Introduction

The United States is witnessing the "third wave" – the migration of value from the industrial economy to the information economy. The market capitalization of Microsoft ($160 billion) and Intel ($125 billion) exceed the combined market capitalization of the Big Three auto manufacturers ($120 billion). Entrepreneurial technology firms are creating billions of dollars of value, and hundreds of thousands of highly paid jobs. As the heartland of the Industrial economy, the Chicagoland Metropolitan region has traditionally relied on the agriculture, manufacturing, and financial service sectors for economic growth and development. However, Chicagoland's future economic growth will depend on its ability to attracting and retain technology firms to the region. Chicagoland is presented with a unique opportunity to reposition itself as an attractive investment destination for information economy firms. On the other hand, the region is faced with the threat of economic stagnation if it does not create a favorable investment environment for information economy firms, and entrepreneurs like Marc Andreesen of Netscape continue to leave Illinois for greener pastures.

The Chicago Metropolitan Council bears the responsibility of initiating the policy measures that will allow the Chicagoland region to compete and win in the Information economy. This thought piece is intended to guide the strategic thinking and decision making of the Chicago Metropolitan in addressing the challenge of positioning Chicagoland for the future.

How Regions Compete: The Concept of Economic Ecosystems

Before we can begin to define the approach that the Chicagoland region should take to positioning itself for the future, we need to reflect on a fundamental question – how do metropolitan regions compete in the information economy? What makes regions like Silicon Valley in California or the Research Triangle in North Carolina so attractive to entrepreneurial technology companies? Why do we see such high geographical concentrations of firms in a few regions? Research in regional competition proposes a powerful metaphor for explaining how regions evolve and compete in the information economy. This is the metaphor of an "economic ecosystem". Just as a biological ecosystem consists of symbiotic relationships among living organisms that grow and evolve over time, an economic ecosystem consists of a network of economic institutions that co-evolve to create a thriving community of information economy firms. The ecological perspective offers two powerful insights for public policy planners. First, it defines the essential ingredients needed to create a fertile landscape for the creation, growth, and evolution of information economy firms. Second, it emphasizes the fact that the whole is more than the sum of its parts. Not only do all the essential economic institutions need to exist to create a thriving economic ecosystem, the institutions need to interact and collaborate in a mutually reinforcing fashion, just like the various species in an ecosystem co-evolve in a biological ecosystem.

Economic ecosystems are not a new phenomenon – they exist in the industrial economy, in the form of firms that provide ancillary products and services to industrial giants. The automobile industry in the Midwest has its ecosystem, as does Toyota in Japan. But in the information economy, ecosystems are becoming broader, deeper, and more diverse. Unlike the vertically integrated firms of the industrial economy, information economy firms tend to be virtually integrated networks of a large number of highly specialized firms that perform very specific activities. As the number and the diversity of firms increases, there is a greater need for them to connect and co-locate in a small geographical region, in order to effectively coordinate their activities. In the information economy, economic value will be created by highly specialized "molecular" firms linked via a digital information infrastructure. Instead of independent firms operating in a vacuum, information economy firms will grow and evolve in economic ecosystems. Urban planners will have to think and act like gardeners. They will need to seed, feed, and weed economic ecosystems, and to compete against other ecosystems for investment capital and human resources.

Elements of an Economic Ecosystem

The elements of an economic ecosystem include:

• The availability of venture capital.
• Research universities with close ties to industry.
• A talented, educated workforce.
• Infrastructure to facilitate business environment (e.g., information technology infrastructure, transportation, business parks, government that works as a catalyst.)
• A cluster of information economy firms.
• Conducive physical environment and culture
• Perceived image as a technology center

While all of these elements must exist in order to foster a healthy economic ecosystem, it is the synergistic interaction among these elements that determines the vitality and success of the region. However, each economic ecosystem has a distinct personality, and distinct strengths and weaknesses that arise from its historical growth and evolution. The Metropolitan Council needs to define a personality and strategic position for the Chicagoland region that builds upon the traditional strengths of the region, and a position that is distinct from competing ecosystems. Towards this end, it is useful to benchmark some major competing economic ecosystems that have achieved varying degrees of success, and to understand their respective strengths and weaknesses.

Analysis of Competing Economic Ecosystems

Chicago competes against many high-tech regions to attract and foster the growth of technology enterprises. In attempting to understand the factors that determine the key characteristics that determine an economic ecosystem's success, we evaluated several major economic ecosystems that are positioning themselves as investment destinations for information economy firms. The ecosystems we benchmarked are:

• Silicon Valley, California.
• Research Triangle Park, Raleigh, North Carolina.
• Austin, Texas.
• Silicon Alley, New York.
• Route 128, Massachusetts.
• Cambridge, England

To provide a flavor for the elements and the interactions among elements in an economic ecosystem, we describe two of these ecosystems in detail – Silicon Valley and the Research Triangle Park. While the history of Silicon Valley is instructive in understanding a "classic" economic ecosystem, the emergence of the Research Triangle Park illustrates how a relative latecomer region can become a strong player in the technology arena. We follow this analysis with a summary of the strengths and weaknesses of all the economic ecosystems that we benchmarked.

Silicon Valley: The Santa Clara Valley in Northern California is by far the largest and most successful ecosystem in the information economy. In three decades, Silicon Valley has transformed itself into a dynamic self-reinforcing ecosystem through a combination of university research, military spending, and entrepreneurial risk-taking. From its early roots in the technology developments at Stanford University and the founding of Hewlett-Packard in 1937, Silicon Valley has evolved into an enormously successful agglomeration of technology enterprises, engineers, specialist consultants, venture capitalists, law firms, and suppliers.

Silicon Valley's success can be attributed to many factors. Stanford University and the University of California at Berkeley provided research and development, and a steady supply of engineering talent. Community colleges were responsive to the needs of local business through contracting with local companies to teach private courses for their employees and provided equipment and labs. Stanford also opened its classrooms to local companies through the Honors Cooperative Program, and encouraged engineers at electronics companies to enroll in graduate courses. By 1961, there were thirty-two companies participating in the program, with about 400 employees pursuing advanced degrees in science and engineering on a part-time basis. The university-industry collaboration led to the creation of an industrial park around Stanford, where companies such as GE, Eastman Kodak, Admiral Corporation, and HP settled. Another major contributor to Silicon Valley's success was the entrepreneurial spirit that hinges on constant communication and networking among creative individuals to develop and launch new technology businesses. The culture of the Valley is a culture of change - the peer pressures and social pressures support risk-taking, and there is little stigma in changing jobs or being laid off. The third major element of the Silicon Valley ecosystem was the emergence of a vibrant Venture Capital community that replaced the military as the leading source of financing for Silicon Valley start-ups by the early 1970's. Silicon Valley also became the home for an expanding network of specialist suppliers and service providers that facilitate the start-up process, including law firms that specialized in intellectual property, licensing, incorporation of start-ups and trade law. Rounding out the strengths of the Bay Area is a rich cultural environment in terms of arts, sports, restaurants, and hotels; and the pleasant climate and natural beauty of the surrounding region.

But Silicon Valley's success is becoming its worst enemy. With the unemployment rate as low as 3.7%, there is a tremendous shortage of skilled workers. In some areas like software programming, the shortfall exceeds 100%. The labor shortage in turn has resulted in an escalation of salaries, and increased workforce turnover. The economic prosperity of the region has also created a tremendous shortage of affordable housing. The median home price in the Valley is $320,000, and apartment occupancy rates in Santa Clara exceed 99%. The third major problem in the Valley is the lack of a good mass transit system, which has resulted in traffic congestion and long commutes. The increased cost of living and decreased quality of life threaten to reduce the attractiveness of Silicon Valley, and present an opportunity for lower-cost regions to capture new investment capital.

Research Triangle Park: The Research Triangle Park in Raleigh, North Carolina is a relative newcomer in the world of economic ecosystems, but it has achieved remarkable success in the short duration that it has been around. Just as Stanford and Berkeley incubated the ideas and research in Silicon Valley, three excellent universities (Duke University, University of North Carolina, and North Carolina State University) catalyzed the creation of the Research Triangle ecosystem. However, unlike the organic and serendipitous growth that characterized the early development of Silicon Valley, the Research Triangle Park, as its name suggests, was planned much more deliberately as a research park. Today, the Research Triangle Park is the largest research park in the world. It is spread over 6,900 acres, and is home to 133 organizations that employ 35,000 people. Another important difference is the fact that several large technology companies anchored the development of the research park, analogous to large department stores anchoring the development of a new mall. IBM, Northern Telecom, Ericsson, and the SAS Institute were some of these anchor firms. This was related to the fact that the state government played an active role in attracting these firms, and in providing the economic incentives to the firms to locate in the region.

The reliance on publicly funded universities and government incentives has its weaknesses. The public universities are faced with budgetary pressures, which has limited their ability to continue to fund research and development that fuels the growth of the Research Triangle Park ecosystem.

Benchmarking Competing Ecosystems

In our analysis of competing ecosystems, we have identified critical dimensions for competition among economic ecosystems, and we have subjectively rated each of the six ecosystems on these key dimensions. This analysis is a useful starting point for assessing the strengths and weaknesses of the Chicagoland area, and for identifying strategic positioning options for the region. The benchmarking analysis is summarized in Table 1. Detailed strengths and weaknesses of each ecosystem are presented in the Appendix.

Evaluation of Chicagoland as an Ecosystem Contender

In recent years, Chicagoland has begun to assert itself as an ecosystem in its own right – the "Silicon Prairie" that lies in between Silicon Valley on the West coast, and Silicon Alley on the East Coast. According to the Illinois Coalition, Illinois offers a " network of managerial talent, venture capital and angel investors, professional service providers, and science and technology resources supportive of technology entrepreneurship. The network of talent, money and technology that makes Silicon Valley a bastion for high tech growth is taking shape in Chicago and across Illinois." Some of the highlights of Chicagoland's achievements in the information economy are:

• One of every 14 persons in Illinois employed in the private sector in 1996 worked at a technology firm. Almost 20,000 new jobs were added by the technology sector in Illinois between 1989 and 1996. The technology sector accounted for $1.00 out of every $8.50 in private sector wages paid in Illinois in 1996.
• The region is home to technology giants like Motorola, Ameritech, General Instruments, Tellabs, and U.S. Robotics. Illinois ranks ninth nationwide in total R&D investment, with $6.7 billion in R&D spending in 1993.
• Venture capital investment in Illinois topped $595 mm in 1996. The majority of all Illinois firms receiving venture investment are technology companies.
• Illinois ranks fifth in the country in the number of scientific and engineering doctoral degrees awarded annually, with 1,142 in 1995. The region is home to several leading engineering institutions, including the University of Illinois at Urbana-Champagne, the Illinois Institute of Technology, the University of Illinois at Chicago, Purdue University, and Northwestern University.
• Illinois ranks third in the nation in the export of manufactured technology products.
• Northwestern University, Indiana University, and the University of Chicago have been selected as nodes for Internet 2, and Northwestern University in particular is acknowledged as an innovator in Information Technology deployment.

On the negative side, the infrastructure of supporting services, such as venture capital, legal firms specializing in technology firms, and suppliers of business services to technology firms is not as well-developed as in Silicon Valley. Another significant barrier is the conservative Midwest culture that militates against risk-taking and entrepreneurship. A third weakness is the lack of a well-developed venture capital community that focuses on seed and early-stage investments in Midwest firms. This forces startup firms in the Chicagoland region to look Westwards for financing. However, venture capitalists in California are reluctant to spread their early stage investments geographically, because these are relatively small investments that are expensive to manage. While Chicagoland boasts a successful incubator (the Northwestern Research Park), this incubator has been losing business to other incubators like Austin, Texas.

Recommendations for Strategic Positioning

While many of the ingredients for an economic ecosystem for the information economy exist in the Chicagoland region, these elements will not coalesce into a successful ecosystem without a clear sense of direction. To date, Chicagoland has not clearly articulated its strategic positioning, and the role that it intends to play in the information economy. In today's competitive age, it is not enough to say that Chicagoland wants to be a Mecca for high-tech investment. This is tantamount to trying to be something to everybody, and everything to nobody! Based on a careful assessment of its strengths and weaknesses relative to competing ecosystems, Chicagoland planners need to define what the region will be best at, and what types of technology companies it will try to attract. Clarity in strategic positioning is important in focusing the efforts of urban planners and policy makers as they position the Chicagoland region for the future.

Clearly, the availability of a highly-skilled and low cost (relative to Silicon Valley) workforce is from the fine engineering institutions is a key strength of the Chicagoland region. Drawing lessons from Silicon Valley and the Research Park, these institutions need to become the nuclei for the Chicagoland ecosystem. This will require a much tighter integration between industry and the local universities, something the region's universities have not been traditionally too good at. For instance, the relationship between Northwestern University Research Park and Northwestern University leaves much to be desired, and Northwestern's technology transfer program, the Basic Industrial Research Laboratory (BIRL), has been a dismal failure. The local government and the universities in the region need to work in concert to forge tighter links with industry.

The Chicagoland region can learn an important lesson from the "deliberate" planned approach to creating an ecosystem followed by the Research Triangle Park in North Carolina. The local and state governments played a proactive role in the creation of that ecosystem. Chicagoland cannot wait for its ecosystem to evolve organically, as it did in Silicon Valley. Times have changed, and there is fierce competition for the hearts, minds, and wallets of entrepreneurs. The government needs to jumpstart the process by developing world-class incubators centered around leading universities in the region, and focusing these incubators exclusively on information economy companies. These incubators need to be seeded by attracting a few large technology companies, by providing targeted tax incentives to these firms. These large firms will serve as magnets to attract smaller entrepreneurial firms, as well as suppliers of ancillary business services.

Besides determining what actions are needed to catalyze the development of the ecosystem, policy planners at the Metropolitan Council also need to clearly define the positioning strategy for the Chicagoland region, and the personality that the ecosystem will project to investors. Chicagoland needs to specialize on a few dimensions, to project a coherent image, and to differentiate itself from competing ecosystems. While the possible dimensions for specialization are numerous, a key dimension we recommend is the continuum of "content versus carriage". Carriage refers to the physical structure of the information superhighway – networks, software, and switching devices. Content is the information that actually flows over the system. Observers of the Digital Economy argue that companies that create carriage goods will ultimately find themselves in commodity businesses. Content and software-based businesses will exploit the future wealth in the digital economy. For instance, software companies like Microsoft and content companies like Amazon or E-Trade will be far more profitable than carriage companies like AT&T and hardware companies like Hewlett-Packard.

Software and content relies far more on human talent than hardware. This fact, coupled with the fact that abundant availability of skilled (and relatively cheap) technical manpower is the Midwest's key advantage over Silicon Valley, leads us to the recommendation that the Chicagoland region should position itself as the Mecca for Internet software and content companies. More specifically, the region can specialize in software and content companies that focus on Business-to-Business Electronic Commerce services. As the place where the founder of Netscape, the world's fastest growing software firm in history, went to school, Illinois has a legitimate claim to becoming a leader in the software and content arena.

Clearly, this thought paper only begins to scratch the surface of the strategic issues in positioning Chicagoland for the information economy. However, we hope that the concept of economic ecosystems, our analysis of competing ecosystems, and our initial recommendations for creating a vibrant ecosystem in the Chicagoland area will provide a "thought architecture" that can structure and guide further thinking on this subject.