1 CREATIVE CLUSTERING: AGGLOMERATION EFFECTS IN INNOVATION ____________________________________ A Thesis Presented to The Honors Tutorial College Ohio University _______________________________________ In Partial Fulfillment of the Requirements for Graduation from the Honors Tutorial College with the degree of Bachelor of Arts in Political Science ______________________________________ by Thomas Irwin June 2012 2 This thesis has been approved by The Honors Tutorial College and the Department of Political Science Dr. James Mosher Professor, Political Science Thesis Advisor Dr. James Mosher Honors Tutorial College, Director of Studie Political Science Jeremy Webster Dean, Honors Tutorial College 3 Acknowledgments As with any long project, this paper benefited from the influence of several people to whom I am indebted. First and foremost, my advisor Professor Jim Mosher deserves thanks for his patient guidance and interested involvement with my work on this project. His thoughtful criticism, informed insight, and genuine interest pushed me to make this paper better than it otherwise could have been. I would also like to thank former Dean of the Honors Tutorial College Ann Fidler, and Professor Julie White, in the Department of Political Science, for their early encouragement and support of my cross‐disciplinary academic goals. 4 Contents Acknowledgments ................................................................................................................... 3 Introduction .............................................................................................................................. 5 Literature Review ................................................................................................................... 11 Theory ...................................................................................................................................... 22 Case Studies ............................................................................................................................ 35 Financial Services ............................................................................................................... 35 Automotive Industry ......................................................................................................... 43 Silicon Valley/ Route 128 ................................................................................................... 66 Analysis ................................................................................................................................... 81 Financial Services ............................................................................................................... 81 Automotive Industry ......................................................................................................... 86 Silicon Valley / Route 128 .................................................................................................. 90 Conclusion .............................................................................................................................. 95 References ............................................................................................................................. 106 5 Introduction Innovation is a challenging, but extremely important subject to study. It is at best poorly understood, and it seems that for every idea that is developed there exist a thousand real‐world examples that defy the logic of the theory. Nevertheless, innovation is recognized as a primary driver of real economic growth. Without innovation there is no Industrial Revolution, there is no Internet Revolution and so there go several centuries of technological and economic progress. It is therefore the goal of this project to attempt to shed some light on the subject, in a way that complements the existing body of scholarly work and allows us to make some claims about appropriate public policy to promote innovation. We will be using a very particular definition of innovation throughout this discussion that bears mentioning because it encompasses more activities than we might think if we have in mind only the work that takes place in research labs. I adopt the convention of Chris Freeman and Luc Soete from their book The Economics of Industrial Innovation, in which they contrast their definition of innovation with what they call invention. Claiming to have adopted the notion from Schumpeter, they write that invention is “an idea, 6 sketch or model for a new or improved device, product, process, or system,” while innovation refers to the whole process of bringing a technology from the stage of idea to commercial availability (Freeman & Soete 1997). We adopt this definition because it is the economic impact of innovative activity that motivates this study in the first place. Technological progress has long been recognized to be a primary source of real economic growth, and therefore if we are concerned about economic growth and increasing the overall material standard of living, we must be concerned with innovation. One of the most important characteristics of innovation, which once pointed out is obvious but whose importance is not always fully recognized, is that it depends on human action. It is beyond the scope of this project to address the issue of where innovative ideas themselves come from, but even if ideas come to us fully formed like manna from heaven, there is still a great deal of work remaining for us to transform those ideas into real goods and services. This is the issue that drives our interest in innovation. We must be cognizant of the role that human action plays in innovative development, so we may better understand how to improve innovative outcomes. To narrow the focus of the project to the point where it could be completed in a reasonable amount of time, it was decided to focus on 7 empirical case studies in innovative agglomeration. Agglomeration of industrial activity is a phenomenon observed in numerous industries, all over the globe. Cities and towns are obvious examples, and these clusters have been the subject of economic study for over a century. In recent years, interest in the location of economic activity has increased, with the emergence of the “new economic geography” literature and other work. It is now believed that these clusters of activity provide a variety of economic benefits to the individuals and firms that live and work within them. It was hypothesized at the outset of this project that benefits of agglomeration specific to innovation, and therefore the incentives to agglomerate innovative activity, were somewhat different from those affecting industrial activity generally. To test this idea, I focused on a descriptive analysis of three innovative agglomeration case studies. This analysis was intended to allow for the discussion of innovation across a range of sectors, and to permit a consideration of a wide range of factors in the locational decisions of innovative firms and people. It is hoped that this method of analysis will provide a starting place for developing a theory of innovative agglomeration that is grounded in the real world, in the same way that Richard Nelson and others used comparative analysis to structure the 8 discussion of national institutions of innovation in National Systems of Innovation (Nelson 1993). The three case studies chosen represent a variety of strongly‐ agglomerated sectors that have many significant differences. This allows for a consideration of factors that transcend sectoral boundaries in promoting innovative agglomeration, and lets us be more general in our conclusions about innovation incentives. Innovation in the financial services industry in New York, the automotive industry in Detroit, and the semiconductor and computer industries in Silicon Valley and Route 128 will be considered. These selections present us with geographic and industrial diversity. The financial services industry was chosen in large part because it does not generate innovations that one typically considers “technological.” Usually when we are asked to picture technology, we think of computers, rockets, smart phones, and electric cars. History, however, shows us that process breakthroughs like the division of labor and the moving assembly line are no less important, particularly in their economic impact. Financial industry innovation typically does not generate tangible products, but it does create new ways of providing capital, investing money, generating liquidity, etc., all of which improve the efficiency and impact of the services that the industry 9 provides. By studying the unique innovation in this sector, we are able to make our analysis more general, and therefore more useful. The automotive industry case study was selected for several reasons. First, it is a very strong industrial agglomeration that has remained so over more than a century of existence. Second, the automotive industry is one of the largest manufacturing sectors in the American economy, and we would therefore expect that this industry would be strongly influenced by more traditional agglomeration factors like material transportation costs, resource access, and unskilled labor pooling. Considering this case study allows us to address innovative agglomeration side by side with other potentially relevant agglomeration factors. The Silicon Valley / Route 128 case study was picked because it has been very well documented in recent years, and is sometimes discussed as a story of contrasting