and labs that needed a certain climate
to do research. People also wanted to live there, as it was more temperate than
other parts of India,” and this “acted like a magnet for individuals with high levels of
human capital in the region.”
Direct policy also played a role in catalysing success. In 1990, the Department of
Electronics introduced the Software Technology Parks scheme - similar to China’s
special economic zones, for Bangalore. Software firms were given tax cuts for five
years and guaranteed access to high-speed satellite links and reliable electricity.
Figure 4: Bangalore Timeline
1984: Texas Instrument
opens Bangalore office
1990: Indian government in-
troduces Software Technology
Parks (STP) scheme
1993: New visa rules in the US increased cost of importing
Indian software programmers, leading more US firms to
outsource work to Bangalore
2005-2006: Between 1-2
multinational R&D cen-
tres open per month
2008: Kempegowda In-
ternational Airport built,
but persistent conges-
tion remains

US-based technology firms began offshoring to Bangalore, incentivising local SMEs
to specialise in services like coding. Initially, this often meant importing Indian pro-
grammers to the US to provide maintenance. However, in 1993, the US made it more
difficult to obtain non-immigrant visas. This led US firms to outsource work back to
Bangalore. Indian firms quickly adapted to the requirements of US firms, for example
punctual delivery and product quality. Some Indian firms developed reputations as
reliable suppliers in the US market, such as Infosys. Over time, the US-India relation-
ship evolved yet further. Once US firms saw the quality of top tier Indian companies,
they began to outsource internal R&D tasks.
However, Bangalore has run into its own problems over time. Its ability to climb the
value chain has been inhibited by India’s loose stance on intellectual property
protection – foreign firms have been increasingly reluctant to outsource much R&D.
Many of Bangalore’s companies still provide standardised services and, because
there are now so many firms, multinationals have little incentive to create a long-
term relationship with any single supplier.
The mushrooming of companies has also led to a problem of ‘over-competition’. As
of today, the top 20 Indian software exporters account for over 50% of total exports,
leaving over 800 firms with the rest of the market. Competition is fierce among the
bottom 800, leading to a lack of collaboration. Because competition is so aggres-
sive, firms instil in their employees a culture of “get it right the first time.” This ensures
customer satisfaction, but low levels of experimentation and risk-taking. As a result,
Bangalore is finding it difficult to climb the value chain.
Bangalore’s success has also created cost inflation due to rising wages, and con-
gestion has increased. Infrastructure projects have been difficult to implement rela-
tive to China, one of India’s main global competitors. Even Bangalore’s new airport,
built in 2008, cannot relieve the traffic that makes the two main technology parks
inaccessible during the day, according to Cristina Chaminade, professor of innova-
tion studies at Lund University. Taken together, cost increases, low R&D outsourcing
and congestion all show the need for Bangalore to evolve if it wants to stay ahead.

Chapter Four: From zero to hero – with a little help from government
For Bangalore and Silicon Roundabout, policy decisions over IP and immigration
arguably harmed their cluster’s evolution. But the government is not always an ob-
stacle. It can, through smart interventions, allow clusters to flourish.
Despite being a small country of just 1.3 million people, Estonia has produced one of
the most epic technological disrupters of the modern era: Skype. The government’s
actions over the last 20 years sowed the seeds for this success and others.
When Estonia gained independence from the Soviet Union in 1991, it was a small
country with hardly any infrastructure. Yet one of the benefits of its Soviet past was
the combination of egalitarian access to higher education and Estonia’s strategic
importance to the USSR during the Cold War, which created a native Estonian pop-
ulation with high levels of education in fields that catered to the rising technology
sectors.
In 2015, 30.7% of 55-64 year olds were educated to tertiary degree level, the high-
est in Europe and the sixth highest in the OECD. Soviet Estonian education has also
focused heavily on science, engineering and mathematics. The post-1991 govern-
ment also invested heavily in knowledge. The Estonian government almost tripled
R&D spending, from 0.6% of GDP in 2000 to 1.7% in 2013, and in 2011 and 2012 Esto-
nia spent above the EU average before lowering spending in 2013.
Figure 5: Government Expenditure on R & D (Percentage of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.50
1.50
2.50
EUROPEAN UNION
(28 COUNTRIES)
Source: EurostatEURO AREA
(19 COUNTRIES)
ESTONIA

The Estonian government did not just develop skills – it also invested in digital tech-
nology for public services, creating a population of ‘digital natives’. Milestones
include the 2005 internet-based general elections, and the issuance of electronic
identity cards. The e-ID card proved a more secure identification system for banks
and other private sector agents to use. Uptake increased as e-cards came to be
used for purchasing bus tickets, paying bills, renewing medical prescriptions online
and much more.
Digital public services, combined with a well-educated and tech-savvy population,
made Estonia a fertile ground for innovation. Indeed, the country’s high ICT pene-
tration - the percentage of the population with Internet access increased from 0.3%
in 1993 to 80% in 2013 - left Estonia exposed to cyber-crime, which led entrepreneurs
to explore new ways to boost security. The video linkage program Skype and file
sharing program Kazaa were both produced and scaled by Estonians by utilising
security-related technology. Estonia is thus a good example of how government in-
vestment in the broader innovation ecosystem – spanning education, digital service
delivery and R&D spending – can catalyse clusters.
Singapore: Built from scratch
Like Estonia, Singapore is an emerging market whose government has a pro-innova-
tion agenda. Singapore was an agrarian society when it became independent in
1965. A tropical island with few natural resources, a lack of fresh water, rapid popu-
lation growth and domestic ethnic and religious conflict, as well as hostilities in the
broader region, it hardly had an auspicious start.
Since then, the country has focused with laser-like precision on becoming as eco-
nomically powerful as possible, as fast as possible. Singapore established itself first
as a centre for low-cost manufacturing and later on electronics and, more recently,
life sciences. Its innovation credentials have strengthened since the early 2000s in
particular, and it is now a world-leading centre in areas such as biotechnology.
Its strengths as an innovation cluster are down to three factors: talent, supportive
government policy, and direct public investment. The first is the result of a major and
sustained public commitment to education. From a very low base, Singapore now
ranks consistently at or near the top of most major world education ranking systems
over the last decade according to the OECDw2
. The strategy started with the ‘build-
ing’ stage of 1959-1978, which saw the rapid construction of schools, mass teacher
recruitment and unification of a single Singaporean education system – as well as
the introduction of bilingualism to bring English language skills to the population.
Universal primary education was attained in 1965 and universal lower secondary by
the early 1970s.
2
OECD 2010, “Strong Performers and Successful Reformers in Education: Lessons from PISA for the
United States”

The second phase, from 1979 to 1996, focused on improving education quali-
ty – lowering dropout rates, raising grades, and developing more practical and
vocational skills. Reforms included ‘academic streaming’ to differentiate students
according to their abilities, and the formation of a more diverse range of education
institutions (including academic high schools, polytechnic high schools and tech-
nical institutes). Singaporean students were already ranking among the best in the
world in maths and science by 1995, meaning the country had ascended to the top
tier in little over a generation.
In the final phase, from 1997 to the present day, the education system was further
refined, for instance through allowing schools greater management autonomy and
more nuanced accountability models. More recently, the tertiary education system
has come to play a greater role in promoting the high level skills on which innova-
tion depends, for instance through the building of new universities like the Singapore
University of Technology and Design (in 2012). Industry-academia coordination has
been strengthened by a public agency, the Biomedical Sciences Industry Partner-
ship Office, whose mandate is to identify research strengths in Singapore’s univer-
sities, research institutes, hospitals and medical centres, and match them with the
interests of relevant companies.
Singapore city in sunset time

Due to its small population, Singapore has also looked to attract students from
nearby countries through the ASEAN scholarship, which covers fees and tuition for
qualified students, and the Tuition Grant Scheme (TGS) for international students,
which covers up to ten semesters of tertiary education. Both schemes require that
graduates remain in Singapore for up to 6 years and for 3 years, respectively. Pro-
grams like the Agency for Science, Technology and Research (A*STAR) fellowship,
which covers both undergraduate and graduate education, also helped attract
and retain global talent. These tactics, as well as a liberal immigration policy, aided
global inflows of highly skilled labour, leading to technology and skills transfer be-
tween large multinationals and domestic companies.Supportive government policy
has also played a role – through efforts to create an efficient and easy business
environment, and direct investments. As the economy shifted to knowledge-based
sectors and the skills base improved, the government sought to attract multinational
companies by offering tax incentives, eliminating political corruption, and bolstering
IP protection.
Supportive government policy has also played a role – through efforts to create an
efficient and easy business environment, and direct investments. As the economy
shifted to knowledge-based sectors and the skills base improved, the government
sought to attract multinational companies by offering tax incentives, eliminating
political corruption, and bolstering IP protection.
Singapore topped the World Bank’s Ease of Doing Business index in 2014 and 2015
and is a consistent top performer in multiple categories from contract enforcement
and trading across borders. One of its strongest performance areas is the ease of
setting up a business and carrying out processes. Simple registration procedures
makes it possible to incorporate a company and register for taxes using the same
online document, for instance, while digitisation has been extended to applications
for construction permits and property registration. In 2015, it introduced an electron-
ic litigation system to streamline proceedings.
Along with ease of business reforms, there are also grants to encourage business for-
mation and start-ups, such as the ACE Start-up Grant, dedicated to newly formed,
local majority-owned companies developing a differentiated business concept. The
government has been a direct active investor in broader innovation infrastructures,
Highly educated population Regional economic competition
Centralised decision-making and
low corruption
Lack of natural resources
Liberal immigration policy Rise in domestic tension and dissent
Strong IP protection Limited space
Figure 6: Singapore

too, spending around $6 billion between 2000 and 2005 in biomedical sciences in-
cluding the formation of Biopolis, a biomedical research and development hub. This
is perhaps Singapore’s most promising cluster.
Singapore began looking to biotechnology in the 2000s to diversify its economic
base, and utilised a combination of tax holidays and incentives - such as paying up
to 30% of building costs of companies undertaking basic drug research and devel-
opment. Its ability to attract stem cell investment was also helped by a reduction
in funding in the US due to ethical objections from the Bush administration. Singa-
pore is a legally more liberal research environment, allowing a number of research
practices, such as use of the early stage human embryos for therapeutic research,
which is banned in other countries. Between 2008 and 2012, Singapore – along with
Korea – showed the largest increase in stem cell research activity3
. It also, along
with Switzerland and Denmark, has an unusually high level of academic-corporate
partnerships, and international collaboration. As a result, top biotechnology experts
from leading establishments such as the Massachusetts Institutes of Technology, the
National Cancer Institute in Maryland and the University of California 4
have come
to Singapore over the last decade, citing greater funding, more organisational free-
dom, a more liberal research policy, and a greater appreciation of the benefits of
long term R&D.
A busy island
So far, Singapore has successfully adapted its model through each successive stage
– moving from low cost manufacturing to electronics to a more diversified econo-
my, positioning itself as a hub for multinationals wishing to build their Asian business-
es. Nestle, Abbott Laboratories and Google are among the companies who have
even set up research institutes in Singapore.
But as with all clusters and highly productive economic geographies, it faces
emerging challenges – especially with regards to the workforce. While immigration
brings new workers and ideas to the host country, it is not without risks. Singapore is
a small island, roughly half the size of London, and two-thirds the size of Hong Kong,
and is home to 5,469,700 people. The population has increased by 3% annually from
2005 to 2013, according to the World Bank, and population density, measured as
the number of people per square kilometer, has increased 27.7% between 2000 and
2013, according to Singstat, the Singaporean statistical agency.
As the population has increased, so has the number of immigrants, more than
doubling between 2000 and 2014. The strain on public services, and competition for
space, has combined with ever-growing demand for housing, increasing property
prices and prompting domestic dissent, according to Dr Poh Kan Wong, Director of
National University of Singapore’s Entrepreneurship Centre.
3
http://www.eurostemcell.org/files/ “Stem cell research: Trends and Perspectives on the evolving interna-
tional landscape”
4
“Singapore Acts as Haven for Stem Cell Research”, New York Times, August 17 2006

Dr Wong argues that foreign immigration has perhaps reached a critical mass
where enclaves of foreigners are starting to form, reducing assimilation and integra-
tion, in turn undermining the idea of a ’Singaporean identity’. At the same time, poli-
cy makers know that they are in a race for global talent and must remain open to
highly skilled labour. As a result, the governing party has started focusing on filtering
immigration, attracting highly skilled immigrants that can contribute to Singapore on
the global value chain through knowledge and technology transfer, while making
it more difficult for lower skilled immigrants to settle. As with all clusters, Singapore’s
success created its own new problems, which the city state has to adapt to.
Chapter Five: Boulder, Colorado: Delivering on Quality of Life
A pro-business climate might attract companies– but on its own, it is not enough to
attract highly skilled workers. Smart people aren’t just interested in work: they also
care about their surroundings, quality of schools and hospitals, leisure and entertain-
ment and a host of other lifestyle factors. In Hong Kong, for example, the SAR gov-
ernment built ‘Cyberport’, a large campus where entrepreneurs could rent cheap
office space and collaborate, but this cluster failed due to its distance from the city
centre where people wanted to live and work.
Lifestyle factors have certainly been contributors to the historical evolution of Boul-
der in Colorado, US. Boulder is a small town (population 102,760 in July 2013) that
punches above its weight as an innovation hub. From 2009 to 2013, there were 10.20
patents per 1,000 residents, the fifth highest in the US, after San Jose, California, and
above San Francisco5
. It is home to clusters of aerospace companies like Ball Aero-
space and Technologies Corporation, one of the top 100 defence contractors in
the world, and biosciences companies like Covidien.
Part of Boulder’s cluster evolution is “thanks to large corporations, a university, and
publicly-funded technical research organisations locating in Boulder in the past,
which led to a large number of firm spin-offs,” according to Dr Andrew Corbett,
Professor of Entrepreneurship at Babson College in Massachusetts. In 1965 IBM es-
tablished an office, and four years later a group of technicians left to found Storag-
eTek. Throughout the years, both companies downsized, leaving many highly skilled
people with roots in the local area. They founded companies that either still exist or
served as the incubators for later firms. Much of this talent pool had affiliations and
linkages with government research organisations in the area6
.
But in addition to historical happenstance, Boulder’s success is also integrally linked
to its high performance on liveability metrics, particularly in light of competition from
5
Courtney Miller, ‘America’s Most Innovative Tech Hubs’, NerdWallet, 9 February 2015.
6
Namely the University of Colorado Boulder, the US Air Force Academy, the Cooperative Institute for
Research in Environmental Sciences (CIRES), the Joint Institute for Lab Astrophysics (JILA), the Laboratory
for Atmospheric and Space Physics (LASP), the National Ecological Observatory Network (NEON), the
National Oceanic and Atmospheric Administration (NOAA), the National Institute of Standards and Tech-
nology (NIST), the National Telecommunications and Information Administration (NTIA), the University Cor-
poration for Atmospheric Research (UCAR), and the National Center for Atmospheric Research (NCAR).

the strong well-developed clusters in other parts of the US. Boulder’s proximity to the
Rocky Mountains, its parks and outdoor activities, and cultural and public amenities
like art galleries and highly ranked public schools, make for a good overall quality
of life. Both the government of Boulder and Boulder’s private sector place emphasis
on skills attraction and retention because “it is the skills, the talent, and the expertise
that is attracting the world-class scientists, engineers, entrepreneurs, the companies
and investment that are fuelling Boulder’s economy,” according to Clif Harald, Ex-
ecutive Director of Boulder Economic Council.
Boulder now has the most highly educated population of any American city. Young,
talented, professional workers can relocate more easily than those with larger fam-
ilies and more responsibilities. There are high ‘opportunity costs’ of location, so they
have demanded vibrant neighbourhoods that offer attractive amenities, such as
access to cultural resources and high-ranking public schools. Boulder has worked
hard to offer these.
Figure 8: Eduational attainment (25 years old+)
0 10 20 30 40
BOULDER
COLORADO
USSome High
School or less
High School
Graduate
Some college
Bachelor’s
degree
Advanced
Degree

Open spaces have been part of the liveability mix. In 1967, Boulder increased the
financing of land acquisitions in its hinterland. According to Clif Harald, these open
spaces now account for three quarters of total square mileage in Boulder, and were
purchased to preserve the environment and quality of life that locals’ treasure, and
block urban sprawl. To maintain the city’s development, Boulder established a build-
ing height limitation in 1971 to preserve the view of the Rockies.
Open spaces have been part of the liveability mix. In 1967, Boulder increased the
financing of land acquisitions in its hinterland. According to Clif Harald, these open
spaces now account for three quarters of total square mileage in Boulder, and were
purchased to preserve the environment and quality of life that locals’ treasure, and
block urban sprawl. To maintain the city’s development, Boulder established a build-
ing height limitation in 1971 to preserve the view of the Rockies.
Boulder’s approach to preserving the environment has, however, sown the seeds
of a new challenge: limited housing stock, pushing up rents. Public uproar against
rezoning of land to facilitate commercial property development has had nega-
tive implications for the area’s innovation hub. Limited commercial and residential
property drives up prices, raising barriers for smaller firms. Rental costs are now 20%
higher relative to Colorado and 26% higher than the US average, for instance. High
property costs can push people to larger cities in the state, like Denver, or areas with
greater opportunities to scale up and access national and global markets, like San
Francisco.
High liveability scores (schooling,
public amenities, lifestyle)
High property prices
Proximity to University of Colorado,
Boulder
Greenbelt and building height
limitations
Publicly funded research facilities
Highly educated population Small population
Figure 8: Boulder, Colorado

Innovation clusters: The ‘big 6’ success factors
Innovation clusters are crucial laboratories in which novel tools, technologies and
techniques are created and applied. But they are not just the ‘background’ to inno-
vation; they are living organisms integral to everything that happens within
their ‘walls’.
No two clusters are the same – and there can be no hard and fast ‘formula’ for
what makes clusters work. But these case studies do point towards six broad prin-
ciples necessary for laying the groundwork for success. While the case studies
explored in this paper are distinctive in terms of their sectors, their histories and the
types of innovation they have fostered, these factors have played a catalytic role in
their success.
A skilled workforce
All successful clusters, both in this study and the many others published on the topic,
have a marked edge when it comes to human capital, either local or imported. This
highly skilled workforce has emerged and manifested in several ways. A dense net-
work of top tier higher education establishments has been critical to the success of
Silicon Roundabout in London, Boulder in Colorado and Bangalore. Estonia lacked
this kind of university network, but compensated for it by having a highly educated
population thanks to the country’s fairly egalitarian access to education historically,
buttressed by the government’s eagerness to promote digital skills in the population.
Singapore, with a small population, leveraged both its national academic institu-
tions along with a talent attraction strategy and a solid business environment – both
of which have given it a strong national workforce whether indigenous or expa-
triate. While natural resources have supported the emergence of some clusters in
history, they are knowledge-intensive phenomena and thus skills enhancement with
a diversified global workforce are key ingredients.
Accommodating policy frameworks
Governments have a relevant role to play in promoting clusters, but their interven-
tions just as often prevent success as cultivating it. Evidence from this study suggests
the best interventions for government are not necessarily fiscal and taxation policies
related specifically to a cluster, but rather interventions which support the broader
inputs that clusters depend on such as education, infrastructure and connectivity.
More importantly, governments must carefully weigh the impact of other policy
changes, such as migration caps or visa restrictions, on their national clusters’ ac-
cess to talent. The best practice principle is for government to invest in the funda-
mentals and continuously evolve the nature of its intervention based on the needs
of the growing cluster, and leave the specifics of the innovation cluster process to
the companies and innovators themselves.

The infrastructure imperative
One of the key characteristics of successful clusters is the networking that they en-
able as firms collaborate, and skilled people intermingle to share ideas through mul-
tiple forums. Firms need to collaborate with one another and workers need freedom
to move, whether it be for meeting suppliers, clients, financiers and so on. This in turn
requires relatively efficient infrastructures that can allow workers to move around
quickly and cheaply. Expensive public transport, or growing congestion such as
faced by Bangalore, are both likely to reduce the efficiency of clusters where it
matters most: the intermingling of people and ideas. It is worth looking to history for
proof: according to the economist Joseph Schumpeter, much of the innovation that
emerged during the early high growth years of the US came about as a direct result
of the burgeoning railroad system.
A skilled workforce
Liveability
Accomodating
policy
frameworks
Luck and
serendipity
Infrastructure
Low cost structure
The ‘big 6’
success factors
Figure 9: The ‘big 6’ success factors

Luck and serendipity
Sadly for planners, luck and serendipity play a key role in determining the success
of clusters. By luck, we refer to all of those dynamics which could not have been
brought about with foresight or purpose, but which – having existed – came to ca-
talyse innovation. Historical luck is one example. Estonia’s past position in relation to
the USSR had two impacts on its later technological success: high levels of educa-
tion, especially in maths and engineering, due to a relatively egalitarian education
system, and a continuing cyber security threat in more recent years that impelled
innovation. Boulder built on the decision of large technology companies to locate
there in the distant past that set up a process of talent circulation leading to spinoffs
who became innovators more recently.
Geography is also a ‘luck’ factor, especially in terms of positioning a cluster close to
key markets. While not a case study in this project, Costa Rica is a good example of
a country whose life sciences cluster has benefited considerably from its proximity to
US markets. But crucially, luck does not mean there is no role for human decisions.
Companies and governments must consciously recognise the benefits that such
happenstance occurrences provide, and build on them systematically to create a
competitive positioning. There are plenty of countries that were formerly part of the
USSR, and are still closely located to Russia, that did not build on that as Estonia has.
Similarly, there are many countries in Central America with proximity to the US, but
who have not carved out a life sciences cluster such as Costa Rica.
Low cost structure
Low operating costs, especially rents on commercial property, have been essen-
tial drivers of a cluster’s success in the early start up phases. This applies to rental of
office space but also the residential needs of the cluster’s workers. Other low costs
can also help, such as tax breaks on innovation related activities. Over time, low
rental costs are the first to disappear – this is as near to a hard law as one can find
in the field of cluster analysis. This dynamic is hard to eradicate, but can at least be
offset by policy makers, for instance through fiscal incentives on innovation related
activities in the cluster, or through a planning policy which allows expansion of the
stock of property to moderate price rises.
Liveability
The clusters explored in this case study are generally high performers in terms of
liveability, at least on relative terms compared to other cities within their countries
where talented workers might otherwise choose to go. Liveability is not a specific
metric and no two cities offer the same advantages. But it can cover such critical is-
sues as public safety and political stability, good public amenities, culture and enter-
tainment, and good schools and hospitals. These are all factors which policy makers
or public institutions can influence if they want to nurture cluster success, in order to
ensure their cluster appeals to those top tier skilled workers who, in the modern era
more than ever before, have so many choices about where to locate themselves.

While every effort has been taken to verify the accuracy of this information, The
Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reli-
ance by any person on this report or any of the information, opinions or conclusions
set out in this report.

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