True: We live in a highly globalized world and country/regional boundaries are not as severe. However, it is naïve to think that things are the same everywhere. In particular, technology, innovation and the jobs (and micro and macro economies) which technology/innovation gives rise to. In the last 2 years, I have spent very deliberate and active time in various geographies to understand the ecosystem of disruption and innovation.

Facts:

• India: Thousands of jobs are being created, but in certain areas. Funding is still an issue. Being an investor in India, trust me when I tell you, Bangalore and Mumbai are not the same as Silicon Valley and lack the vibrant growth ecosystem.
• Europe: This year, I was stunned to see the distress in the entrepreneurs in Italy, frustrated with not being able to innovate rapidly and their lack of funding stories. Berlin is slowly emerging to be a vibrant economy. The UK is perhaps standing apart from the others, but the UK also very much regionalized and not flat across.
• China: Hugely regionalized and lack of consistentency across China. While capital is available, the culture (ecosystem) of entrepreneur/investor/risk and reward is in its infancy.  The government bureaucracy is significant and is used as a shield to slow the pace and rate of innovation. Talent is huge and the journey is just starting but the energy is eruptive.
• Japan:  Historically a hugely innovative country but is now slowing down due to a very weak economy. Japan has a very poor ecosystem of innovation and culturally motivating or inspiring the Japanese culture to disrupt and innovate is very difficult. Change is harder to see in Japan.
• South America: In certain pockets, you have zones of innovation but these are not consistent, not connected and not yet globally visible. Energy is huge, though.
• Poland/Russia: Here, perhaps I see something very different. There is huge energy, a willingness to take risk and invest, fearlessness and resources. I am totally excited and blown away by the attitude of disruption and innovation in these countries as well as other countries in this region. Totally shouting out to these countries for nurturing a culture that is organically changing the landscape of possibilities and job creation.
• Detroit: An example of many cities in the US, where innovation has not (and may not) create game changing jobs. Are we okay with only a few cities in our country being centers of innovation? See review below.

To succeed: We need to have mini Silicon Valley’s in all the countries above (and in different cities in each country), else, we will always rely on Silicon Valley, and Silicon Valley CANNOT and SHOULD NOT serve the entire world (thought this may offend many of my VC friends!).  We need to spread innovation and job creating across regions, or else we are creating artificial zones of innovation power (i.e. San Francisco, NY , Boston), while the rest of the country and world is nowhere close. While Moretti’s focus is the US and mine [In my book, ProVoke] is global, we share many points in common around the characteristics of such zones of innovation and influence and the consequences of clustered economies.

These are a few of the geographies in the world which, while the potential is there, we are not yet seeing the organic explosion of technology driven jobs (meaning: Not part of a US or European company or native start-ups funded locally). Case in point: last week in Berlin at TechCrunch Disrupt, almost all the VC’s who got on the stage, with the exception of very few, were from the US, from Silicon Valley, talking about investing in Germany! Clearly, we need to make this a domestic organic effort.  Germany is a hugely innovative country, so why not take risk in innovation and create the landscape of the new jobs within that country?

Why is innovation so important?  Because unless we disrupt and innovate we will NOT create new jobs and opportunities to grow and be vibrant as an economy. We will die away!

While thinking through these thoughts, I came across Moretti’s book The New Geography of Jobs. There are many parallels in our thinking.  Below you will find a summary of the key points for my colleagues and blog readers. Let me know what you think!

Research by Enrico Moretti shows that geography matters more than ever in modern America. In his groundbreaking work The New Geography of Jobs (2012), Moretti reveals that our nation is undergoing a massive redistribution of jobs, wealth and population. Americans are sorting along educational lines, causing pronounced divides between cities in terms of schooling, labor productivity, and earnings. This redistribution disproportionately benefits centers of innovation, with the impact on everyone in these communities, including those outside of the innovation sector. We are witnessing what Moretti calls the “Great Divergence,” the rise of cities that have a strong innovation presence (“brain hubs”) and the decline of cities that aren’t innovating.

• By “innovation sector,” Moretti refers to all jobs that create new ideas, products and services (advanced tech, IT, life sciences, new materials, nanotech, robotics, etc.), in which the main production input is human capital (people and their ideas).

Innovation Drives Our Economic Growth

Even though the vast majority of Americans do not work in the innovation sector, our economic prosperity depends on innovation for two reasons. First, innovation drives productivity growth (due to technological progress) and consequently overall economic growth and the salaries of many Americans, whether they work in innovation or not. Second, innovation jobs have a large multiplier effect, increasing the employment and salaries of local service providers.

• For each new high tech job added in a city, 5 additional jobs are created outside the high tech field within the same city: 2 professional jobs and 3 nonprofessional jobs.
• This multiplier effect of innovation is 3 times higher than that of the manufacturing sector! (Creating 1 new manufacturing job leads only to 1.6 additional jobs outside manufacturing.)

High tech jobs have such a large multiplier effect because high tech workers are very well paid, with more disposable income to spend on local service providers (from hairdressers and waitresses to lawyers, therapists and teachers). Also, high tech company operations require substantial local business services.

• Thus, our economy is highly interconnected: what is good for one group (e.g. higher income) in job creation is also good for another group (lower income) in the same city.
• As a result of the multiplier effect, even though job losses are widespread, job gains are geographically concentrated. Some cities benefit while others lose jobs.

The Great Divergence: Innovation Clustering

With the “Great Divergence,” innovation is concentrating in a handful of US cities, resulting in huge differences between the most and least innovative areas. One key measure of innovation is the share of workers with a college degree. In Moretti’s ranking of major US cities by percentage of workers with a college degree, his findings are astounding:

• In large cities with the highest percentage of local workers with college degree, almost 50% the labor force is college educated.
• In cities at the bottom of the list, only 10% of workers have a college degree and there is little tech presence.
• The city with highest percentage of college educated workers (Stamford, CT) has 5 times the number of college graduates per capita as the city at the bottom (Merced, CA).

These staggering differences lead to large salary disparities between communities. Take San Jose, CA (#5 from the top) and Merced, CA (bottom of the list) which are less than 100 miles apart, but have completely different labor markets.

• San Jose has 4 times the number of college graduates per capita as Merced.
• The average salary of a college educated worker in San Jose is 40% higher than in Merced.
• The average salary of a worker without a college degree in San Jose (e.g. high school or less) is 130% higher than in Merced!
• Thus, brain hubs pay high average salaries to non-skilled workers as well skilled ones.

Most astounding of all, is that for salary, where you live matters more than your resume.

• High school graduates in the top group make MORE than college graduates in the bottom group!

Thus, the Great Divergence is leading to 3 Americas:

1) Brain hubs (with high salaries for both skilled and unskilled workers)

2) Declining cities (with low skill levels and labor markets)

3) Middle cities (which could go either way)

Clearly, where you live matters. It impacts all aspects of your life – even how long you live! But why does this geographical sorting occur in the first place? Why do innovative firms tend to cluster near each other in brain hubs, leading to higher salaries for both skilled and unskilled workers? Moretti finds three major reasons or “forces of attraction”. First, there are thicker labor markets in these hubs, allowing for better matching of demand (employers) and supply (workers) in innovation jobs. Second, there are more specialized service providers in these areas, including venture capital. Third and most important in my eyes as a disrupter and provocateur, clustering leads to knowledge spillovers. When creative workers interact socially, they benefit from more learning opportunities. This leads to greater innovation and productivity, and in turn higher earnings. In other words:

• Being around smart people makes us smarter, more creative, and more productive in the long run.

Implications: Turning Declining Cities into Brain Hubs and Keeping Current Hubs Cutting-Edge

According to Moretti, the key way to create jobs for less skilled workers is to attract high tech companies that hire high skilled workers. So what can we do to help declining cities grow their innovation sector? This is a major challenge with no easy solution.

• Ultimately, it is very difficult for cities without an innovation cluster to start one. These cities are crippled by limited human capital, dead end jobs, and low wages.
• The tough reality is that the power of local governments to revitalize these communities is a lot less than the power of historical factors, path dependency and strong forces of attraction. These latter factors make it very hard for a city without an existing well-educated labor force and established innovation sector to improve.
• In order to be successful, a publicly financed push must lead to a privately sustained cluster.

Here is the irony: our clusters actually give us a global competitive edge (for now), even though they’re leading to divergence. Our brain hubs are part of the reason why the US is so innovative and profitable. But we cannot slip into complacency.

• History shows us that not all hubs are equally able to adapt to change (take Detroit or Rochester, NY).
• Clusters must be able to adapt and reinvent themselves to maintain their prosperity in the long run.