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Innovation
Smart world
by Edward Russell-Walling

Wealthy Middle Eastern backers are behind SmartCity Malta—a high-tech hub for digital and media companies. But is big money enough to create a successful cluster and which sectors are best placed to take advantage of a growing business trend?

You only have to look at Silicon Valley and the City of London to know that geographical clustering can work wonders for same-sector companies. But whether a successful cluster can be deliberately conjured out of nothing has yet to be proved with any certainty. Like others before it, SmartCity Malta intends to give it a try. Contractors have been appointed for the first phase of a $300m (£206m) development to turn Malta's well-worn Ricasoli industrial estate into a "state-of-the-art ICT [information and communications technology] and media business community".

Its backers have identified a trend they call "globalisation in reverse", with successful emerging-market firms now expanding into the west. So they are promoting SmartCity Malta as a gateway to Europe, the European Union and North Africa. They are also billing it as an industry cluster. Malta owns nine per cent of the joint venture. But the real power behind it is Dubai, in the shape of state-owned Dubai Holding and its subsidiaries, cluster specialist Tecom Investments and property developer Sama Dubai. Back on home ground, Tecom has fostered several aspiring industry clusters, starting with Dubai Internet City in 2000. That was followed by Dubai Media City and, aimed at the education sector, Dubai Knowledge Village.

Now Dubai is rolling out the brand, both in Malta and at SmartCity Kochi in India. "We are taking the successful model of Dubai Media City and making it international," says SmartCity chief executive Fareed Abdulrahman. "Not every industry can become a cluster. For the knowledge economy, it is much simpler than for other industries."

That's debatable. Some of the most impressive clusters have evolved in relatively simple manufacturing industries—sofas and woollen textiles in Italy, wooden furniture in Denmark's Jutland, forestry products in Finland. The town of Belluno in Italy's Veneto region has become the world centre for the production of spectacle frames.

Of course, science parks and other forms of techno-cluster have enjoyed varying degrees of success in recent years. But economists have talked about "agglomeration" economies of scale and scope since the late 19th century. In the 1990s, management guru Michael Porter seized on clusters to extend his ideas on competitive advantage. He maintains that they can increase the productivity of the companies involved, drive innovation and stimulate the creation of new businesses.

Part of the benefit is simply that proximity saves time and money, minimising transaction and transport costs. But it also involves the exchange of ideas. Dr Andy Pratt, director of the Centre for Urban Research at the London School of Economics (LSE), thinks there is more evidence of agglomeration benefits in older sectors, but admits they can also apply to digital industries. "[For them,] the agglomeration impact is about subtle and fuzzy knowledge exchange and proximity to markets, to arc innovation and product development," he explains. "It's about people hanging about and doing some serious exchange of industry-specific time and relevant product/market information."

So what does it take to get a cluster going? "The key is a 'leader' company, one that establishes the commercial relationship with the market that all the others can then exploit," says Gianvito Lanzolla, senior lecturer in strategy at the Cass Business School. "Historically, clusters have emerged spontaneously, such as Vicenza's mechatronics cluster. Some are trying to build clusters artificially. Some work, some don't. But you can't build a cluster without a legacy—such as a university or a competence."

SmartCity Malta doesn't have that, though the government hopes to lure back émigré skilled Maltese citizens. In a novel twist, the project is promoting the island as a good location for international IT training centres. SmartCity's Abdulrahman says it is on the verge of announcing the name of a major anchor tenant. "That's the most important factor in a planned cluster," he agrees.

Beyond its general low-tax regime, Valletta is not offering specific tax breaks to anyone who takes space in SmartCity Malta. Most agree that building a cluster on such  foundations would be misguided. So the identity of the "big tenant" will be interesting. "It's not a case of build it and they will come," says Feargal O'Rourke, head of the technology, telecoms, entertainment and media practice at PricewaterhouseCoopers (PwC). "You have to build it, get good government support, bring in key tenants. And you'll probably have to overpay for the first one or two key players."

Government vision and strategy allowed Ireland to create a highly successful financial services cluster, says O'Rourke. But the country failed when it attempted to do the same with the film industry, because it never attracted a major tenant such as a Disney or a Fox.

Rather than trying to create clusters by decree, governments would do better to create the conditions in which they can flourish, argues Athar Osama, a new ventures specialist with technology management consultants Angle. That means concentrating resources on clusters where some form of regional competitive advantage already exists. This is especially important for developing countries, where investment in one sector is invariably at the cost of another. Osama points to Malaysia's Cyberjaya, Qatar's Education City and Panama's City of Knowledge as examples of less-than-successful planned clusters. Techno-economic hubs, says Osama, thrive almost by serendipity. "Planned ones rarely work-developing slowly, fading quickly or seriously failing to reach their objectives," he adds.

The LSE's Pratt agrees, saying that building a "science park" for the cultural and media industries is not the way to do it. "They need to be close to 'market', as they feed on subtle market signals," he says. "In areas such as media, the industry has a winner-takes-all structure—getting to market second will wipe out 95 per cent of profit." The benefits of "being there" for these industries work best in diverse or cosmopolitan places where there is a lot of "noise", he adds. "The skilled operator is able to selectively filter it and use it, but the background noise is vital. It's not so different to financial markets, but it's a lot different to metal-bashing."

Pratt concludes that planned media clusters might work, but not as they are built at present. "Better to look to places such as Soho or Brick Lane [in London] to get an insight into successful innovative clusters," he asserts. "I'd not put much money on a real success in one of these artificial hubs, unless it was about place branding."

Some academics distinguish between not two but three types of cluster—spontaneous, planned and real-estate driven. The Dubai model—and hence the Malta project—falls into the last category. Dubai has attracted many tenants and spun off specialised niches for media production and studios, which have proved popular.

But one professional who has worked there observes that, while Dubai Media City has several major industry tenants, their presence in terms of business activity is actually small. To succeed as a property development is not necessarily to triumph as a cluster.

That's the decisive test SmartCity Malta will ultimately need to pass if it wants to lay claim to the business cluster laurel. As PwC's O'Rourke puts it: "Is your cluster a vibrant standalone generator of new ideas and products? Or is it just a cluster of operations?"