Innovation and Clustering among Information Technology Firms in Melbourne1

Vic21

As the information economy rapidly takes shape at the regional, national and international level, many countries have responded to future challenges by developing and implementing information industry strategies. In 1995, the Victorian state government responded to the challenges of the emerging global information economy by developing the Victoria 21 policy (Vic21).³ The Victorian government was quick to identify the opportunities offered by the new information age. With traditional manufacturing industries in decline, the high technology and service sectors have rapidly become the growth poles for the future.

The government of Victoria's commitment to the information age was evident in its encouragement of an information industry base and multimedia in Victoria. The government believed that the Victorian economy has the opportunity to flourish not only as a major centre of value‐adding and manufacturing industry, but as the leader in multimedia, communications and information technologies.⁴

The Victorian government has developed the Vic21 strategy to reflect its commitment to economic development for Victoria, and to build a coherent response to the challenges faced. The government's objectives have been to:

In general, Vic 21 provided a policy framework for the converging areas of information technology and telecommunications. This policy also developed in response to the high level of competition in the region, and for this purpose the Victorian government provided $A200 million to support the policy and project activity of Vic21. It also appointed the region's only minister for multimedia.

By 1996, more than $A380 million had been invested by the private sector in a variety of ICT industries. Also, major investment had been ploughed into the establishment of domestic service centres for the rapidly growing telecommunications and pay TV industries. There were also other major investments across the industry spectrum from such companies as Fujitsu, Ericsson, Foxtel, IBM, Hewlett‐Packard, Martin Dawes, Olivetti, Logica and Nokia.⁵

To establish a clear direction and the appropriate targets for growth across Victoria's information economy, the government developed a strategic vision: ‘Victorian firms will carve out a major role in the global provision of multimedia products and services, and the Government will use the power of communications technology and multimedia to transform the way it provides services to and communicates with the public’.⁶ Underpinning the implementation of this vision have been the three objectives already mentioned. In addition to these objectives, there have been four inter‐linking strategies. Project priority has been given to those actions that will promote development of the information industry in Victoria, particularly initiatives that offer opportunity for the private sector to link with government to develop content and services.⁷ These strategies include:

To support and implement its agenda, a public sector agency, Multimedia Victoria, was formed by joining units from the Department of Premier and Cabinet, Arts Victoria and Business Victoria. The agency has been established within the Department of State Development and has focused on strategy and project implementation. As mentioned, the government appointed the region's first minister for multimedia and from 1996 established a major multimedia expo— Interact—to be held every year to showcase Victoria's multimedia content industry. In sum, the Vic21 strategy was a comprehensive policy supported by a strong commitment at the political, bureaucratic and industry level.

Connecting Victoria

After its victory in the state election of 1999, the Labour government put forward a new policy agenda for information and communication technology. Connecting Victoria is the government's strategy for growing the information and communications technology industry. The main aims of the policy are to position Victoria as the nation's ICT leader and to build Victoria as a knowledge economy. However, this strategy focuses more on small and medium‐sized businesses and on regional and rural Victoria than Vic21. The government outlined six elements to its strategy to grow the ICT industry:⁸

Through Connecting Victoria, the Labour government wants to create a social, as well as an educational and economic agenda for universal access to information and communications technologies.

One main focus of the new state government is on regional initiatives. The Department of State and Regional Development (DSRD) has responsibility for shaping policy for regional development and delivers programs to enhance economic and infrastructure development, investment attraction, job creation and community development in regional Victoria. Multimedia Victoria works with other groups in DSRD to achieve this. Some programs with a strong regional focus include:

These programs are designed to ensure that new technologies are helping regional Victorians overcome the tyranny of distance. They are to help regional businesses reduce the cost of servicing their customers, making it easier for them to find markets that were once too expensive or remote to reach.

In November 2001, the government of Victoria released a new ICT industry plan, Growing Tomorrow's Industries Today.⁹ This document outlines how the Victorian government will work with industry to grow a globally significant ICT sector in the state. It claims that Victorian industry has internationally competitive expertise and products, and that Victoria produces world‐class ICT graduates. The plan identifies Victoria as a global hub for research and development with several ICT clusters of excellence. In short, the four objectives of the plan are:

The plan emphasises the importance of clusters of firms and the need to identify and promote these clusters.¹⁰

Specialisation

It has been widely argued that regional industry clusters refer to geographical concentrations of firms in the same or related industries. In most of the cases, these clusters are specialised within one or more industries within the local region. Benefits that have been observed to flow from such clustering include: the creation of localised pools of specialised workers; the provision of inputs at lower cost and with greater variety; environments conducive to the formation of intermediate goods industries; and tacit knowledge that can be shared because it is concentrated ‘external to the firm but internal to the locality’.¹⁹

While the Victorian ICT industry is not as big as the state's agri‐food or automotive industries, it is still substantial in national terms. Victoria also has a strong position as one of Australia's key ICT exporting centres. Indeed, the Allen Consulting Group found that 14 of the top 50 exporters in the information industries were based in Melbourne.²⁰ Similarly, in many other key areas, Victoria has a large proportion of economic activity in the information industries.

In 1995, according to the government, the ICT sector produced $A534 million in new investments and $A200 million in new net exports for Victoria. Growth in this sector, and the opportunities presented by multimedia, made it a priority for attracting new investment and facilitating exports and joint ventures. The Victorian government invested heavily in the sector; for example, the government provided $A32 million over the period 1996–98 for ICT development.²¹

In Victoria in general, and in Melbourne in particular, there are groups of firms with emerging specialisations in different sub‐fields of ICT. Most of the firms in the present sample were focused in software engineering, multimedia, telecommunications or Internet services. Few firms were engaged in activities across more than one or two of these areas.

Local Networks

Innovation can be stimulated through interactive learning processes, both within firms and between firms in the supply chain (suppliers and customers). Local networks can link firms into regional clusters in order to take advantage of collective knowledge and access to a range of resources. These resources include knowledge embedded in institutions such as research institutes or universities, but also tacit knowledge that can be shared across firms through the movement of ideas and people. Local networks refer to firms that cooperate in a number of different ways, including through ‘learning networks’.

In Melbourne, our survey and interview data suggest that while most ICT firms considered in‐house R&D and sources within the firm as ‘crucial’ for their new product and/or process development, interaction with customers and suppliers was also a very important source of information and learning. Firms in the sample were asked to include only those close collaborative links that had been, or still were, of considerable importance to the development of the company. Data on the frequency of links, and interaction with the external partners, are presented in Table 1. The most important external links for competence development were those established with customers.

Clearly, the supply chain network extends beyond the local region. Nearly 34% of the firms reported suppliers located in other areas of Australia and 40% of the firms reported global suppliers. Data also suggest limited interaction with other firms in the same industry or other firms in related or different industries. When there was evidence of such interactions, it was usually at the national rather than the local level. This evidence suggests that local ‘networking’ was not a particularly important factor in the general business activities of these firms. This finding was underscored in interviews carried out with two firms located in the same city premises. The firms were engaged in a similar specialisation, yet there was no joint learning, no informal meetings, no exchange of ideas or discussion of common problems.

R&D and Educational Institutions

Another characteristic of a regional cluster is that it is likely to incorporate institutions engaged with R&D and training in areas relevant to the business activities of the firms in the cluster. Such institutions include local technology development centres, research centres and universities. This characteristic is particularly important when the cluster is a high‐tech or a science‐based cluster. Here both public and private sectors play an important role in setting up such centres to ensure growth of the local firms. These institutions are important in the cluster because they provide a range of human resource and technology development capabilities not otherwise available within individual firms.

There are several world class R&D and educational institutions in the area of ICT in Victoria. For example, Melbourne is home to Australia's largest public spender on communications R&D—Telstra—and private spender on R&D— Ericsson. In fact, eight of Australia's top 10 spenders on R&D are located in Victoria. Six universities in the city offer degree and other courses on various specialised aspects of ICT. One would expect local firms to take advantage of these pools of local resources.

Interestingly, of 48 firms surveyed, 12 indicated that they never had any direct interaction with a local research organisation (Table 1); and 13 firms reported that they had never had any interaction with the universities. Of the remaining firms, a majority (19 firms) reported that they had ‘some’ interaction with a research institution or a university. Only a few indicated that they had regular (‘always’) interaction with research organisations or universities (five firms with research organisations and six with universities).

The data also suggest that when such interaction exists with research organisations, the distinction between local and national links is comparatively weak. Interaction with research institutions was reported equally strongly at local and national levels, while for universities, surprisingly, it was stronger at the national level. This suggests that local firms look for expertise not only from local institutions, but also from national institutions. It seems that firms increasingly rely on computer‐based information networks as sources of information and rely less on local scientific and technological capability. Firms do, however, take advantage of the local institutions' knowledge in the sense that the majority hired skilled employees who had trained at local universities. Firms considered these skilled employees to be ‘crucial’ for their innovative activities in developing new services and/or products.

Existence of a Qualified Workforce

The existence of a qualified and skilled workforce is another characteristic one would expect to find in a successful regional cluster. For a sector such as ICT, a range of skills is required. It is not only scientific and technical skills that are important, but also commercial, administrative, marketing and general business skills. It is also important to have access to both codified, formal knowledge skills as well as less formal skills and tacit knowledge. In particular, a high level of creativity is required if firms in the cluster are to build an entrepreneurial culture.

Most firms rated the existence of skilled employees as crucial. However, most also rated Melbourne as ‘average’ in terms of the availability of technically qualified labour in ICT as well as the availability of skills for business (see Figure 1). Given the apparent high quality of the educational institutions in Melbourne, it is surprising that these firms did not rate Melbourne more highly as a place for sourcing qualified ICT personnel. Their responses may reflect the general shortage of such skills and the way the workforce is quickly absorbed by larger, well‐known companies, able to provide better work and pay conditions. Smaller firms, in contrast, while offering interesting and creative opportunities, provide more of a risk for longer‐term career prospects.

Assessment of general locational factors.

Although firms indicated that technically skilled employees and in‐house R&D were the main factors in their innovative capacity, they also drew attention to the need for complementary management, sales and marketing skills (see Table 2). Of the 48 firms, almost half indicated management as ‘valuable’, while the other half indicated it to be ‘crucial’. In the case of marketing, 27 firms reported it was ‘crucial’ while 14 firms reported it as ‘valuable’. This illustrates the demand for a band of skills that include, on the one hand, a supply of technical and specialised skills (including research), and, on the other hand, a supply of high‐level commercial skills.

Access to Local Financial Institutions

Another characteristic of a successful cluster is the easy access of firms to financial institutions. Being locally based ensures that financial institutions are familiar with the sector, with local management and marketing issues and with the range of constraints and opportunities available to firms in the region. This means that financial institutions can help to bring competency to firms.

In gaining access to capital, it is not only venture capital firms and private financial institutions that are important but also public authorities, public financial support mechanisms, and effective and reliable administration. Among the sample ICT firms in the present study, almost half indicated that they had used some form of public assistance. This assistance mainly comprised state and federal government assistance schemes and support for ICT and the use of the federal R&D tax concession scheme.

In terms of private financial institutions, the evidence suggests that more than half of the firms (27) had used funding from private financial institutions, mainly banks. In most cases these institutions were local. Far less use was made of venture capital firms. While half of the firms indicated that they had ‘minimal’ contact with venture capital firms, only six reported ‘frequent’ interaction with these firms. Although interaction with venture capital firms was low, it appears that firms in the ICT sector are now working more closely with them. This is reflected in the growing number of venture capital firms operating in the locality during the last few years.

In summary, the availability of capital was rated by the majority of the firms (34) as ‘average’ in their local area. Nine firms responded that the supply of capital was poor, while five firms indicated that the supply was good. There is room apparently for providing more funds and assistance for these firms to help them to grow. As noted, the Victorian government recognises the role of innovation in science, technology, and ICT. In fact, innovation has been a catalyst for the continued growth of the telecommunications industry in Victoria. As a result, the government has allocated $A310 million over five years to boost science, technology and innovation in Victoria.

Cooperation among Firms

One of the important and ideal characteristics of any regional cluster is close cooperation between local firms and a variety of other institutions. This allows firms to form a localised system that demands and establishes mutual trust between firms and institutions, as well as within firms. In some regional clusters, certain ‘meeting points’ exist that make the informal exchange of experiences and ideas possible. This has been emphasised as an important feature in the success of Silicon Valley.²² However, it also suggests, and this is discussed further below, the importance of lifestyle characteristics in emergent ‘knowledge‐hubs’.

When the Melbourne firms were asked if they exchanged ideas or experiences with other firms, a majority of them (32 firms) responded only ‘occasionally’ and only nine firms indicated ‘often’. Seven firms responded that they never exchanged ideas or experiences with other firms. It also emerged that in many cases these informal relations came about through meetings organised by professional bodies or associations. It was interesting to find that proximity did not seem to play an important role in encouraging informal relations. Only five firms responded that their informal interaction was a product of geographical proximity (see Figure 2). However, professional associations did appear to provide both a forum and a catalyst for informal interaction.

How do informal relations occur?

Nearly half of the sample firms reported that they had some form of formal agreements for collaboration with other firms. However, these ‘other firms’ were not necessarily local. Such agreements were distributed evenly across local areas, other parts of Australia and abroad. In short, while these firms had made a decision to locate their business in the Melbourne region, it was not in order to be close to other firms related to their business activities. However, the majority of the firms noted that having ‘friendly contact and interactions’ with local ICT firms could potentially be an important asset for their firm.

Networks for Acquiring Other Competencies

International evidence suggests that firms in a successful regional cluster will have contact with ‘knowledge milieus’ beyond their local region. In this way, firms can gain access to competencies (technological capability, know‐how) not available in their local region. With established external connections, firms are more able to gain assistance with technology development and innovation when need arises. This enables a regional cluster to become even further specialised.

In the case of the ICT firms in Melbourne, the evidence indicates that firms rely primarily on their own internal capability for developing new products or services. Most firms reported that the main source of information for innovation support was ‘within the firm’. This priority was followed by ‘information from clients’ (see Table 3). Other favoured sources of information included technology suppliers (purchasing equipment), hiring skilled employees and attending conferences. Most firms (35) had used consultants as a method for acquiring knowledge at some time over the past three years (Table 4). However, few firms reported contact with other national or local technology support agencies as a means of supporting their technology development. Only half of the firms in the sample reported contact with any technology support agency. While most firms reported relatively frequent contact with other firms in a different industry or in their own industry, these were mainly located in other parts of Australia.

Links with universities or government research institutes were also relatively weak. The majority of firms considered these institutions of minor importance as sources of information. Half of the firms indicated that they had only minimal contact with any training institutions whether located in the local area or at the national level. In this context it is important to bear in mind that the present sample was comprised entirely of SMEs. As noted earlier, there is a small number of quite large firms operating in the IT sector in Melbourne and it has been reported elsewhere that there are several formal collaborative arrangements between Melbourne universities and these firms.²³ The location of these larger firms in the region and their contribution to clustering of professional expertise through teaching, research and business activities provide an innovative milieu that can have positive indirect benefit for the smaller firms in the region. Similarly, there is also the indirect contribution that universities or research institutes can make toward a regional cluster. For example, these institutions contribute to the local employment of highly skilled professionals. Given that the firms in our sample had only minimal direct contact with universities, it is the universities' indirect contribution to human resources and the formation of a professional milieu that is likely to benefit these smaller firms.

Local Innovativeness

The last typical feature of a cluster that we explored concerned the level of firm innovativeness. We expected to find innovativeness not only in the development and production of new products and services, but also in the creation of new firms and organisational changes in existing firms. Such innovativeness underpins competitiveness in global markets in ICT and contributes to creative business cultures.

Among the ICT firms in Melbourne, almost all reported that they had developed new products or services during the past three years. This suggests that these firms are innovative in their field. It may be relevant that a quarter of these firms took over another business over the same period (see Table 4). Over a third of the firms had obtained rights and/or licences from other organisations. The sample as a whole was therefore both innovative in terms of developing products, but also relatively innovative in terms of organisational change. However, the evidence does not necessarily confirm any collective reliance of these firms on locally based institutions for achieving these levels of innovation.

While the data do suggest that there is considerable interaction along the supply chain within the local region, it is at national and global levels where customers, suppliers, universities and research institutes are most likely to influence their level of innovativeness. In other words, they appear to act both locally and globally.