Tuesday, March 17, 2015

Cluster Competition

Guest Blogger

Camilla Hrdy

For the Innovation Law Beyond IP 2 conference, March 28-29 at Yale Law School

Governments across the globe have increasingly made it a core feature of their economic development policies to foster the growth of “innovation clusters” in their jurisdictions: regional economies made up of innovative firms, talent, and supporting institutions, which are thought to benefit from proximity to one another. The concept is elusive, and is often accompanied with references to examples of successful clusters, ranging from biotech in Boston, to information technology in Silicon Valley, to marine technologies in eastern North Carolina.

Now the U.S. federal government is getting involved. The most prominent example of the expanded federal role in growing clusters is the regional innovation program (RIP) created in the America Competes Act (2010) in order to encourage and support the development of “regional innovation strategies.” Administered by the Economic Development Administration (EDA) in coordination with agencies like the Department of Energy (DOE), the RIP’s flagship initiative is a multi-agency grant competition through which states, regional governments, and other stakeholders compete for federal grants and matching funds to design and implement strategies for growing innovation clusters or science and research parks. The largest cluster grant to date has gone to the Greater Philadelphia area, which received over $150 million in federal and matched funds to build an Efficient Energy Buildings hub focusing on developing ways to make buildings more energy-efficient.

The U.S. government’s decision to fund a national cluster competition is curious in light of the fact that there is already an intense competition to grow innovation clusters in the United States at the regional level. For decades, states, cities, and other subdivisions of states have put significant resources into programs to build innovation clusters, from spending on infrastructure, to investments in higher education and university research, to tax breaks, subsidies, and public venture capital for firms seeking to conduct or commercialize cutting-edge research.

Applying basic tropes of federalism, I argue the national cluster competition codified in the America Competes Act is an attempt by the federal government to reduce the costs associated with regional cluster competition, and to improve national outcomes in growing clusters. As in other areas of law where federal intervention is thought to be justified, such as environmental regulation, there are a variety of problems that might warrant federal intervention in the competition to grow clusters.

First, like air pollution, innovation clusters implicate significant externalities—though here the externalities are positive, rather than negative. Simply put, other regions can copy the innovations produced in a cluster or the results of cluster policy experiments funded by taxpayers in other states. This leads to two counter-intuitive results that are familiar to intellectual property law scholars. Regional governments may under-invest in innovating, or they may innovate but then adopt a policy of secrecy. Both results can be problematic from the perspective of national innovation policy, since no one would have access to information that is never generated, and other regions in the U.S. would not have access to information that is kept secret.

Second, despite the potential for national benefits, cluster competition also requires competing for scarce resources, such as top-ranked firms, major IP holders, star scientists, and limited amounts of investment capital. Although some believe that robust inter-jurisdictional competition leads to more efficient allocation of residents and resources across the country, it can also result in practices that are harmful from the national perspective, including wasteful spending on capturing the localized benefits of innovation and severe regional inequality.  

In theory, by subsidizing selected regional efforts at promoting innovation clusters, and by choosing winners early in the process and requiring collection and dissemination of information produced with public money, the federal government can resolve many of the problems associated with regional cluster competition, but without eliminating the benefits of decentralization, local knowledge, and competition discussed in the federalism literature. This is not unlike the way the federal government uses a patent system to “manage” innovation in the private sector by granting exclusive rights to first-to-file inventors in exchange for disclosure of any new information required to practice their inventions in future.

However, rather than using exclusive rights, the government has chosen a different means: a competitive grant competition funded by taxpayers. Just as IP law and theory can provide useful insights into how the government should approach the task of managing regional cluster competition, the government’s evolving experiment in managing cluster competition using regional awards can provide useful insights for IP law and theory.

Camilla Hrdy is the Penn Law Center for Technology, Innovation & Competition Fellow, and a Visiting Fellow at the Information Society Project. She can be reached at cahrdy at


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