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The Innovation Economy: How to Create Regional Wealth

Why do some locations succeed in the quest to become centers of technology and innovation while others fail? Learn what forces are currently shaping this "Innovation Economy."
This chapter is from the book


Take a look around you. Most of us live our everyday existence in routines that acquire a familiar rhythm. Our homes, transportation, work, and activities with friends and family seem to continue much as they always have. Sure, we might own a hand-held device and find it more useful than a paper pocket calendar. Many of us check in with e-mail and find both the expanded access to people and the quickened speed of communication convenient. These technologies that we as individuals see and experience do not appear to be either radical or life-changing. Yet, the convergence of innovative technologies, being introduced and integrated in certain world regions with a rapidity never seen before, will dramatically change the way we live, work, and relate to one another. It will also provide opportunities for generating regional wealth in new ways that we are just beginning to understand.

Think about the advances in medicine and healthcare, based on the integration of technology with international research and development in the life sciences that may extend the typical human life span over the next several generations to biblical ranges of 100 to 120 years.

Consider product and service development that operates 24 hours a day, 365 days a year, and relies on integrated teams who defy the accepted workday routine and have groups in San Jose, California; Bangalore, India; Herzliya, Israel; and Dublin, Ireland, all working to accelerate innovation to spawn new industries, products, services, and business opportunities.

One of the long-term significant changes at the turn of this millennium is the rapid expansion of a phenomenon called the "New Economy". We prefer to call it the Innovation Economy, because at the core of the new wealth being created is the rapid acceleration of change through innovation. This Innovation Economy is being developed with the combination of financial capital and what the Swedish theorist Leif Edvinsson calls "intellectual capital": the ever-expanding knowledge resource that lies at the core of producing new wealth.

This Innovation Economy is largely driven by the intersection of technological innovation, globalization, and deregulation.

Technological innovation is identified most closely with the Internet, but is not exclusively defined by it. Satellites, telecommunications, biotechnology, advances in microchip technology and applications embedded in products, digital technology, optics, and major breakthroughs in renewable and portable energy are all integrating elements of this rapidly changing environment. In this Innovation Economy, rapid innovations in these categories have begun to create wealth and economic advantage for businesses and regions, which have adapted to the principles of this rapidly changing marketplace. This phenomenon may have revolutionary implications in the shifting of economic advantage and power among regions. Those who "plug in" (that is, invest in the education and skills of their people as the greatest resource for wealth) will thrive. Those regions not developing the intellectual capital of their people, and whose institutions of government, industry, universities, and non-government organizations are dysfunctional, as in much of Latin America, the Arab Middle East, and Africa, will continue to decline.

Sir Peter Hall, author of Cities in Civilization, provides a useful perspective on the transition from an industrial to an informational era.

Peter Hall

There are four elements, all technologically driven. The first is the development of a new infrastructure of communication, commonly called the Internet, and its probable successor, the information superhighway. The second is the increasing interconnectivity of different electronic machines - telephones, computers, faxes, modems - both in terms of numbers of connections, and the bandwidth of connections. The third is perhaps the most fundamental: the fact that almost all information is becoming digital. The fourth is the development on this basis of new applications - the so called killer applications that will constitute the new basic industries of the information age.1

The fast-growing Innovation Economy is not a fantasy. It is largely driven by massive amounts of investments in innovative information technology. The United States has been the primary driver of this investment, enabling U.S. financial markets, governments, and corporations to cut costs and increase flexibility and efficiency. The result is long-term faster growth and lower inflation.

Table 1-1 illustrates the dramatic difference in cumulative annual growth rates (CAGR) between the total and the Internet segment of the U.S. economy.

Table 1-1 The New Internet Economy*

 19951999CAGR Growth
U.S. GDP$6,762 b$7,801 b3.6%
Internet Economy$5 b$507 b213%

This dynamic is even more dramatic in smaller countries such as Ireland, which has seen 9% to 10% growth in GNP from 1995-2000. The Irish have figured out how to adapt to the new economy and are emulated by small regions throughout the world. Smaller nations, such as Ireland, Israel, and Taiwan, tend to have the most global orientation because these countries acquire goods, services, and capital not easily generated domestically.

But just throwing money at technology is not enough. To translate technology into faster productivity growth, financial markets have to be able to fund innovation, provide more flexibility in corporations and labor markets, create a faster pace of deregulation, and increase competition. In addition, the roles of national and local government, industry associations, higher-education institutions, and emergent linking/networking organizations will make a critical difference in the ability of a region to accomplish these needed changes to effectively integrate into the worldwide Innovation Economy.

Knowledge Without Borders

Globalization of the work process happens through technology. This is key to understanding how swiftly the world is changing. New industries and companies are being created based on international operations linked by technology. Alongside this, a new class of knowledge entrepreneurs who are international in background and business perspective is emerging.

One such example is Davidi Gilo, CEO of DSP Communications. Headquartered in Cupertino, California, DSPC's engineers are in Israel and its customer base is in Japan. In October 1999, DSPC was acquired by Intel Corp. to be run as a subsidiary. DSPC signal processing technology originated through the Israeli military and is useful in answering and dictation machines.

Davidi Gilo

The high-tech revolution is significantly different from the industrial revolution. When you talk about the global economy or technology, the model may involve, for example, product definition and innovation from the United States, engineering and development efforts could be done in Europe, and manufacturing could be performed in the Far East perhaps. So in that sense, it's very, very different, because a certain level of knowledge is moving from here to Israel, enabling the engineer to design the product, and then on to Japan, enabling them to make the product.

Now you have multinational companies opening offices in Israel and other places. They move people from location to location, who then return to Israel. And while they're here, they learn a lot of the discipline and the technology that they later on employ back in Israel. We live in a very mobile world today and you can see this phenomenon; it's very good, because that's how knowledge, product development, and marketing ideas get transferred between people and help young companies become more successful.

People in Israel who work on a major project at Intel get the same training as they would in Santa Clara. So basically a company like Intel, Texas Instruments, or IBM that has research centers in Israel operates on a global basis. Every multinational company doing business in different countries and using the same standard that made them successful in those countries helps bring the professionalism from engineering, management, and marketing, which is very significant.

When you have American companies setting up in other countries, then they are tapping human resources, which can be very good. It can be cheaper. The Internet, networking, and optic technology enable you to transfer files in a few minutes. Technological innovation enables all these things to happen. This is huge!

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