The New Geography of Innovation An Interview with Mehran Gul: Mehran Gul talks with Jim Euchner about the emergence of innovation hubs throughout the world.
Jim Euchner [JE]: Could you start by giving the readers the basic frame of your proposition? As I understand it, your research indicates that innovation hubs outside the United States are becoming much more important and the relative position of the United States as an innovation center will decline over time. Can you elaborate?
Mehran Gul [MG]: My book, The New Geography of Innovation, is motivated by this observation: if you look at the past 50 to 60 odd years, almost every major technology company has come from one place, and that's the United States. Whether it's Apple or Facebook or Amazon or Microsoft or Uber, these tech companies come from three main locations, all of them in the United States--San Francisco, Seattle, and the New York/Boston corridor.
All of that is beginning to change now. You can see this by looking at the distribution of high-value startups around the world, which typically are called unicorns. If you looked at the number of unicorns in the world five years ago, around three-fourths of them would have been based in the United States. Over the past five years, there has been a significant shuffling in terms of where these new high-value tech companies are coming from. Now, only about a third of unicorn companies are based in the United States, and the overwhelming majority are based outside.
The book asks, "What are these new places?" If I am a venture capitalist or I am a big tech company trying to locate its operations around the world, or even an entrepreneur trying to find the best place to start a company, what are the alternatives to Silicon Valley or New York? The book is the story about what these eight or nine places are going to be.
JE: Even in North America, there is Silicon Valley and New York, but also Austin and Toronto and the Washington, DC, area. Are you looking at those as well? Innovation is becoming less Silicon Valley-centric, but I think you're making a broader point.
MG: In the United States, the hubs vary by location. There are a lot of companies based around design that are located in Austin. They are quirky little companies that have a very good design sensibility, including really good fashion startups and lifestyle companies. I would say similar things about Los Angeles; the creative community is very strong there. But I have yet to come across an interesting tech company that could rival an Uber, for example, or a Lyft that comes out of Austin or Los Angeles.
Toronto is huge, especially when it comes to artificial intelligence. Some of the work that's being done at the Creative Destruction Lab at the University of Toronto, for example, is very impressive. In North America, I would say, Toronto is a big hub to keep an eye on.
JE: What are the forces that are driving this? Are the majority of these non-US unicorns located in China, or are they more distributed?
MG: It's very clear that the main story is one of the United States versus China. Of course, Europe is big, and of course, there is activity happening in Israel and India, but the most useful filter that I am using looks at geographies that are capable of producing very large-value companies. It is really only the United States and China that can produce companies that have over $100 billion in market valuation. If you look at Europe, for instance, the largest would be a company like Spotify, which has a valuation of about $25 billion. In India, it would be something like Flipkart, which is valued in the tens of billions of dollars.
There's a very clear division. In China, multiple companies are reaching the $100 billion level. Alibaba is an obvious example, but there are also companies like Ant Financial, which within a matter of months went from zero to a billion-dollar valuation. One very common statistic is that it took about 20 years for the average Fortune 500 company to reach a billion-dollar valuation. Google achieved that milestone in eight years; Uber did it in four years; Grab, the ride-hailing app that's based in Singapore, did it in just three years; and Ant Financial in China did it in just seven months.
As I am studying the geography of innovation, there are several filters that I'm using to identify the emerging hubs: How fast is it possible for a company to grow in a certain country? What are the numbers of high-value companies that a country can produce? It's easy to produce one or two unicorns almost any place; Pakistan, for instance, has three unicorns. What I am asking is what makes it possible for a place to produce dozens of unicorns. I am also interested in whether the companies that are created are basically local companies, with local influence, or whether they can reach scale beyond their own borders, as well.
JE: Just to press on that a little bit more, Alibaba and Tencent and Baidu are huge in China, and in many ways they're innovative, but in many ways they replicate analogues in the United States. These companies didn't have to compete with Google and Amazon because of the constraints the Chinese government would put on those companies if they were operating in China, so the China-native companies have gotten huge. Is that dynamic driven more by the great firewall of China and the huge population of China, or is it actually driven by a new innovation hub?
MG: I would make three points about that. The first is that the analogue argument was probably true until five or six years ago. But now you see products in China that are very unique to China, products that people in Western countries have been trying to replicate but are unable to do.
The classic example of that is WeChat, which is a super app. WeChat is hard to describe to somebody who hasn't used it, but it's as if you had WhatsApp and Uber and Uber Eats and your bank account in one app. The problem that it solves is a problem that a lot of American tech companies haven't been able to solve, which is that of digital identity. People think WeChat is chat software, but it's not: it's a way to give you a verified digital identity online that you can use to make all sorts of transactions, whether they are financial or purchasing decisions or ordering food. That's a pretty big problem that WeChat has been able to solve.
The second point I would make is that, to a certain extent, the big three companies are China companies, but if you look at the patterns of their acquisitions, they are increasingly trying to acquire companies outside of China. This will extend their reach beyond China's borders. To give you an example, the largest tech acquisition of 2016 was of a Finnish gaming company [Supercell] that created Clash of Clans, which was an online gaming sensation. The company was bought by Tencent. That was a pretty big deal because this was the first time that such a massive acquisition of a tech company happened in which there was no US involvement; the buyer wasn't American and the seller wasn't American either. Rather, a European company was being sold to a Chinese company. The three China behemoths are definitely China-centered, but they are acquiring companies outside of China which, perhaps in stealth, can extend their capabilities outside.
The third point is that there are other tech companies in China that are absolutely dominating, not just within China but globally. An example of that is DJI, the drone manufacturer. It is a Chinese company that has almost cornered the market in consumer drones around the world. It has a market share of about 84 percent. It's one company in a very competitive setting. GoPro's Karma, for instance, was probably better positioned to claim a large market share, but it was DJI that established a larger presence globally.
JE: It's going to be very interesting to see how this plays out. China seems to be doing a lot to create its own presence in places like Africa, as well. Is that part of your story?
MG: I think China is doing a lot of infrastructure investments and old-school economy investments in Africa. My study is looking very specifically at tech companies, and I'm not aware of China either buying or nurturing tech companies in Africa. Maybe that will happen sometime in the future, but from what I've seen, their investments in Africa are more old-economy investments to help these countries build infrastructure. I think that this is more of a geopolitical play than trying to push technological innovation in Africa or Latin America.
JE: What do you see as the other interesting hubs that are most likely to be really generative over the next decade?
MG: The first tier of innovative countries is clearly China and the United States. There's no question about that. After that, there are a few that I think are increasingly important. India is emerging as a big tech hub. Israel is huge as well. I think Sweden is the most notable hub in Europe. Amsterdam is not as big as Sweden, but it's emerging, as well. And then there is Singapore, which is investing a lot in its early-stage companies.
It might seem as if these are very obvious examples, but the surprising thing is who's not on the list. There are plenty of examples of very developed countries that do not make the list of the most innovative countries. Japan, for instance, is not on this list, even though some of the biggest technology companies from the 1980s and 1990s were Japanese. South Korea is not on the list, even though Samsung is the dominant power in mobile phones right now. There are plenty of European countries, like Germany, for instance, or Switzerland, that do old-school engineering really well, but you don't see them being active in creating the types of technology companies that Silicon Valley produces. And I think there are interesting reasons why.
JE: What's distinct about Singapore or Israel or India? What makes them likely to be innovation hubs, and how is that different from what makes China a hub?
MG: A couple of points. China and the United States are general-purpose hubs. You're as likely to come across a great hardware company over there as you are to come across a great fintech company or a great startup in a creative sector. But if you look at places outside the United States and China, you see a much more specific division of labor.
Sweden, for example, has really good startups in the design space, some really interesting ones in the area of gaming, and many interesting things around music. But you are not really seeing the next big operating system coming out of Sweden, for example. Similarly, if you look at Israel, cybersecurity is huge over there, and geo-positional mapping is huge over there as well. But again, you're not really seeing things happening in social networking or self-driving cars, for instance. In India, there a lot of companies that are very good at retail; Flipkart would be a very good example. In sum, outside of China and the United States, countries are good at specific things but not good at everything.
The second point I'd make is that each of these hubs is very different. There are a lot of places that are trying to create the next Silicon Valley, and those are exactly the places that fail to do so. Russia, for instance, very consciously tried to create a Silicon Valley, and I think Dubai is doing something very similar. Saudi Arabia is also trying to do replicate Silicon Valley. Every country seems to have a plan to make a Silicon Valley.
The ones who try to take that template and bolt that on top of what they already have are not succeeding. The striking thing about the successful new hubs is how different they are. Silicon Valley was powered by creative research universities, the availability of fresh capital, and a freewheeling culture that set it apart from the East coast, but those are neither necessary nor sufficient conditions for innovation to happen in other places.
The government is very active in Singapore; innovation happens to be very government driven there. In Sweden, that is not the case; in Sweden, it's a history in aesthetics that evolved into and began to reflect what they were doing with technology. In Israel, the army is the main breeding ground for tech entrepreneurs; there's a great book written about that called Start-Up Nation. The Israeli army is the institution that brings people together and trains them, and when they leave, some of them make companies, which is why there is such a strong security bent in the startups we see in Israel. In India, it's the fact that there is such a massive domestic market; the companies that have grown there, like Reliance and Tata, were originally in the business of creating distribution networks to serve a very large population. It was natural for India to lean very heavily towards creating retail startups.
The driving forces are very different in these countries. What has succeeded for them is to focus on strengths rather than to try to replicate an alien model from somewhere else. There's no pattern per se, other than the fact that these countries work from their own strengths.
JE: You have identified a very significant shift in innovation patterns. The data you talked about on unicorns is illustrative. What are the big forces that are driving this shift?
MG: If you look at the history of innovation and technology over the past 50 years, you can see four distinct waves. The first wave happened in the large research labs and universities in the United States. The technical expertise and the technical talent was really monopolized by the large industrial labs, like Xerox PARC and Bell Labs, and by MIT, Cal Tech, and the great research universities.
We went from that model to one in which innovation was primarily happening in the garages of American entrepreneurs working to build the next big consumer technology company. Steve Jobs and Bill Gates would typify the innovation of that era.
In the third era, there was a wave of international entrepreneurs who migrated to the United States to access a stable institutional environment, along with the resources and the technical expertise to build their companies. People like Elon Musk, for instance. I think that the total market value of all the technology companies built by immigrants to the United States is around $3 trillion.
I believe that we are now going through a fourth wave, where the factors that made America different for much of the 20th century--the stable institutional environment and the availability of technical expertise and risk capital--are beginning to take hold in other places as well. Fifty years ago, Singapore would not have had the technical talent to build a good technology company; anyone of Singaporean origin would have had to go to a much more developed country to build what they wanted to build. But now the necessary infrastructure is present in many more countries.
The thing that I would like to emphasize is that the basis of analysis should be the breeding grounds of companies, not the companies themselves. We should look at the cultures they come from. It is not an accident that the United States and China can build companies that are worth more than $ 100 billion and that other places cannot; the soil is just not fertile enough for trees to grow that tall in other places. But that is beginning to change. Innovation is beginning to become more international, rather than just American or Chinese.
JE: The interesting observation about the two behemoths, China and the United States, is how different their soil is. The educational institutions in China are graduating many, many technologists and engineers, and both the United States and China have large markets. What's different, though, are the institutional factors: the laws, the patent protections, the freedom to speak out if you disagree with something. Conventional wisdom would say that those are extremely important, as well. Why is innovation thriving in such different legal and political environments?
MG: In human psychology, there's a big debate between nature and nurture: how much of a person's behavior is based on genetics and how much is a result of the environment in which they were raised. When considering the success of innovation in different countries, the analogous debate is between structure and culture. How much of a successful innovation environment is structure--the institutional infrastructure, the rules, the laws, the IP protections--and how much is cultural--the attitudes of the people, their beliefs, their level of ambition, what they want out of life.
If you look at the United States and China, the interesting thing is that, structurally, they are almost completely different. IP protection is much stronger in the United States than it is in China, and the ability to speak out against authority is much stronger in the United States than it is in China. But China is still, somehow, despite that very constrained structural environment, able to produce some really amazing companies. That makes me believe that China's innovation performance is the result of cultural factors. The kind of gritty entrepreneur that you find in the United States, with people programmed to win at any cost, seems to be a lot more prevalent in China than in other places. In fact, you often see Chinese entrepreneurs coming to the United States and complaining about how lazy American tech workers tend to be--how they emphasize work/life balance, whereas in China there is more of a gladiatorial contest, where there are no rules and you just try to win by any means possible. You can disagree with that approach, and you can see it as being very harsh, but so far, it's working for them.
The other reason I think that China's innovation performance is the result of cultural factors and not structural ones is there are other countries that are much more structurally friendly to technological innovation that don't perform as well. Europe, for example, is much more similar to the United States than to China in its structural factors. Japan is also much more like the United States than China is. But Europe has waited 20 years for its Google, and it has not happened. Even though Europe has tried to keep American companies out of Europe in order to create space for its local champions to emerge, the local companies have not materialized, and that's because the entrepreneurial culture isn't there.
An exceptional European student coming out of college, much like an exceptional Japanese student coming out of college, still wants to go to work for a large company and have a stable life and a predictable future. The risk tolerance of a typical person in Europe is very different from that of a similarly situated person in the United States or China. I think that subjective element is very important--what drives people and how much risk tolerance they have. That is very different across different cultures.
JE: That's very interesting. I will be interested to see how you unravel these factors as you try to explain this phenomenon. Do you also find differences by industry sector? Tech obviously includes devices and software and telecommunications and gaming and Internet companies, but there are also tech industries around health care and manufacturing and energy, which are inherently more dependent on physical location, and maybe on breakthroughs in science. Do you find the new hubs encompassing that broader scope of industries?
MG: I think there is a division between countries that are doing software very well and countries that are doing hardware very well. As I mentioned earlier, I think the United States has developed a very strong domain depth in software, but for much of the past 30 years, it has been outsourcing its manufacturing to China and other east Asian countries. As a result, the United States has really lost its ability to manufacture things at scale. Importantly, this does not just affect its ability to manufacture the final product; it also affects things such as prototyping a product at a very early stage.
In China, prototyping cycles happen much faster than they do in the United States, which is why it's no accident that a company like DJI came from China and rocked the United States drone industry; it's because DJI is a hardware company. Obviously, this is a generalization, and there are really good examples of American companies that do hardware well, Tesla being the primary example. There are also very good examples of Chinese companies that do software very well, Tencent being a very good example. But, to the extent that any generalization is true, it is true that China does hardware innovation better than the United States does.
JE: What about industries like medical or pharma? I know there are instances where medical research is taking place in China, especially in areas where it has been more regulated in the West, but in general, pharma and medical innovation has been more US-centric. Do you see that changing?
MG: In pharma, there are two things happening. The first is innovation in terms of product--making pharmaceuticals better or delivering precision medicine, the more highly technical stuff. This is still happening in the United States. But there are examples in India, for instance, where entrepreneurs have used technology to make access to health care much more widespread, for example, by setting up telemedicine centers. They have even done this in areas such as mental health, in a way that makes help available to people wherever they might need it.
But even though you might see more happening using tech to extend access to health care in developing markets, the more high-end stuff is still happening in the United States, and that might be because health care requires a massive investment in R&D. Countries that don't have the necessary resources would much rather focus on low-hanging fruit in their markets than try to discover the next big blockbuster drug.
JE: That makes sense. What do you see as the counter forces that might cause a swing back? I'm thinking particularly about political forces. Does China eventually run into an insurmountable dilemma around freedoms versus innovation? Are there restraining forces that will cause the diffusion of innovation hubs to be limited, or do you see this as an inexorable trend?
MG: There are a couple of challenges to the phenomenon I'm trying to describe. The first is that the story I'm trying to tell is one of decentralization--of the creation of technologies and wealth moving from one place to many places. But if you look at the past 100 years, the story has actually been exactly the opposite.
Twenty years ago, for example, Michael Porter talked about the creation of industrial clusters. The automobile industry, for example, has tended to cluster around one place, as has the medical industry, which has been centered in Pennsylvania. He theorized that these industrial clusters would begin to congeal around their hubs more and more closely.
Of course, that did not happen. The biggest leap forward in the manufacturing of cars, for instance--the emergence of electric cars--did not happen in the established centers of car manufacturing, such as Detroit or the automotive centers in Germany or Japan; it happened in San Francisco. Similarly, some of the most interesting breakthroughs that we have seen in health tech startups didn't happen in Philadelphia or Boston; they happened in San Francisco. PayPal did not happen on Wall Street; it happened in San Francisco. Uber did not happen in places where the transport industry was huge; it happened in San Francisco. Facebook is the largest media company in the world, but it didn't come from Los Angeles. So counter to Porter's theory, almost all sectors began to see innovation happening in one specific place, rather than around their industrial clusters. That was because the hard tech that was underpinning the transition of these sectors was developing much faster in San Francisco than in other places. Which means that the story over the past 100-odd years is really one of concentration in one place rather than diffusion in many. But I think things are changing.
Others object that there have been many predictions of the decline of American power in different fields over the past 100 years, and they just haven't come true. It happened when the Soviet Union beat the United States into space; it happened when Japan emerged as a massive manufacturing power; it happened post-9/11, to some extent. But every time people have prophesied an economic decline in the United States, the country has shown itself to be massively resilient. So even though we see these new centers emerging, we don't know whether China is going to be the next United States or the next Japan. It's still very early in the game to be making any prediction either way. So in some ways, the story I'm trying to tell is going against the cumulative experience we have had over the past 50 to 100 years.
JE: Very interesting. Eric von Hippel at MIT has studied the democratization of innovation--not the decentralization of hubs and centers, but innovation by users and user communities. The trend has been driven by the dramatic drop in the cost of innovating. Elastic computing, 3-D printing, Kickstarter and Indigogo, and so forth have all caused the cost of innovating to plummet. He has found that this is a global effect that has emerged in countries with very different cultures. Do you feel like that is part of what you are seeing, that it's just easier to innovate anywhere, even for individuals?
MG: Perhaps. Joi Ito at MIT's Media Lab talks about this as well. He talks about authority versus emergence. Where innovation used to happen under hierarchical authorities, whether they were research labs or companies or governments, innovation now emerges more out of a collective hive mind, out of an organized chaos. The best example of this might be Bitcoin. We don't know who made it; its development was very decentralized. People have predicted its demise multiple times, but it is still the gold standard of crypto-currencies. But I don't know whether these kinds of innovation are just quirks, things that are going to happen at the margins. I just don't see a company like Tesla, for instance, being crowdsourced.
I'm more conservative in my outlook toward crowd-sourcing, because building complex things is hard, and companies don't just perform the function of setting a goal. I think you need to have a way to focus the minds and energies of people on something specific and for getting them to work together really hard for a long period of time. That kind of structured environment is still only present within organizations, as opposed to these much more decentralized mechanisms.
The analogy I would use is that a company is like a school. There's a difference between schools and libraries. Schools are not just there to make information available; they're there to make sure people are disciplined, to create a culture of expectations, to create an environment where high performers are rewarded, and to make sure that things keep moving along. That's what companies do as well. They don't just make goals and resources available; they also help people to arrive at those goals. I just don't see how you can make innovation happen at scale right now outside of these structured environments. Creating a lot of libraries around the country is not a substitute for creating a lot of schools.
JE: I have one final question. How do countries or states or communities that want to encourage these kinds of hubs to grow around them do so? I lived in Akron, Ohio, for a while, and the government of Akron was trying to figure out what we, as a community, could do to make it more of an innovation hub. What can countries or states do to make it more likely that an innovation hub will take root?
MG: That's one of the motivating ideas behind my book. The traditional answer to that question is to do item A, item B, and item C--to try to replicate Silicon Valley--but I don't think that's possible. A case study method is more appropriate than having a rough framework for how these things are done. You can't just build a great university, use it to attract high-quality talent, and make capital available. There are countries that have managed to build innovation ecosystems without some of these attributes and there are countries that have all of these things and have not been able to create innovation hubs.
I would suggest that those interested get inspired by looking at places that have worked. Look at what Sweden is doing, look at what India is doing, look at what China is doing. Don't just use Silicon Valley as the template. These things are not mechanistic; they are organic. Study successful models and get inspired. Try to mix and match the approach based on what you already have in place rather than copying something wholesale from someone else.
Mehran Gul is the Lead for Digital Transformation of Industries at the World Economic Forum in Geneva. His work focuses on the intersection of technology and business. He works with global business leaders to develop strategies to ensure their digital transformation investments result in tangible outcomes. He previously served as an Expert at the United National Industrial Development Organization (UNIDO), where he advised governments on the role of higher education and entrepreneurship in industrial policy. He is a recipient of the McKinsey/Financial Times Bracken Bower Prize. He is currently working on The New Geography of Innovation, due out next year, which charts the rise of global technology hubs, email@example.com
Jim Euchner is editor-in-chief of Research-Technology Management and Honorary Professor at Aston University (UK). He previously held senior management positions in innovation leadership at Goodyear Tire and Rubber Company, Pitney Bowes, and Bell Atlantic. He holds BS and MS degrees in mechanical and aerospace engineering from Cornell and Princeton Universities, respectively, and an MBA from Southern Methodist University. firstname.lastname@example.org
Published by Taylor & Francis. All rights reserved.
Caption: As the lead for Digital Transformation of Industries at the World Economic Forum, Mehran Gul is examining the forces behind the
emergence of innovation hubs.