The value of the MBLC approach is that they explicitly recognize that innovation at the local level is a market-based phenomena, not primarily a technological phenomena.
The secret sauce of regional innovation entails the revitalization of regional markets, especially regional IT markets where consumers and producers of IT meet each other.
IT plays an essential function in future economic growth because it both creates and then diffuses local economic knowledge. As MBLC note, "many studies have emphasized the importance of geographical proximity in the production of new knowledge. Audretsch and Feldman (1995) have suggested that a tendency exists for high-technology industries to be geographically clustered, as if proximity to sources of knowledge spillovers was crucial for the firms to succeed in producing new knowledge through their Research and Development (R&D) activities."
They cite Malecki (1987) who identified the significance of the geographic localization of high tech industry. The "localization economy," means that firms within the regional innovation sectors generate benefits by being close to each other.
This concept of the benefits of localization goes back to Alfred Marshall, who showed in 1920 that interactions between agents from the same industry within one territory tended to produce greater economic effects. Marshall described how localization economies arise when all the firms benefit from being near other related firms in the same industry.
In the case of MBLC, they emphasize the benefits of the local regional IT firms being located close to each other and they cite three regional economic benefits that result from IT localization economies:
- the benefits of labor pooling,
- the cost reductions for purchased inputs when economies of scale are realized in the industries that produce the purchased inputs, and
- the better communication and more rapid spreading of knowledge or intra-industry knowledge spillovers.
The IT users create one side of a regional three-sided IT market. MBLC cite market demand as the single greatest factor in stimulating economic growth. In other words, the direction of causality for future economic growth is from market demand to innovation to economic growth.
As MBLC conclude, " Finally, our analysis has implicitly assumed that the direction of causality is from IT agglomeration to productivity. If, in fact, causality is partially in the other direction (with productivity inducing agglomeration) then there is an endogenous problem to be dealt with. The models give some support to the notion that the main source of agglomeration is IT using rather than IT producing activity."
The first leg of the new economic stool in America is innovation the local economic level driven primarily by investments in IT and greater interactions between firms in related industries that are located close to each other. Which raises the question of the second leg of the stool, where is the capital for investment in regional innovation going to come from?
The Second Leg of the Stool: New Capital Markets to Boost Regional Economic Growth
Much of the popular press and business media attention in America focuses on the venture capital community. Yet, most of the investment capital requirements for innovation for regional firms never make it onto the VC radar screen. The focus on the contribution of VCs to innovation is misplaced.
Part of the issue is that innovation at the regional level requires a much more extensive capital market system than just the VC community. Part of the issue is that the capital required by small manufacturing firms and startups to support innovation is so small that it is not attractive to the VCs. And part of the issue is that the preferred VC exit strategy does not contribute to long-term economic growth at the regional level.
In Assessing and Measuring the Equity Gap and the Equity Requirements for Innovative SMEs, Elisabetta Gualandri and Valeria Venturelli highlight the problem of "the small ticket." (CEFIN Working Papers, No 6. January 2008).
As the write about their research, "The cluster analysis shows that the highest average value of the equity requirement (645.9 thousand euro) is associated to the innovative firms in the cluster characterized by the higher growth of rate in sales. This problem, known as the small ticket problem (Berger and Udell, 1998 and Petrella, 2001), can be overcome through the involvement of business angels, who are willing to invest smaller amounts in projects still in the seed stage.
They investigated the capital requirements of 4508 Italian firms, mostly micro- and small-enterprise manufacturing firms. In terms of sectorial distribution, firms in the manufacturing sector predominated (78.2%), while with regard to the degree of innovation, overall almost 14% of the sample studied consisted of high-tech firms with medium and high technology content.
What they found was that "With regard to the equity requirement expressed in monetary terms, the aggregate value of 147.3 thousand euros for the entire sample conceals a high degree of variation: the range is from a value of 28.0 thousand euros for micro-enterprises to 521.2 thousand euros for medium-sized firms, confirming that the equity requirement is correlated to business size, as expected."
In other words, most firms that were attempting to innovate required around $500,000, or so, give or take a few hundred thousand to account for the U.S. exchange rate issues. They cited Harding and Cowling, (2006) who found evidence of an equity gap of between £ 150,000 and £250,000 at the lower end and between £ 1.5 and £ 2 million at the upper end for existing firms in the innovation phase.
For younger firms, and startups, the gap "for small amounts, between £ 10,000 and £ 30,000, was identified in the expansion stage for firms between 18 and 24 months old, arising because of the need to meet regulatory and fiscal expenses."
"When it comes to providing financial backing to the most innovative firms," concludes Gualandri and Venturelli, "the relative backwardness of financial systems aggravates the structural difficulties faced by SMEs in obtaining access to finance, and in particular amplify the problems related to the availability of equity. This problem is especially serious for start-ups and the smallest firms, for which venture capital is not generally the main means of boosting the level of capitalization.
