Saturday, April 20, 2013

More Evidence Of Innovation Economy Decline

The world is getting flatter. The Creative Class economy is dying. As agriculture and manufacturing before it, innovation is converging. In general, that's good news for most places. It's bad news for the winners of the last round of agglomeration. Case study number one, Brazil:

THE world is littered with would-be Silicon Valleys with catchy monikers, from Chilecon Valley (Santiago) to Silicon Wadi (Tel Aviv). Now Belo Horizonte, Brazil’s third-biggest city, wants to join the list. Dubbed “San Pedro Valley” in 2011 by a group of start-ups that formed a chance cluster in its São Pedro district, it is now home to nearly 50 young tech firms. (They switched the Portuguese “São” to the Spanish “San” for a cosmopolitan touch.)

The group now holds regular meetings and hack days, and two years ago set up a national association of start-ups. Gustavo Caetano, its president, acts as a mentor to many of San Pedro’s budding entrepreneurs—and an inspiration. His firm, Samba Tech, set up in Belo Horizonte in 2004, now has offices in São Paulo, Buenos Aires and Miami, and sells its online-video platform across Latin America.

That Belo Horizonte could pip bigger and richer São Paulo and Rio de Janeiro to the title of Brazil’s Silicon Valley may seem a stretch. But a big new middle class, fast-changing tastes and Brazilians’ voracious appetite for social media provide plenty of opportunities to challenge incumbents. Facebook overtook a local social-media site, Orkut, in Brazil in late 2011. It is now four times as popular. Only America has more tweeters than Brazil. A recent survey by Rakuten, a Japanese e-commerce firm, found that Brazilians are some of the world’s keenest “social shoppers”, swapping product tips with their friends and other online contacts.

By Brazilian standards Belo Horizonte boasts a well-educated workforce. Four of the universities ranked in the top ten nationally by the education ministry are in Minas Gerais, the state of which it is the capital. A lower cost of living helps—which is why Mr Caetano moved back from Rio to set up his firm. He stayed for a laid-back lifestyle he describes as “West Coast with added cowboy”. San Pedro firms that make it will need a sales team in São Paulo one day, he counsels, but their developers need not move.

Yuri Gitahy of Aceleradora, a “business accelerator” (ie, a firm which helps start-ups keep growing), prefers to work with entrepreneurs with experience in big companies, which usually means a spell in São Paulo. If San Pedro Valley takes off, he thinks, more of these will come home to found their firms. The state government plans to tempt them by offering up to 150 start-ups a year around 60,000 reais ($30,000) each, plus mentoring and shared working space.

Convergence of the Innovation Economy is good news for Belo Horizonte  It is bad news for São Paulo and Rio de Janeiro. Urban hierarchies aside, more places are competing for world class talent. I see talent production clusters such as San Pedro Valley having a competitive advantage in the diverging Talent Economy. Skate to where the puck is heading.

Next up, India:, a fledgling ecommerce website, appears to be the classic Silicon Valley start-up – it has a business model that combines fashion, media and technology, it targets western consumers, and it has a small team of engineers developing proprietary technology. Except that Styloot’s engineers and fashion analysts are not based in California, but in an apartment in Pune, an Indian city with an increasingly global outlook.

“We chose Pune because the cost of living is low, and the quality of life is high,” says Samir Patil, one of Styloot’s co-founders, pointing to the tree-lined, residential street in Model Colony, in the heart of the city, where the company is located. “Mumbai was unviable because the costs of living for the developers would have been too high and we wouldn’t have found the technology talent. And had we been in the US, we would not have been able to create this depth of technology with seed funding.” ...

... Located 150km to the southeast of Mumbai, India’s financial capital, Pune was historically known as the “Oxford of the east” for its many engineering colleges. Its intellectual leanings are accentuated by a strong cultural tradition, especially in music, literature and theatre. A pleasant climate and proximity to Mumbai also make it a convenient location for a second home for many investors from other parts of the state of Maharashtra.

See the pattern? Innovation is seeking talent production centers that offer lower costs than alpha global cities. The rent is too damn high. Talent is too damn dear. A firm doesn't have to be in Mumbai in order to have a global impact.

However, not all companies are so forward thinking. Going old school:

We chose a city, Pittsburgh, to build the new organization. We advertised the role and conducted job interviews. But, I don’t think we are going to open an office in Pittsburgh. ...

... I spend a great deal of time on talent development at H.Bloom: interviewing, hiring and training our folks. And yet, here I was in Pittsburgh, interviewing people for a position that didn’t have a growth path. Our data analysis had uncovered an extraordinary close rate by our sales people when they have an in-person meeting, and it highlighted the fact that the activities employed to generate those in-person meetings were performed remotely. But the data did not take into consideration one of our three founding principles (drawn from John Quincy Adams’ quote): “Create an environment in which team members can dream more, learn more, do more and become more.”

How could we combine these two important goals: create more activities with a dedicated lead-generation force while also continuing to provide an environment in which people can learn and take on more responsibility?

It would be difficult in Pittsburgh. While the remote location would provide a dedicated work force and a lower cost of operations, it would not have the additional resources that exist in our headquarters, including access to the management team and current account executives. And it would not have the ability to see our operations in-person on a daily basis. The absence of these things would be fine if the new office were exclusively a lead-generation center. However, if it were to reflect the H.Bloom ethos of talent development, its remote location would be a real impediment.

To me, the decision to bail on Pittsburgh is smokestack chasing in a world shifting to knowledge production. In the Richard Florida universe (Innovation Economy diverging), Pittsburgh produces talent that is refined in New York. If I'm right about the Innovation Economy converging (see Brazil and India examples above), Pittsburgh is Belo Horizonte or Pune. These are the places where the Talent Economy is diverging. Pittsburgh's remote location is an asset (rent and talent aren't too expensive) instead of a liability (poor talent development).

H.Bloom is stuck in the mesofactual past. Companies that know how to develop talent in the places where it is produced will have a huge edge. These days, every community has a talent attraction/retention strategy. Few, if any, have a talent export strategy.

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