The Geography of Innovation: Does Location Matter?

March 10th, 2016

globe-924927_960_720Traditionally, the landscape of innovation has been dominated by locations such as Silicon Valley or New York. However, a contemporary urban model is now emerging around the globe, giving rise to what is known as “innovation clusters”. By definition, innovation clusters are described as groupings of independent undertakings — innovative start-ups, small, medium and large undertakings as well as research organisations — operating in a particular region and designed to stimulate innovative activity.

Fittingly, Australia’s latest Prime Minister has recently pinned the country’s economic renaissance on an ‘Ideas Boom’, where innovation and technology drive jobs and exports. In specific, Malcolm Turnbull has pledged $1.1 billion to transform Australia into an innovative location of choice. However, just how much of a role does location have on innovation?

Indeed, the defining challenge for competitiveness has shifted, especially in advanced nations and regions. The challenges a decade ago were namely focused on lowering costs and raising quality. Today, however, technology and innovation are pegged as the pillars of the economy. Nonetheless, conventional beliefs concerning the management of innovation focuses predominantly on internal forces – in other words, the competences and processes within companies for creating and commercialising technology. While the significance of these services is unquestionable, the external environment for innovation is also imperative.

Since innovation is one of the most significant factors of economic competitiveness, many countries endeavour to establish innovative networks within their local ecosystem. This approach, of linking geographical territories with innovation networks, influences national policies throughout the world. As a result, clusters of innovation networks are flourishing in almost all industrial and emerging countries. For a good reason – the literature on regional innovation clusters is extensive both in theory and in empirical studies (Acs, 2000; Holbrook and Wolfe, 2002), and draws upon concepts from economic geography, industry supply chains and the innovation systems approach. Consequently, it is now broadly affirmed that strong clusters foster innovation through dense knowledge flows and spillovers, as well as positively influencing the regional economic performance.

As the technology sector is predicted to grow at seven times the rate of the rest of economy, creating more opportunities and spaces within Australia’s local network is vital. However, Australia appears to be on the right track towards innovation. Aside from the Innovation Agenda, Australia also boasts a stable government, a strong economy, generous research  incentives, a skilled workforce and excellent research capability. Local infrastructure, such as the banking system, regulatory environment, tax incentives and telecommunications, makes it easy to do business here. For instance, the government provides a lucrative Research and Development (R&D) Tax Incentive which is highly effective in aiding rising companies in promising future industries.  In fact, when juxtaposed against other countries, Australia has one of the most generous R&D Tax Incentive programs.

Ultimately, building a foundation for innovation requires a clear understanding of the role location plays in both innovation and competitiveness. In today’s globalised world, managers can no longer simply manage the innovation process within their companies; they must also manage the process of how their companies enhance and take advantage of opportunities in the local environment. Whether this is through operating in clusters or  taking advantage of generous tax incentives , companies in Australia shouldn’t hesitate in harnessing the strengths of our local ecosystem.

Please contact one of Swanson Reed’s Specialist R&D Tax Advisors if you are interested in learning more about the R&D incentive and what this can mean for your business.