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Spatial alchemy:Why proximity matters for innovation

A BRIEFING PAPER FROM THE ECONOMIST INTELLIGENCE UNIT

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ABOUT THIS REPORT

© The Economist Intelligence Unit Limited 2016 Page 2

Spatial alchemy is an Economist Intelligence Unit report commissioned by Dubai Tourism. It examines the relationship between physical proximity, geography and innovation. The report is based on desk research and expert interviews. The Economist Intelligence Unit wishes to thank Jung Won Sonn, assistant professor of urban economic development at University College London, and Rune Dahl Fitjar, professor of innovation studies at the University of Stavanger Business School in Norway. The author was Denis McCauley. The editor was Adam Green.

Spatial alchemy: Why proximity matters for innovation

Key findings

Digital technology once promised 'the death of distance', allowing workers to collaborate from anywhere. But research shows that physical proximity can, in some contexts, promote higher rates of innovation. Co-working spaces, casual 'water-cooler conversations' and the sharing of 'tacit' knowledge are among the reasons, especially in Western markets across Europe and USA. In sharp contrast, Asian contexts - specifically China and South Korea - indicate the importance of international networks and digital interaction as catalysing innovation more than geographic proximity.

At its best, innovation needs both physical and digital - yet personal - interactions, augmented by communications tools with the outside world. The latter can help companies to access rare talent, protects against ‘groupthink’, and recreates ‘happenstance’ idea exchange within an office or lab, through forums and e-brainstorming tools.

Distance: A rebirth?In 1997 Frances Cairncross, a senior editor at The Economist, said the internet and wireless communications were making geographical distance irrelevant to how people conduct their lives. Her coverage was sweeping, covering individuals, government and business. When it came to innovation the message was clear: the march of digital communications meant that the obstacles posed by distance were becoming less relevant to how people and organisations work together, collaborate and share ideas.

1. Frances Cairncross, The Death of Distance: How the Communications Revolution is Changing Our Lives, 1997 (updated in 2001).

Spatial alchemy: Why proximity matters for innovation

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2. For the US, see Global Workplace Analytics. For the UK, see flexibility.co.uk.

And yet, the story is turning out to be more complex than the digital evangelists once predicted. Some businesses are lamenting the unexpected negative impact of teleworking on team cohesion, interpersonal bonding and creativity. The most prominent example was Yahoo management’s 2013 diktat requiring employees to work from the office. Others have followed suit, such as US electronics retailer Best Buy and online company Reddit. Google designed their new California headquarters and offices to make the workplace more engaging and interactive; a 'home away from home'. Its facilities are so comprehensive than one staffer, deterred by San Francisco rents, lived in a truck in the Google car park.

The trend toward ‘teleworking’ gained momentum around the same time. Advancements in mobile technology and faster digital network infrastructure meant that the actual location of people was no longer a deterrent to productivity and accessibility. Employees could work from anywhere – home, on the road, and any part of the globe. Smarter collaboration tools allowed teams to engage and interact very efficiently across geographies and time zones – sharing ideas over the ecosystem enabled by the internet. Human engagement and the networks for community interaction would remain fundamental to innovation and idea generation, yet with the ballooning of the digital environment, the world was suddenly a lot smaller and closer for the benefit of all.

Since then, the acceleration of digital technologies has made collaboration-at-a-distance easier – and more cost-efficient – than ever. For the latter, think Skype and cloud-based applications such as Google Docs, iCloud and Dropbox. Teleworking is now widespread in the US and parts of Europe. 2


While ICT might make distance irrelevant in theory, in practice proximity seems to exert positive effects on innovation rates. But why does ’spatial closeness’ appear integral to innovation?

Research is increasingly showing how important geographical co-location is to innovation. Physical closeness is part of a formula that enables creativity and co-creation through the clustering of talent and ideas.

According to Jung Won Sonn, assistant professor of urban economic development at University College London, communications technology has a paradoxical effect. Information and data today has become widely accessible, but the same is not true of ‘economically useful’ knowledge – the type most relevant for innovation purposes. The paradox, says Mr Sonn, is that because communication has become mass, ‘non-communicable’ aspects of knowledge have become even more important.

Inventors and researchers, Mr Sonn explains, are often unable (or unwilling) to document everything behind their research and make it available on the internet. But they do talk about it with their colleagues. “To be at the cutting edge of technology,” says Mr Sonn, “you need to talk to people on a regular basis.” The transmission of tacit knowledge – implicitly understood but difficult to articulate – and the development of the personal trust required for true collaboration “are easier when formal and informal settings are combined, and especially when you are in the same place,” he believes.

In 2003, Mr Sonn and Michael Storper reviewed innovation in the US, using patent citations as a proxy for ‘knowledge spill-over’ – the exchange of ideas among individuals, which is considered critical for innovation. Their finding: “Inventors increasingly use domestic knowledge more than foreign knowledge, in-state knowledge more than out-of-state knowledge and knowledge from the same metropolitan area more than knowledge from outside…Proximity in the creation of economically-useful knowledge appears to be becoming even more important than was previ-ously the case” .

Interestingly, the connection between physical proximity and innovation is weaker in China and South Korea, where Mr Sonn has conducted similar research. In both countries, international networks appeared to be more important for innovation than the geographic co-location of innovators. He believes that communication between researchers within each country matters less than communication between researchers across the world, particularly in the US and Europe, where the quality of research (and patents) is higher.

Two insights emerge from this. Firstly, the innovation process is not globally homegenous: success factors in some countries are different from what one may find in others. Secondly, proximity is most valuable when it places individuals and organisations close to other cutting-edge sources of innovation.

3. See the first paper in this series, Innovation Clusters: A Life Cycle Theory. See destinationinnovation.economist.com4. Jung Won Sonn and Michael Storper, The Increasing Importance of Geographical Proximity in Technological Innovation: An Analysis of U.S. Patent Citations, 1975-1997, December 2003

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Cosmopolitan curiosityGeographic proximity may be part of what drives technology clusters and innovative companies. But it may not be important in all contexts. Rune Dahl Fitjar, professor of innovation studies at the University of Stavanger Business School in Norway, believes proximity can have a negative impact on innovation in some cases. Collaboration within similar minded communities, he finds, can result in ‘group-thinking’ which stifles innovation.

Mr Fitjar and a colleague studied innovation in Norway, focusing on collaboration of firms within the country’s regions, and between these and other regions further afield – in Norway, other parts of Europe and overseas. They found that Norwegian firms that collaborate internationally are more innovative than those that limit their collaboration to regional partners. Intra-regional collaboration, the study finds, does not seem to benefit innovation much.

Such findings, as Mr Fitjar acknowledges, run counter to the accepted wisdom around clusters - that they are the only possible way to transmit the tacit knowledge necessary for innovation. For him, one of the defining attributes of successful innovators is openness to outside ideas, including from overseas.

“Successful clusters display ‘openness’ to the world and an ability to attract talent from around the world,” explains Mr Fitjar. “They’re not just situated densely together with other firms, but they’re situated in places that have a multicultural atmosphere and also close links with the rest of the world, thanks to their world-class universities and communications networks. These help such clusters link to sources of knowledge elsewhere.”

In Norway, the combination of ICT and the higher levels of education typical of managers of Norwegian firms - by increasing their openness to the outside world - have been instrumental in helping them become better innovators.

The importance of international links does not, believes Mr Fitjar, negate the importance of personal relationships and meetings. “Skype and other online collaboration tools are commonly used to facilitate collaborative innovation across borders,” he says, “but we find that they are not more important for international collaboration than for the local variety. Personal meetings are just as important for the former as for the latter in building trust. They may be even more important, given they’re likely to occur less frequently.”

5. Rune Dahl Fitjar and Andres Rodriguez-Pose, “The geographical dimension of innovation collaboration: Networking and innovation in Norway,” Urban Studies 2014, vol 51(12), 2572–2595.

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6. “7 Lessons Lego Can Teach You About Enterprise Collaboration,” Social Business News, May 11, 2012; “How GE Plans to Act Like a Startup andCrowdsource Breakthrough Ideas,” Wired, November 4, 2014.7. See, for example, Steven Cherry, “Telecommuting, Serendipity, and Innovation: Does proximity spur collaboration? A new study finds it does,” IEEE Spectrum, 1 July 2013.

Water cooler conversationsThe history of innovation and scientific discovery is full of fortune – and chance interactions between people seem to be essential. Claude Lorius, the French scientist who was at the fore-front of discovering climate change, had his breakthrough insight when at a party, watching the air bubbles emerging from ice cubes in the beverages of his colleagues. This led him to the real-isation that he could work out information about the earth's atmosphere in previous centuries by studying air bubbles trapped in age-old ice, deep underground.

Unexpected discoveries continually happen when colleagues strike up conversations around the water cooler, in conference rooms, kitchens, or corridors. While such accidents cannot be engineered, companies like Google and Pixar (under the architectural guidance of the late Steve Jobs) have tried to maximise random occurrences through clever spatial design of their office environments.

Experts acknowledge, however, that while physical proximity is integral to coincidental meetings, little is understood about what takes ideas through the development stages to innovation. Individuals or teams remotely located still have a role to play in the later stages of the innovation process. Some researchers believe that ICT can improve the likelihood of chance discoveries leading to an innovative end product. There may, for example, be a role for


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How ICT overcomes distance

Open-source: The Linux operating system and Mozilla’s Firefox browser, to name just two, were created – and improved – by thousands of developers around the world. Online platforms enable similar models of product creation and improvement far beyond the IT industry. The toymaker Lego and industrial engineering firm GE are two of many examples.

Space research: The European Space Agency operates an online collaboration tool – the Concurrent Design Facility – that enables a dozen or more engineers from among its 22 member states to work on the same projects together. NASA, its US counterpart, hosts an online innovation community which taps software and other expertise from outside the aerospace industry. Contributors hail from far and wide.

Medical research: Collaborative drug innovation is generally a difficult accomplishment in the pharmaceuti-cal industry. It is more common when public-sector research institutes are involved. A recent example is a cancer-screening technology used by the London-based Institute of Cancer Research, a private UK firm, Cancer Research Technology and Denmark-based drug discovery company Nuevolution to assist in the devel-opment of anti-cancer drugs.

Despite the predictions of the past, the stampede of digital technology has not made geograph-ical distance irrelevant. There is something about direct contact – whether frequent or constant, in the case of an office, exhibitions or clusters - that better enables personal connections to be established and ideas to bubble up. As good as today’s videoconferencing and collaboration technologies are, they have not been as effective yet, in replicating this ‘spatial alchemy’.

Equally though, do not discount the power of technology. Online innovation platforms prove that where face-to-face interaction is not achievable, technology can enable several thousand ideas to germinate. Similarly, when teams co-operate to innovate, the long distance collaboration made possible by ICT offers a strong complement to the ‘idea germination’ that takes place within the confines of a conference room. Thanks to technology, organisations can view proximity and distance as allies rather than opponents in their endeavour to enhance innovation. But in the end, human beings are at their best when they are together.

8. Tom Coughlan, “Enhancing Innovation through Virtual Proximity,” Technology Innovation Management Review, February 2014.

‘virtual proximity’ – as observed in social media environments – to augment physical proximity and increase innovation.

The return of distance

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Economist Intelligence UnitThe Economist Intelligence Unit (EIU) is the world’s leading resource for economic and businessresearch, forecasting, and analysis. It provides accurate and impartial intelligence to companies, government agencies, financial institutions and academic organizations around the globe, inspiring business leaders to act with confidence since 1946.

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Spatial Alchemy: Why Proximity Matters for Innovationdestinationinnovation.economist.com/wp-content/uploads/sites/3/... · Spatial alchemy: Why proximity matters for innovation. Key