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Location Matters in Innovation and New Product Development

By Wisconsin School of Business

February 26, 2015

New research suggests some types of locations promote innovation while others enable speed to market

In trying to promote economic development, businesses and government policy-makers have sought to spur innovation. One tool for doing that has been the creation of regional business clusters, like Silicon Valley or Detroit, where firms are interconnected in a common industry. But some clusters have been more successful than others and, in some cases, new clusters have failed entirely.

Jan Heide, professor of marketing at the University of Wisconsin-Madison’s Wisconsin School of Business, has examined how regional clusters support innovation through new product development. Together with Paul Tracey of the University of Cambridge and Simon J. Bell of the University of Melbourne, Heide and his team have identified two specific types of clusters, each fostering a different type of relationship between firms, and each influencing new product development in different ways.

“When clusters work well, they are a phenomenal engine for new product development,” said Heide. “Our findings suggest that location matters for a company because it may support or constrain new product decisions. We believe that a firm’s new product objectives must be considered against the backdrop of location options.”

This new model of cluster configuration proposes two basic types of clusters:

  • Densely connected clusters, where individual firms have many relationships with their peers and competitors in the region. Silicon Valley, with its close-knit community of tech startups, established companies, and investors, is an example of this type of cluster.
  • Centralized clusters, where a few large companies have a disproportionate number of relationships with suppliers, distributors, and associated firms that depend on their business. This results in a hub-and-spoke network, such as in Detroit, where the big three automakers work with a constellation of much smaller companies that support the industry.

In densely connected clusters, firms have a great deal of exposure to the practices of their peers. Values and attitudes at firms throughout the cluster tend to converge, establishing informal norms of behavior. In these environments, strong, trust-based relationships allow firms to share information and take risks. As a result, densely connected clusters support the development and commercialization of truly novel products.

In centralized clusters, large companies use their dominant position to unilaterally establish formal contracts and agreements with their smaller partners. Relationships are governed by explicit rules and contracts, with project requirements being agreed upon in advance. As a result, goals are aligned and decisions are more easily made, helping firms in centralized clusters bring new products to market more quickly.

“Companies focused on generating a steady stream of novel products should favor dense clusters, while those for which speed to market is paramount should favor centralized clusters,” said Heide. “Our model offers new insights and a new portfolio of decision variables for businesses to consider that go beyond the usual considerations of advertising, packaging, and pricing.”