The university has played a crucial role in expanding Cambridge's high-tech cluster. But, says Bill Wicksteed, the government has not risen to the challenge.

Images of wealthy zillionaires from Silicon Valley litter the pages of the press, but what exactly is the "new economy" that everyone is talking about and how important is knowledge to the creation of wealth? Discussions about it either conjure up images of a brave new economic dawn or, less frequently, stoke fears about how all this technology will affect people and places. But one thing is certain: most are purely speculative.

A detailed look at the Cambridge area in the United Kingdom and its recent development might, however, shed some light. The region may not be typical, but it might prove a useful example for other parts of the UK because of its job creation record. As development consultants, Segal Quince Wicksteed has explored the changing face of Cambridge since 1984. In absolute terms, the number of people employed in high-tech firms - between 33,000 and 35,000 - is probably the same as in most large cities. But the steady increase of 10 per cent a year over 14 years is significant, and the proportion of scientists, engineers and technologists in the local labour market is exceptionally high. What has brought this about, and what can others learn from its success?

The university has played and continues to play a crucial role. Traditionally, its liberal attitude to the exploitation of intellectual property has given individuals a fairly free rein to exploit their inventions. This is still the case, although funders' increased determination to share in any intellectual property has lessened their room for manoeuvre. Nonetheless, new companies with an academic founder remain an important feature of the Cambridge scene and appear to perform relatively strongly. In addition, the university's encouragement of embedded laboratories, which bring together leading researchers from industry and university departments, has enriched the dialogue with business.

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This has led to individual departments introducing radical changes to their structure. For instance, the department of chemistry has established some 12 cross-disciplinary research centres with support from industry. Since 1988, external funding has increased from ?700,000 to ?8 million. New university institutes have been established, too, such as the Institute of Biotechnology, and a programme of collaboration with the Massachusetts Institute of Technology is being developed, which encourages entrepreneurial thinking.

There have also been high-profile developments at Addenbrooke's Hospital, including an ambitious development plan that will increase the scale and breadth of research and position Cambridge in the top international league. The Laboratory for Molecular Biology is playing a key role in this.

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The university has also forged closer links with leading science-based companies in the UK and overseas, and attitudes to the exploitation of scientific advances for wealth creation, whether through licensing or new company creation, are widely positive. Firms in the Cambridge high-tech cluster have benefited from the university's attitude, whether through direct collaboration, the international profile given to Cambridge by its ability to attract companies such as Microsoft, or association with an aura of excellence that helps recruit staff into the area.

At the same time, many locally founded companies have prospered. The biggest names, such as ARM and Autonomy, are IT-related, but there has also been a strong advance in life science-based activities and Cambridge companies form the central core of the Eastern Region Biotechnology Initiative. Over the past three years, this biotechnology cluster has helped firms to improve their competitiveness through sharing expertise and information.

Another sub-sector that has contributed greatly to the Cambridge scene is technology consultancy. The major firms have evolved through a spin-off process - Gordon Edge left Cambridge Consultants to establish PA Consultants and then left to found Scientific Generics. Each of these is a substantial employer. Together they employ about 1,300 staff. The creation of spin-offs has a knock-on effect: between 80 and 100 firms in the Cambridge cluster probably have had at least one founder from a technology consultancy. The Technology Partnership - which originated from PA Consultants - recently floated its mobile phone technology spin-off, raising ?69 million. The company is valued at ?542 million.

All this activity has attracted risk capital providers, the business service community and real estate investors. Each of the major technology consultancies has an involvement in venture capital, and there are more than ten significant providers of seed or venture capital based in the area. The big five accountancy firms are all present in the city and for several it is the base for their European technology groups. Local lawyers have developed expertise in intellectual property and employment law as it affects high-tech firms. There are five science parks. Private-sector developers and investors, emboldened by the performance of the first parks, are willing to take the risks entailed in schemes with restrictive planning permission.

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But a high level of success has brought problems. Very low levels of unemployment mean labour shortages. Demand for scientists, technologists and engineers has been met only by attracting large numbers of people into the area. Others have moved out. Although this churning process makes a vital contribution to networking, both within the area and farther afield, it has led to pressure on the local housing market. People are having to live further from Cambridge to find housing they can afford, which is increasing congestion on the roads. The area's experience over the past 15 years highlights the failure of planning and infrastructure provision by central government to respond to very high levels of economic dynamism. There appears to be a growing willingness to change, but this merely highlights the barriers to doing so. Other successful smaller cities are facing similar problems from lack of flexibility in the UK system, and more difficulties can be expected wherever knowledge-based growth becomes a major economic driver. It is no coincidence that deliberate policies to achieve high growth have always required special legal and administrative mechanisms, whether through new towns or urban development corporations.

The staffing shortages in the higher grades are as bad in the technical and support staff grades, where wages are lower and insufficient to attract staff from other areas. Public services are also stretched. And it is hard for firms to find space for expansion near existing sites. All of this has either limited companies' plans for growth or encouraged them to adopt a business model focused on creating and licensing intellectual property, or into selling to a major company (typically from overseas). Neither of these options involves their becoming a manufacturer or a major employer providing a wider range of job opportunities locally or elsewhere in the UK.

These matters need to be addressed by the government at a national level. But there are some problems that can be tackled by the firms. A culture has been established that encourages risk-taking, is hard-working (with long and erratic hours) yet is typified by high levels of job satisfaction. But this may be detrimental in terms of family-friendliness, the involvement of women and getting the best out of older workers. Women are under-represented in the consultant/scientist posts within many firms. Increased flexibility may also be needed for the older worker, so that work becomes a positive choice even when it is no longer essential for the income it provides. These are problems that are likely to face all knowledge-based firms because of the forecast global shortage in key areas of expertise.

Nevertheless, Cambridge continues to thrive both from its internal dynamic and through the movement into the area of teams from global companies: partly because it has a good labour market and improving links to London and partly because it provides a positive brand that improves companies' image and standing. It is much harder for other major cities to gain renown as knowledge-based economies, especially if their activity is diffuse and difficult to identify. This is where science parks are starting to show their true worth. They bring together property, knowledge, finance and a community of like-minded firms and people. This, in turn, helps to build confidence and hopefully ripples out an entrepreneurial culture into other areas of the economy.

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The Cambridge Phenomenon Revisited is available from