DIY innovation hotspot

Monday, 01 August 2022

Stefan Hajkowicz & Lucy Cameron photo
Stefan Hajkowicz & Lucy Cameron
Principal Scientist & Senior Research Consultant, CSIRO Data61

    If Australia is going to create leading- edge sectors that fuel regional and national growth, certain building blocks need to be in place, write CSIRO’s Stefan Hajkowicz and Lucy Cameron.

    Clayton Christensen, the influential Harvard Business School academic and innovation researcher, observed consistently throughout his lifetime writings that successful firms invested in early-stage emerging technologies and transitioned their business models accordingly. Regardless of what sector you’re in or what type of company you lead, technology-fuelled change is assured. What matters is how you adapt.

    The same applies to industries and entire regional economies. Technological advances are continually reshaping markets, creating risk and opportunity. Take, for example, the impact of renewable energy technologies on the coal-fired electricity generation sector. These technologies were a significant factor behind Origin Energy’s decision to shut down Eraring power station — Australia’s largest coal-fired electricity generation plant — in 2025, seven years ahead of schedule. “The economics of coal-fired power stations are being put under increasing, unsustainable pressure by cleaner and lower-cost generation, including solar, wind and batteries,” said Origin CEO Frank Calabria MAICD in a 17 February press release.

    After 40 years in operation, with 750 workers (plus 200 contractors) the Eraring closure will impact the regional economy. However, as one industry declines, new ones grow. A recent World Economic Forum study estimates the clean energy sector will generate 10.3 million net jobs globally by 2030 (offsetting an estimated 2.7 million fossil fuel sector jobs lost). University of Technology Sydney research estimates that renewable energy in Australia could employ up to 46,000 people by 2035. While the challenge is not trivial, it’s highly likely that coal-fired electricity generation workers and firms can transition their skills and business models to the renewable energy sector.

    Technology-fuelled transition is happening in practically all industries and all regions. The pandemic and rise of online retail is driving transition in retail. Many firms went partially or fully online during COVID-19 lockdowns. The banking and financial services sector is being disrupted by fintech. The research and professional services sector is being disrupted by data science and artificial intelligence. Disruption is omnipresent and ongoing.

    How regional economies navigate disruption

    The stakes are high. Get it right, you build vibrant, resilient and prosperous regions. Get it wrong, you may see unemployment, urban decay and population decline. Therefore, it’s worth some effort. There are myriad considerations, strategies and approaches, but we focus on two important pieces of the puzzle — path dependence and geographic hotspots.

    Path dependence means a new industry that is related to a region’s long-standing industry is more likely to succeed. It’s basically advice to play to your strengths. Researchers from Lund University in Sweden published a paper in the Economic Geography journal about industry development in 70 Swedish regions from 1969–2002. They found industries that were technologically related to preexisting industries within the region had a much better chance of survival. For example, if you were a forest-tech startup, you had a much better chance of thriving if the local regional industry was traditional forestry.

    Another example is the Australian mining equipment, technology and services (METS) industry. This comparatively new industry is built upon the foundation of Australia’s long-standing traditional mining industry. According to industry body the Minerals Council of Australia, the METS sector now generates $143.5b in economic value, 483,500 direct jobs and 1.13 million full-time equivalent (FTE) jobs. While METS firms are spread across Australia, there is a strong concentration is in Perth where mining plays a primary role in the statewide economy.

    Yet another example comes from South Australia, where more than half of Australia’s wine is made. State capital Adelaide is home to organisations such as the Australian Wine Research Institute and Wine Australia, and hosts events such as Winetech and the Australian Wine Industry Technical Conference. Consequently, it is a must-be for many Australian and New Zealand entrepreneurial wine company startups. One example is online wine sales company Vinomofo, which according to a 2019 article in SmartCompany, began in an Adelaide garage in 2011, and has now sold more than 17 million bottles of wine to 672,000 customers worldwide.

    Path dependence doesn’t always imply a simple association of same-same. The new industry can be functionally related to the old industry, even if it’s a different industry — and there can be quite a few jumps from old to new. For example, in the US, the Pittsburgh steel industry thrived for many decades. But in the 1980s, the steel market tumbled and mills were forced into closure. So Pittsburgh switched from selling steel to selling steel know- how. A metallurgical science and technology industry emerged, which after a few more decades transitioned into software and information technology. This new digital industry doesn’t have much to do with steel, but there is an obvious pathway of development.

    Geographic innovation hotspots

    These hotspots are spatially concentrated agglomerations of high-tech firms in similar or related industries. They are typically built on specialist skills or high-tech infrastructure. Think Silicon Valley, Silicon Fen (Cambridge, UK) and inner south-east Sydney for digital industry hotspots. Think Seattle (US), Toulouse (France) and North West England for aerospace industry hotspots. Think lower Manhattan in New York, Docklands in London and Singapore for financial services. In Australia, the Department of Industry, Innovation and Science has identified several existing and emerging innovation precincts including: Melbourne Biomedical Precinct, Sydney’s Randwick Health and Education Precinct and Westmead Health and Innovation District, Perth’s Indian Ocean Marine Research Centre, Tonsley Innovation District in metropolitan Adelaide, and the SuperYacht Group Great Barrier Reef cluster in Cairns, Queensland. Australia has recognised that building world-leading industries that fuel regional and national economic growth may be hastened if collaborating research and industry institutions are co-located in specialised innovation areas.

    Decades of economic research shows that firms within an innovation hotspot grow revenue and jobs faster, and innovate more. This is because they collaborate in some spaces and compete in others. Being in close proximity to one another, both collaboration and competition tend to be more intense. Consequently, the firms, and employees within those firms, tend to become more efficient and skilled. They also tend to be first-movers in developing new and innovative products and services. Such continual innovation helps the hotspot, and firms within it, to navigate disruption.

    Hotspots provide another key benefit of integrated and localised supply chains. For example, the Seattle aerospace hotspot contains every type of company supplying every type of product or service needed for aviation. These firms attract skilled engineers and specialist workers in all professions relevant to the industry. Aerospace companies within this cluster can almost always source the skills and suppliers to get the job done. This substantially increases the efficiency and global competitiveness of the region’s industries.

    Creating a hotspot

    There have been many attempts to replicate the most famous innovation hotspot in the world — Silicon Valley. (A dedicated Wikipedia page lists 84 “Silicon” somethings (beach, roundabout, spa, canal, glen, dock, cape, lagoon). Not all have succeeded. In reality, innovation hotspots are continually emerging, disappearing and reforming. They are all unique, complex and contextual — and innovation itself is changing the value proposition of hotspots for varying industries. Broadband and digital technologies make high-tech collaboration over distances easier and far more effective. Technologies such as digital twins, artificial intelligence, augmented and virtual reality, quantum computing, blockchain, cloud computing and additive manufacturing mean that more can be done remotely, new knowledge shared globally and new enterprises established via completely new funding models. These technologies will undoubtedly change the geography of innovation over the coming decades — and the ways in which new products and processes are created.

    The policy levers typically applied to catalyse growth of hotspots include infrastructure and cultural amenity (for example, shipping ports, transportation, parkland, art and recreational facilities), setting localised missions, workforce education and training, research and development funding, investment through integration with procurement and the work of government institutions or large industry, and the attraction of key personnel or anchor tenants.

    Through our work, we’ve examined industry clusters across the globe. They seldom happen via serendipity alone. Certainly, serendipity plays a role, but in most cases, government and industry have actively sought to develop industry via the application of policy levers. Path dependence is a relevant and overlapping concept. The industry hotspots we create and grow will be more likely to succeed if they build upon the foundations of existing industry.

    Fast-tracking industry transition and growth is likely to be an imperative for governments, companies and communities. It will be an increasingly important research field for our team as we seek to inform decision-makers about the right policy levers — and when and where to apply them.

    For further information, see Building an Innovation Hotspot: Approaches and Policies to Stimulating New Industry by Alicia Cameron (CSIRO Publishing). Stefan Hajkowicz is principal scientist in strategy and foresight and Lucy Cameron senior research consultant at CSIRO’s Data61. Cameron is also leader of the Asia Pacific Foresight Group.

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