Why Su­per­clus­ters Mat­ter

Policy - - In This Issue - Kevin Lynch

In its 2017 bud­get, the Trudeau gov­ern­ment an­nounced $950 mil­lion in fund­ing for re­gional in­no­va­tion su­per­clus­ters. The five sub­mis­sions that were cho­sen and un­veiled in Fe­bru­ary rep­re­sent a combination of tech­nol­ogy-en­hanced mod­ern­iza­tion of Canada’s legacy nat­u­ral re­source sec­tors and dou­bling down on 21st-cen­tury tech wiz­ardry. Former Clerk of the Privy Coun­cil and cur­rent BMO Fi­nan­cial Group Vice Chair Kevin Lynch, an early su­per­clus­ter ad­vo­cate, writes that the sec­toral in­no­va­tion hubs will change Canada’s in­dus­trial land­scape.

What a dif­fer­ence a rev­o­lu­tion makes. Ten years ago, there was no pub­lic aware­ness of AI (ar­ti­fi­cial in­tel­li­gence), ma­chine learn­ing or big data; to­day, these and other new tech­nolo­gies dom­i­nate pop­u­lar cul­ture as well as busi­ness strat­egy. Ten years ago, info-tech com­pa­nies like Face­book, Ama­zon, Net­flix, Alibaba, Ten­cent and Google were fast-charg­ing star­tups; to­day, they are among the most valu­able com­pa­nies in the world. What they all have in com­mon are hugely scale-able tech­nol­ogy plat­forms, an ex­tra­or­di­nary ca­pac­ity to gather, process and mon­e­tize data, and a will­ing­ness to flout tra­di­tional busi­ness models.

While iden­ti­fy­ing the pre­cise char­ac­ter­is­tics re­quired to be­come a tech gazelle is the dream of ev­ery busi­ness school pro­fes­sor, most suc­cess­ful tech firms share a num­ber of com­mon fea­tures re­volv­ing around “mind and place.” De­spite ex­ist­ing in a dig­i­tal, hy­per­con­nected world of their own cre­ation, tech com­pa­nies, some­what para­dox­i­cally, tend to orig­i­nate from, and con­gre­gate in clus­ters. Why?

Such clus­ters are where tal­ent gath­ers, where emerg­ing tech­nolo­gies and ideas in­ter­min­gle, where capital lo­cates, and where in­ter­con­nect­ed­ness is a pub­lic good. Part of the unique­ness of the fourth in­dus­trial rev­o­lu­tion—in­ter­net-en­abled tech­no­log­i­cal change—en­cour­ages clus­ters. Tech firms are not mono­lithic in their tech­nolo­gies—they are con­tin­u­ally de­vel­op­ing or ab­sorb­ing or com­bin­ing new tech­nolo­gies to en­hance their busi­ness models. Prox­im­ity to lead­ing edge re­search, tech­nol­ogy in­no­va­tions and the tal­ent that un­der­stands how to ap­ply and ma­nip­u­late them is cru­cial for tech com­pet­i­tive­ness and growth.

Clus­ters have al­ways been around, whether it was me­dieval Euro­pean guilds, Vic­to­rian cities of the first in­dus­trial rev­o­lu­tion, post­war global fi­nan­cial cen­tres in Lon­don and New York, trans­porta­tion hubs around the world, man­u­fac­tur­ing cen­tres in many coun­tries, back-of­fice in­for­ma­tion ser­vices in Ban­ga­lore and, of course, Sil­i­con Val­ley.

What is dif­fer­ent about to­day’s clus­ters is that they are tech­nol­ogy-based notin­dus­try based, and that they ex­hibit in­creas­ing re­turns to scale, not di­min­ish­ing ones. These prop­er­ties give rise to tech­nol­ogy su­per­clus­ters, of which Sil­i­con Val­ley is both iconic and il­lus­tra­tive. Su­per­clus­ters ex­hibit ex­treme den­sity in a cer­tain range of tech­nolo­gies. This den­sity of tal­ent, tech­nol­ogy, ideas, en­trepreneur­ship and capital it­self cre­ates ex­ter­nal­i­ties for start-ups, scale-ups and ti­tans op­er­at­ing within the su­per­clus­ter. Ev­i­dence from ex­am­in­ing per­for­mance met­rics across clus­ters demon­strates there are dis­pro­por­tional com­mer­cial re­wards to be­ing part of the largest of the in­no­va­tion ecosys­tems. Den­sity mat­ters.

The most com­pre­hen­sive global rank­ing of in­no­va­tion ecosys­tems is by Start-up Genome. Their 2017 rank­ings (Fig­ure 1) in­di­cate that Canada has two in­no­va­tion ecosys­tems among the global elite, with Van­cou­ver at #15 and Toronto-Water­loo at #16, but none among the top 10 su­per­clus­ters.

Fig­ure 1: Unequal Distri­bu­tion of Top Global In­no­va­tion Ecosys­tems

The dy­nam­ics among the rank­ings are note­wor­thy. China has come from nowhere to have two ecosys­tems among the global top 10, sup­port­ing the Gov­ern­ment of China’s Strat­egy 2025 to be a world leader in a spe­cific range of tech­nolo­gies. Tel Aviv demon­strates you don’t have to be a global eco­nomic be­he­moth to cre­ate a top 10 in­no­va­tion ecosys­tem, but you do have to have a clear strat­egy and strong lead­er­ship. After lag­ging, Lon­don, Ber­lin and New York City have surged in the re­cent rank­ings, sug­gest­ing that size alone does not beget in­no­va­tion ecosys­tem suc­cess, but one won­ders what Brexit will do to Lon­don’s at­trac­tive­ness. Canada has demon­strated the abil­ity to cre­ate glob­ally com­pet­i­tive in­no­va­tion ecosys­tems, but can it “own the podium” by build­ing a top tier su­per­clus­ter with all the spin-off ben­e­fits that ac­crue?

The Trudeau gov­ern­ment’s “su­per­clus­ter ini­tia­tive” is de­signed to both broaden the range of tech­nol­ogy clus­ters in Canada and deepen their ca­pac­ity. It is ex­pressly in­dus­try-led to em­pha­size ap­plied tech­nol­ogy in­no­va­tions with early com­mer­cial ap­pli­ca­tions, rather than uni­ver­sity an­chored re­search con­sor­tia.

The five cho­sen su­per­clus­ters demon­strate both tech­no­log­i­cal and ge­o­graphic breadth: Ocean Su­per­clus­ter in Hal­i­fax and St. John’s; AI-Pow­ered Sup­ply Chains Su­per­clus­ter based in Mon­treal; Ad­vanced Man­u­fac­tur­ing Su­per­clus­ter in the Toronto-Water­loo cor­ri­dor; Pro­tein In­no­va­tions Su­per­clus­ter in the Regina-Saska­toon cor­ri­dor; and, the Dig­i­tal Tech­nol­ogy Su­per­clus­ter based in Van­cou­ver. They will re­ceive $950 mil­lion of fed­eral fund­ing over five years, to be matched at least dol­lar-for-dol­lar with fund­ing from each su­per­clus­ter con­sor­tia. To vary­ing de­grees, they will de­velop ad­vanced tech­nol­ogy ap­pli­ca­tions to strengthen the com­pet­i­tive­ness of Canada’s nat­u­ral re­source sec­tors, which is cer­tainly needed. To vary­ing de­grees as well, they will en­able tech­nol­ogy dif­fu­sion into the broader SME busi­ness com­mu­nity, which is des­per­ately needed. What are the fac­tors that will shape the suc­cess of the five nascent tech­nol­ogy su­per­clus­ters? First and fore­most, it will be gov­er­nance, not tech­nol­ogy. The po­ten­tial strength of the su­per­clus­ters is their unique, busi­ness-led coali­tion of in­ter­na­tional com­pa­nies, Cana­dian SMEs, tech start-ups, in­cu­ba­tors and uni­ver­sity re­searchers. The chal­lenge is get­ting the proper gov­er­nance around part­ner re­spon­si­bil­i­ties and ac­count­abil­i­ties, around own­er­ship and de­ci­sion rights, around al­lo­ca­tion of fund­ing to projects and around am­bi­tion for the su­per­clus­ter—set­ting the key per­for­mance in­di­ca­tors (KPI) for suc­cess.

Sec­ond, it will be find­ing the right bal­ance be­tween the pub­lic in­ter­est and the pri­vate in­ter­est. The su­per­clus­ter con­cept is based on ex­ter­nal­i­ties—that the whole is much greater than the sum of the parts—and that is the ra­tio­nale for the pub­lic con­tri­bu­tion. The part­ners will need to de­velop the pub­lic tech space, par­tic­u­larly for SMEs and in­no­va­tion dif­fu­sion, not just their en­hanced pri­vate tech space as firms. Third, and some­what re­lated, it will be find­ing the right bal­ance be­tween a clus­ter of projects and a clus­ter of firms. While projects will be the modal­i­ties, they are a means to the broader ob­jec­tive of a deeper clus­ter with more firms, more tal­ent, more tech dif­fu­sion, more in­tel­lec­tual prop­erty, and so on.

Fourth, it will be build­ing a col­lec­tive brand for the su­per­clus­ter, and this will re­quire ac­tive mar­ket­ing and brand de­vel­op­ment rather than fol­low­ing a pas­sive ap­proach. The pay­off to an en­hanced global tech and in­no­va­tion brand is huge through at­tract­ing ven­ture capital, global tal­ent, global tech firms and re­searchers and en­trepreneurs. Fifth, it will be the abil­ity to cre­ate a defin­ing cul­ture for the clus­ter. Why such an em­pha­sis on cul­ture in the build­ing-out of the su­per­clus­ters? I be­lieve that a per­va­sive cul­ture of in­no­va­tion is es­sen­tial for strong and sus­tained in­no­va­tion suc­cess in all sec­tors of the econ­omy and so­ci­ety—it is much more pow­er­ful than tweak­ing tax cred­its or fid­dling with the terms of grant pro­grams. It means a com­mu­nity where par­tic­i­pants an­swer pos­i­tively to cultural at­tributes such as: Does the clus­ter cel­e­brate ideas? Does it mo­bi­lize di­ver­sity? Does it fuel in­no­va­tion pas­sion? Does it foster au­ton­omy over hi­er­ar­chy? Does it sup­port fail­ing for­ward? Does it lis­ten hard and keep minds open? Does it think small and scale big? What en­trepreneurs de­scribe as most unique, and per­son­ally im­por­tant, about top-tier in­no­va­tion ecosys­tems be­sides their den­sity and depth is their cul­ture.

Lou Ger­st­ner, the leg­endary CEO of IBM, ob­served in his au­to­bi­og­ra­phy: “I came to see, in my time at IBM, that cul­ture isn’t one as­pect of the game, it is the game—whether in busi­ness, gov­ern­ment, ed­u­ca­tion, health­care or any area of hu­man en­deavor.”

While the su­per­clus­ters will un­am­bigu­ously bet­ter po­si­tion Canada for the world of the fourth in­dus­trial rev­o­lu­tion, we have to un­der­stand much more clearly and strate­gi­cally as busi­ness, gov­ern­ment and ed­u­ca­tors the ex­tent of the tech trans­for­ma­tions un­der­way and their im­pli­ca­tions for both the Cana­dian econ­omy and so­ci­ety.

The mass dif­fu­sion of dig­i­tal tech­nol­ogy and the rise of AI-en­hanced au­to­ma­tion pose ad­just­ment chal­lenges for all economies, par­tic­u­larly on the jobs and equal­ity fronts. Ac­cord­ing to a re­cent Brook­ings re­port:

What are the fac­tors that will shape the suc­cess of the five nascent tech­nol­ogy su­per­clus­ters? First and fore­most, it will be gov­er­nance, not tech­nol­ogy.

“The dig­i­ti­za­tion of ev­ery­thing has at once in­creased the po­ten­tial of in­di­vid­u­als, firms, and so­ci­ety while also con­tribut­ing to a series of trou­bling in­equal­i­ties, such as worker pay dis­par­i­ties across many de­mo­graph­ics, and the di­ver­gence of metropoli­tan out­comes.”

The Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) and McKin­sey have cal­cu­lated the risk of job dis­lo­ca­tion as a re­sult of au­to­ma­tion (Fig­ure 2) for a va­ri­ety of coun­tries. The re­sults should not en­cour­age ei­ther pub­lic or pri­vate com­pla­cency. The OECD es­ti­mates that roughly 15 per cent of Cana­dian jobs are at high risk of au­to­ma­tion and a fur­ther 28 per cent are at sig­nif­i­cant risk. This points to enor­mous forth­com­ing churn in Cana­dian la­bor mar­kets, where still-un­clear new jobs with new skill sets will be cre­ated while ex­ist­ing jobs with ex­ist­ing skill sets will be dis­lo­cated.

Dis­rup­tive tech­no­log­i­cal change is trans­form­ing not only the goods and ser­vices we con­sume and the skills needed to pro­duce them, but also busi­ness models and the “pro­duc­tion func­tion” it­self.

Pre­par­ing stu­dents with the skill sets of the fu­ture and re-skilling cur­rent work­ers at scale for those new jobs are just as chal­leng­ing and im­por­tant as be­ing at the lead­ing edge of the tech­nol­ogy curve to keep Cana­dian busi­ness com­pet­i­tive. In­deed, suc­cess­ful economies and sta­ble so­ci­eties will be those who do both. Dis­rup­tive tech­no­log­i­cal change is trans­form­ing not only the goods and ser­vices we con­sume and the skills needed to pro­duce them, but also busi­ness models and the “pro­duc­tion func­tion” it­self.

Data is now a fac­tor of pro­duc­tion along­side la­bor and capital for info-tech ti­tans, and that capital is in­creas­ingly in­tan­gi­ble rather than the bricks and mor­tar of old. To an un­der-ap­pre­ci­ated ex­tent, info-tech com­pa­nies are in­ter­me­di­aries, like banks—one in­ter­me­di­ates money while one in­ter­me­di­ates data, and both de­pend on pub­lic con­fi­dence to op­er­ate. The info-tech busi­ness model of ac­quir­ing in­for­ma­tion about users from users and then mon­e­tiz­ing this data through pre­dic­tive an­a­lytic models de­pends on user trust and data rights, and that is why the Cam­bridge An­a­lyt­ica scan­dal is so dam­ag­ing, not just to Face­book but ul­ti­mately to the un­reg­u­lated info-tech busi­ness model.

And that is why trust and val­ues will be­come such an im­por­tant part of the tech­nol­ogy sec­tor go­ing for­ward. My per­spec­tive is that trust can be a com­pet­i­tive dif­fer­en­tia­tor in the global tech mar­ket, just as safety is in the food sec­tor, and Canada should seek to dif­fer­en­ti­ate its tech sec­tor through val­ues—“tech for good”—as well as great home-grown tech­nol­ogy and ex­cit­ing prod­ucts and ser­vices. This would re­quire real ef­fort and likely a flex­i­ble mix­ture of some data safe­guards reg­u­la­tion, ex­plicit cor­po­rate com­mit­ments, an em­pha­sis on val­ues in the train­ing of our tech work­force, and pub­lic lead­er­ship. But the pay­off in terms of build­ing the Canada tech brand and deep­en­ing the at­trac­tive­ness of our tech su­per­clus­ters to global tal­ent and capital could be trans­for­ma­tive.

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