Balancing Exploration and Exploitation in Small World Clean-Tech Clusters

Abstract

Clean technology clusters of firms around the world are learning how to scale up to meet institutional investor objectives, while at the same time creating and extracting value from new products and services. Learning and building out debt- and equity-financed value chains through international partnering is posited as key to achieving stable long-term returns and reduced risk. Our paper theorizes that this is facilitated through a balance of exploration and exploitation in small world clusters. The small world cluster diversifies the risk of alliance failure through multiple cohesive relationships. Alliances in the small world cluster are cohesive if there is a balance of exploration and exploitation in several factors including: 1) tacit knowledge sharing, 2) ambidextrous multi-scope partnerships, and 3) internationalization. Since clean technology is not a distinct asset class, investors need to be convinced of the small world cluster value concept through the identification of investable clusters on an efficient frontier. This paper develops a novel approach derived from portfolio theory to directly value a small world cluster before and after engaging with a new external partner. This approach considers direct ties as consequential to cluster stability, and represents a framework for incorporation of small world cluster structural factors into a robust valuation model.