High-Tech Clusters Stimulate Innovation

The Washington, D.C., region needs to celebrate its world-class technology centers if it wants to grow its technology business base, says Harvard Business School professor Michael Porter, author of the three books, Competitive Strategy, Competitive Advantage and Competitive Advantage of Nations.

WT: Why do high-tech companies cluster together in different regions, such as Silicon Valley, Boston and increasingly, in the Washington, D.C., area?

PORTER: High-tech companies aren't the only companies that tend to cluster together. It happens in virtually every business and it has to do with natural competitive advantages created by the clustering process. When companies cluster together, you tend to have a mutual reinforcement. The flow of information is enhanced when a bunch of companies work in the same field. It's much more efficient to do business because you can turn to suppliers or other companies who are right there to do things for you, rather than creating everything yourself. It's easy to find people. It's easy to find new business partners and it's really a self-reinforcing process that tends to feed on itself.

Once you get a cluster started, new companies will form there because people will leave the existing company and start a new company. Or people will leave a company to start a supplier. Then once you get a cluster started, you'll often find the local schools and universities will start to develop special programs in that particular field. Then those students will want to work in those industries and they'll start new companies. So it's a self-reinforcing process and it creates a dynamic environment that stimulates a lot of innovation. Particularly in high tech, what's the real scarce resource? The capacity to innovate rapidly. So in high-tech type industries you see clusters very vividly all across the world.

WT: What usually starts this clustering process?

PORTER: They start in different ways. Sometimes it's an accident. Someone gets an idea, builds a company and once that company starts, other people see that and they get ideas and new companies form and you're off to the races.

Usually, though, there is something else present that creates a nurturing environment. For example, there may be an existing supplier base in the area that can be reallocated to supply a new field. Sometimes it comes out of a university research effort, sometimes out of a government laboratory or government institution that has created some critical mass of technology. Sometimes it comes out of the location of some very sophisticated customers for a particular product.

For example, all the people who do the FBI's finger-print identification are now in West Virginia or are in the process of moving to West Virginia thanks to Sen. [Robert C.] Byrd. And now that the finger-print identification group is in West Virginia, companies are developing around the area of pattern recognition and software that allows scanning images and looking for patterns. It's a spin-off of the need created for technology in this field.

WT: How do you see this process happening in the Washington, D.C., area?

PORTER: On the Maryland side, the catalyst for a lot of stuff has been the National Institutes of Health. There is an emerging biotech and health sciences cluster in that area and I think it's been triggered by this tremendous research concentration. On the Virginia side, you tend to find more computer and information and communications-related companies starting to form clusters. I think that probably relates to government contracting, which has now developed into civilian applications. I don't know why MCI ended up in Washington, D.C., but now there's a communications cluster there, and new companies are being attracted and other companies are forming.

WT: When one big company moves into an area, such as Motorola building a $3 billion plant in Richmond, can that start the clustering?

PORTER: It's rare that one big company could trigger the whole thing, but it depends on what the one big company is doing. If Motorola is building an assembly plant for assembling parts and making mobile phones, that's much less powerful than what I call a home base, which is really the center of technology for a particular business or product line. A home base is a headquarters for that process.

If Motorola said they are moving their world headquarters for cellular telephones to Richmond, and the research, marketing and manufacturing were going to be there, that would be much more likely to stimulate a substantial cluster around it. Then you would tend to see much more opportunities for suppliers, more possibilities for technological linkages with local universities and you'd see more possibilities for spin-off products and spin-off companies.

WT: How important are a region's educational facilities and other factors in attracting new firms?

PORTER: When you're talking about a branch plant, the issues of labor costs, utility costs and taxes are all incredibly important. That's why places in the Southeast, such as North Carolina, have been doing well in attracting branch plants. When you are talking about home bases or headquarters, that's when you need a much broader set of attributes. What tends to attract companies to a particular region, is other companies in that cluster, specialized facilities or infrastructure, or supplier bases or educational institutions. In general, having a good educational system in the region is a benefit, and having low taxes is good. But what really attracts these clusters of high-technology businesses is not those kinds of things, but the presence of critical mass of expertise and specialized skill people and technological resources.

If you're a state such as Mississippi or Arkansas, you're trying to attract branch plants because you're in a state with very low per capita income, and you have lots of people who need jobs. When you're talking about a place such as Boston, what attracts business to Boston is not the tax climate. You want to try and attract parity in those things, but what really attracts business here is the environment for innovation, the established clusters, the ability to attract companies because this is such a center for innovation in that field, whatever it is.

WT: How can Washington, D.C., which already has an increasing number of technology businesses, attract more?

PORTER: The way to attract businesses is to market your strengths. The real strengths are not the tax climate and all that, it's important, but it's not going to tip the climate. Your strengths are your existing clusters. You need to get organized, publicize and celebrate the kind of world-class centers you've been able to build. You build off your strengths, you don't try to attract companies that are in totally different fields, where there is not technological or other existing connections with your existing fields.