Why are companies in a business cluster more innovative? And what makes a business cluster particularly successful? These questions were addressed by Professor Georg von Krogh, Professor for Strategic Management and Innovation at ETH Zurich, and Nina Geilinger, his doctoral student, in collaboration with the Business and Economic Development Division of the Office for Economy and Labour in the Canton of Zurich. The team studied business clusters in the biotech, cleantech and ICT (information and communications technologies) sectors in Canton of Zurich.

ETH News: Innovation is important for all companies. Why did you choose the biotech, cleantech and ICT sectors?

Von Krogh: The pace and expansion of technological innovation has increased significantly – particularly in knowledge-intensive fields such as biotech, cleantech and ICT. For example, it took 84 years until 50% of the US population owned a car; it took only ten years for half of them to get an internet connection. This development means that technology-intensive companies must continue to work faster to create new products – and they must do this with the global market and their competitors in mind. Firms like Apple or IBM are driving this trend, but small businesses and company founders from anywhere in the world can suddenly revolutionise the market with an innovative idea.

What role do business clusters play in this process?
Von Krogh: Expertise from a limited field of knowledge is often insufficient to develop a new product in technology-intensive sectors. A business cluster facilitates rapid and direct knowledge exchange. Having a good local network supports a global presence.

Geilinger: In the high-tech sector in particular, business clusters frequently emerge from start-up activities out of universities and are therefore concentrated in a geographical area. In a business cluster, employees from various firms know each other personally, either from working for the same past employers or from their university studies. People meet spontaneously in an informal environment where they swap experiences or bounce around ideas – something that happens rarely in relationships on a global scale. This is where the true value of a business cluster lies.

Generally, companies are reluctant to share their knowledge. How is it that those in a business cluster are willing to open up and exchange ideas?
Von Krogh: That’s what makes a business cluster special. In a business cluster, companies tackle similar problems, making them more inclined to share their knowledge. Physical proximity is also a enabling factor. Proximity engenders trust, which is not so easy to forge over video-conferences or occasional meetings. Collaboration on projects and regular meetings also lead to informal, personal relationships. It’s often in random conversations that relevant knowledge is shared.

Geilinger: Of course, nearly all firms possess knowledge that needs to remain confidential. On the other hand, many companies are aware that they can’t survive in a vacuum. That’s why they pass on their knowledge to others, so that in turn they may profit from the others’ experience and expertise. Our study also showed that business clusters are more successful when product and research spheres are similar.

Can you give some examples?
Geilinger: Up to now, firms in the biotech and ICT clusters in the Canton of Zurich have learned more from each other than those in the cleantech cluster. In the latter cluster, the products and objectives are more diverse: one company is developing a system to recover energy from waste while another is developing solar panels. There is little overlap in these two areas. In addition, the ICT cluster has the advantage of having grown organically over the years. A successful and dynamic business cluster needs time to develop.

How did you arrive at your findings?
Geilinger: We approached managing directors and executives from the three studied clusters in Canton of Zurich and carried out a total of 87 interviews. We supplemented the interviews with a standardised survey and assessment of the literature. We wanted to get to the heart of the matter instead of analysing superficial, quantitative data.

What did the study reveal with regard to the business clusters in Canton of Zurich?
Geilinger: The exchange of ideas with universities is just as important for business clusters as is the exchange with mentors, private investors, customers and competitors. This exchange is a key advantage of the cluster eco-system in Canton of Zurich.

And how do they compare on a global level?
Von Krogh: In the ICT sector, Silicon Valley is clearly unbeatable in terms of size and diversity, even though Canton of Zurich is the centre of the Swiss ICT industry. The advantage of a domestic business cluster is companies and their employees often know each other very well, which eases the flow of information, thus speeding up the innovation process.

Geilinger: In Canton of Zurich, universities and firms are also in close proximity, and the business clusters are well connected to the academic world.

How can firms further harness the power of business clusters in terms of process and product innovation?
Geilinger: Public authorities can assume a greater role here. Important considerations include the establishment of more financing opportunities for start-ups, a shared brand identity for the cluster eco-system and more international conferences and trade fairs in Zurich. In addition, knowledge sharing and collaborations between universities and firms should be intensified further. The Innovation Park in Dübendorf will lay the right foundations for such developments.

Von Krogh: When top ICT companies such as Google set up offices around the world, smaller firms learn a lot from them in a short span of time. At the same time, these companies only tend to put down roots in places where there is already a significant knowledge-base. Furthermore, large companies are suitable partners for small businesses.

How will markets develop going forward? Can product innovation advance yet further?
Von Krogh: Each market has its own unique trends, and not all markets are open to more and more technological changes. This can be due to a lack of customer resources or because people are no longer inclined to invest in new concepts. Fundamentally, I expect that consumers in many sectors will change their habits, buying more products as a one-off and then share these products more often. Cars are the prime example. The concept of the sharing economy will likely affect companies’ investment behaviour, which may have a knock-on effect for innovation activities. Innovation through intensive knowledge-sharing between companies will be inevitable.

Geilinger: Firms in the cluster eco-system in the Canton of Zurich can use their full innovation potential by adopting new business models and management practices.

This article is published in collaboration with ETH Zurich. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Inken De Wit writes for ETH Zurich.

Image: Businessmen and visitors enjoy the good weather on the stairs under the Arche de la Defense.  REUTERS/Charles Platiau.