Tuesday, April 30, 2013

Can Innovations Happen Away from Silicon Valley? It Depends on the Network

The mobile phone market continues to be in turmoil. The launch of the innovative Galaxy S4 phone is now delayed for the US carriers T-Mobile and Sprint, and the reason is “supply issues,” which usually means that there are not enough of them. Unless something has gone wrong in Samsung’s factories, it means that it is selling more than anticipated in the markets where it has already been launched. Meanwhile, Finland’s Nokia and Taiwan’s HTC are battling each other in the marketplace with new phone models, and also trying to obstruct each other in court with legal claims. Apple is selling iPhones fast, but not so fast that they can avoid speculations that they may have to imitate Samsung’s lineup of phones in a range of different screen sizes. Whew.

Maybe you have noticed already, but only one of the four companies I mentioned hails from Silicon Valley: Apple. How does this square with the idea that the Silicon Valley is the center of information technology innovations, or more generally, that innovations in an industry usually come from agglomerations of technologically advanced firms? Well, there is a lot of research showing that such agglomerations will continue to produce innovations and new firms, so there is no need to predict doom for Silicon Valley. But there is reason to wonder about the exceptions: firms that can stay innovative away from such agglomerations.

A recent paper by Russell Funk in Academy of Management Journal looks at innovations in the nanotech industry, which also has agglomerations (one is in Silicon Valley, of course). He looked at how the structure of the networks of innovators within each firm combined with the location to determine the innovativeness. The idea is simple, but novel: we normally assume that networks that effectively spread knowledge are good for innovation, and in fact this is what happens when there is a lot of useful knowledge around. Firms surrounded by other advanced firms should have such networks. But networks that don’t spread knowledge effectively because the individuals are not well connected let each individual develop novel and unique ideas. They can help firms rebound from some of the disadvantage of being away from other sources of knowledge.

As he expected, he found that firms away from other high-tech firms were able to innovate more the fewer connections their innovators had, so maintaining internal diversity helped keep them innovative. We might suspect that Nokia and HTC, distant from Silicon Valley, are trying this approach because they are doing many product launches, and are not completely consistent in their choices. For example, HTC has both Android and Windows phones; Nokia is simultaneously pushing new models in the smartphone and basic phone market.

So the mobile phone market is likely to stay interesting for a while, and Russell Funk’s research may explain why that is so. But his research does not predict success, because innovativeness and success are as closely related as we think. But that is a story for another blog post.