Key Point

Economic growth, and the associated growth in jobs and income, depends on productivity growth, and this in turn depends on innovation – improving existing goods and services at lower cost, or developing and selling new products and services – doing more with less. In the US, rapid productivity growth is very location specific. The country  can be divided into 3 economic geographies; those places that are dynamic ‘brain hubs’ – also called ‘innovation hubs’ – characterised by rapid innovation and fast economic growth, attracting skilled labour, with close to full employment, high wages and high costs, especially very high property values and rents; the second category are those with hollowed-out economies that are in secular and sustained decline,  and that resist all efforts to revive them; the third category are those areas which are at a ‘steady state’ situation, showing modest growth. This story is very relevant for Ireland, where our future prosperity depends on productivity growth and innovation, but where the location issue, and what this implies for policy, competitiveness, enterprise and the creation of jobs is rarely discussed. This note is designed to encourage the debate.

Introduction

In his book The New Geography of Jobs¹  Enrico Moretti, a professor of economics at University of California Berkeley explains the shared characteristics of areas in the US   that have become ‘brain hubs’ and centres of innovation and rapid economic growth, he identifies the key hubs on the US, how they came about, the role of immigration and policy and of the universities, and the implications for policy. This commentary draws heavily on Moretti’s work, summarising some key features and findings, and what they imply for Ireland

The Characteristics of Innovation Hubs

They all have three features

• ‘Thick’ labour markets (lots of very specialised skills). Because thick markets are better at matching workers and employers, innovation clusters have an enormous advantage in attracting even more high tech employers and workers
• A supportive innovation ecosystem, including access to venture capital and its support and mentoring, and providers of specialised services that are important to innovative firms, such as advertising, legal support, technical and management consultancy, shipping and repair, and engineering support.
• Knowledge Spillovers – new ideas arise in mysterious and unpredictable ways from free and unstructured interactions. Being around smart people tends to make us smarter, more creative and ultimately more productive

Where are they?

The number of patents per capita is an important indicator.

The States that produce the most patents per capita are California (lion’s share), New York (distant second), Texas and Washington. Among metropolitan areas, the most innovative by far is the San Francisco-San Jose region, with an enormous lead over the second, Austin Texas. Some of the key locations and activity are shown in Appendix A.

Migrants and Innovation

A test of any culture is its ability to attract and hold onto smart and innovative people. An important – perhaps the most important – ingredient in the emergence of Israel as the ‘start-up nation’ was its welcoming of about 1 million highly educated migrants from Russia during the 1990s; a similar exodus of well-educated and ambitious Hong Kong Chinese to Vancouver before the hand-over to China in 1997 has been a key ingredient in the creation of a dynamic metropolis. And we in Ireland benefitted from the skills, energy and dynamism of the Huguenot French Protestant migrants at the end of the 17^th century.

The dynamic strand in the US economy is hugely dependent for its vitality on migration, sometimes in the second generation, and California is a preferred destination for this entrepreneurship. Steve Jobs’ Syrian father came to the US for his doctoral studies, Jerry Yang (co-founder of Yahoo!) was born in Taiwan, but moved to the US at the age of 10; Sergey Brin (co-founder of Google) emigrated from Moscow at the age of six. Indians account for less than 1% of the US population, but account for 14% of start-ups in Silicon Valley. The implications for Ireland are obvious; we should welcome and facilitate smart people who have ideas and the courage to convert them into enterprise.

One outcome of these dynamic hubs is very expensive property. He notes that seven  of the 10 most expensive metropolitan areas in the US (San Jose; San Franciso-Oakland-Vallejo; Santa Cruz; Santa Barbara-Santa Maria-Lompoc; Ventura-Oxnard-Simi Valley; Santa Rosa-Petaluma; Salinas-Seaside-Monterey) are found in California². But people continue to flock into these areas because that is where the jobs are.

Explaining the creation of brain hubs – the importance of serendipity

In the US, there was no government led policy push to make this happen. The success of an original anchor company was typically the seed that grew into a high-tech cluster.

Microsoft started up in Albuquerque, New Mexico in 1975. On New Year’s Day, 1979, it moved to Bellevue, outside Seattle, Washington; it now has >40,000 employees. The founders (Bill Gates, Paul Allen) were from Seattle: “they both wanted to go back to the place where they had grown up” (p. 75). Microsoft’s presence created a high tech cluster. Jeff Bezos decided to base Amazon in Seattle – access to skills, including web site design and venture capital. And Microsoft alumni have created 4000 new businesses (including Expedia, RealNetworks).

In Portland Oregon, it was the opening of the Intel semiconductor facility in 1976 that jump started the semi-conductor innovation cluster there

In Boise, Idaho, Hewlett Packard moved its printer division there in 1973, and this has generated a general high tech cluster.

In Kansas City, Ewing Marion Kauffman started its pharmaceutical lab in 1950s and this led to a food ingredients hub.

Moretti makes the point that these rapidly growing brain hubs are difficult to replicate, and there are huge advantages of incumbency – once they get going, the gap between them and the rest of the economy widens.

The role of universities

There are a few very high profile universities in the US that are famously associated with innovation led enterprise. MIT in Cambridge Mass is the model of a university that sustains   growth; since 1980, it has generated 3,673 patents, companies started by MIT graduates generate sales of $2 trillion annually and Stanford University and the University of California Berkeley have played similar roles in California – Google initially operated under the Stanford website. And the presence of a university is on average associated with a better educated labour force and with higher local wages. He argues that wage inequality is caused by increasing demand for college graduates (40 million) and declining demand for non-graduates (80 million). An average College graduate will earn $1 million over a life time, compared to less than half of this for non-graduates.

However, a university – even a good one – is no guarantee that brain hubs will emerge. While most large cities in the US have universities, only a small minority of metropolitan areas have large concentrations of innovative industries. Some places with excellent universities – St. Louis (University of Washington), Phoenix (Arizona State), Gainesville (University of Florida), Ithaca (Cornell) New Haven (Yale) – rank low on the list of innovation hubs. However, once a cluster is established, “colleges and universities play an important role in fostering its growth, often becoming a key part of the ecosystem that supports it and makes it successful” p. 97.

Culture, Innovation and Economic Development

Moretti takes issue with Richard Florida’s proposition that the ‘creative class’ is particularly sensitive to quality of life, and that local economic growth hinges on making a city interesting and exciting for its citizens³. Florida’s fame was further enhanced by his claim that a good predictor of a community’s economic success would be its openness to gays. Moretti notes that Cleveland has attractive cultural amenities, including a first class orchestra and art museum but hasn’t established a new economic base; many US cities – Miami, Santa Fe, New Orleans, Santa Barbara – have all the cultural qualities, but  sleepy economies; Berlin is the capital of cool, with a tolerant and a dynamic arts scene (3 major opera houses, several symphonies, scores of museums), and very affordable housing,  but it has the highest unemployment rate in Germany, and second lowest growth in per capita income.  And he observes that his home country, Italy, has loads of culture but relatively little economic innovation and dynamism. He makes an exception of New York, whose economic renaissance can be” traced to improvements in quality of life and the willingness of many skilled professionals to return to the city.” (p. 190)

Issues for Irish Policy

Do we in Ireland have an innovation hub or hubs?  A message from Moretti’s work is that they are very difficult to create, and incumbents have a huge advantage. The size of the challenge we face is illustrated by the story of Tipperary brothers John (23) and Patrick (25) Collison. Patrick won the BT Young Scientist of the Year at the age of 16; John holds the record for the highest number of points received in the Leaving Cert. They went to study at MIT (Patrick) and Harvard (John). In their spare time, they got together to develop what became the hugely successful fast online payment company Stripe. And very soon moved to Silicon Valley. According to the Sunday Times Magazine Rich List 2014 (p. 83) their wealth is valued at €467 million.  So we in Ireland are two moves away from the realisation of their genius and entrepreneurship. Ireland’s universities could not compete with Harvard and MIT, and they in turn – and the Boston area generally – could not compete with Silicon Valley; the brothers decided that Northern California provided their best chance of finding the labour, the ecosystem and the knowledge spill-overs in sufficient quantity and quality to succeed. And they have not been disappointed.

Nevertheless, there are some promising signs in Ireland. Some of the three features (thick labour markets, a supportive innovation ecosystem, and knowledge spill-overs) that characterise them seem to be in place or emerging.

The Labour Market

Five of the top 10 companies in Ireland by annual turnover are global technology leaders, with significant R&D and employment, and their presence is only the tip of the ice berg.

Selected Technology  Companies, Ireland 2014, ranked by turnover

Source: The Irish Times Top 1000 Companies, May 2014, p. 24

This employment involves a range of skills, and there is openness to hiring from outside Ireland where necessary, so it seems likely that there is a reasonably thick labour market, especially in Dublin, but including also Cork and Galway. It is striking that John Collison’s main criticism of the US related to the visa difficulties associated with hiring talent:

“For hiring, it kills me every time when we meet people who are very talented that we know would make a huge contribution to Stripe and we can’t hire them because of visas getting in the way. There are many challenges that come with being an entrepreneur, but that seems to me like the single, most easily fixable one.”

Encouraged by ‘Open Ireland’, The Irish government has made an important move to fix this constraint, by improving our ability to hire the key talent that is critical to progress. The waiting time to get a visa is now down from several months to 3 weeks⁴.

The universities and Institutes of Technology play a key role in providing the new capacities to this labour market. And Sean O’Sullivan, through the MATHlete competition is providing a framework for encouraging school children to embrace mathematics, and fulfil their potential, with the support of teachers, using materials from the Kahn Academy. Perusal of the participants indicates that the children of families that have emigrated to Ireland may be amongst the stars of the future. David Olowookere of The Kings Hospital, Dublin, has been named as the top MATHlete in the country for first-year students.

We should give ourselves credit for being smart and making Ireland the destination of choice in Europe for foreign direct investment in the IT and biosciences areas, and then for supporting the complementary development of research platforms in these areas, and speeding up our visa application process for key skills/ This combination of policies should give us a critical advantage relative to Spain, Portugal, Greece and Italy, as we all try to climb out of the economic trough.

Innovation Ecosystem

As regards a supportive innovation ecosystem (access to venture capital and its support and mentoring, specialised services such as advertising, legal support, technical and management consultancy, shipping and repair, and engineering support), availability of venture capital has been increasing nationally. The Innovation Fund Ireland programme supports investment by government in venture capital. Lightstone Ventures is a leading US venture capital fund that has recently raised a fund of $172 million. Enterprise Ireland has invested €20million in the fund alongside a commitment of €10million from the National Pensions Reserve Fund. In the Report of the Entrepreneurship Forum – Entrepreneurship in Ireland –strengthening the start-up community, January 2014⁵, chaired by Sean O’Sullivan, (SOS Ventures, Carma, etc.) they “highlight actions that are already happening in some communities across Ireland, including vibrant activities in Dublin and Cork”. It is a very practical and actionable report, which, if implemented, will mean that the other pieces of the innovation ecosystem will continue to fall into place.

Knowledge Spill-overs

As regards knowledge spill overs, it is not easy to determine if this is happening, or to what extent. The Entrepreneurship Forum report highlights the importance (p. 22) of: “Developing strong networks of entrepreneurs helping entrepreneurs. From networking events to peer mentoring groups to shared electronic learning, Ireland needs to leverage the skills of the few for the understanding of the many. Peer mentoring is a hugely important source.” And the essential role of co-working spaces is highlighted, which have the following features:  central location accessible via public transport; unlimited and reliable Wi-Fi; open plan, brightly lit, hot-desking/collaborative space with specially designed break-out space; meeting rooms, kitchen facilities and event space incorporated;  24 hour access to the space; an incorporated coffee shop or complimentary coffee break-out area; plug-and-play style services (internet, printing, telephone, postal and storage facilities) at affordable costs.

Moretti highlights the social dividend from research and development: “Private investment in R&D rewards firms who invest, but it also provides social rewards to many other firms. Social rate of return is about 38%, twice as high as the private return”. But this spill over to other companies depends on there being companies already on the ground to avail of same. So a twin track policy of encouraging both local innovation and inward investment, and  maintaining both the public and private research that can spill over, seems to be the way to go.

Dublin seems to be the most likely candidate to become an innovation hub, on the basis that it already has a lot of activity, and seems to have more scale and scope in terms of what it takes to succeed. But this is by no means pre-ordained. It is clear from Appendix A that some of the innovation hubs in the US are in relatively small cities.

We need to better understand the innovation phenomenon, and its prospects of happening in Ireland, and the implications. Moretti’s book and the Report of the Entrepreneurship Forum are good places to start.

Appendix A – Location of Brain Hubs in the US

Source: Moretti  pp. 83-88

.