As companies wrestle with the return-to-office debate, it’s crucial to ask: How much does location really matter for innovation? Surprisingly, where you work can significantly shape how — and how much — you innovate. Assistant professor Ruben Gaetani dives into the research, revealing why dragging everyone back to their office tower cubicles could stifle the very creativity you’re trying to spark.
As companies wrestle with the return-to-office debate, it’s crucial to ask: How much does location really matter for innovation? Surprisingly, where you work can significantly shape how—and how much—you innovate. Assistant Professor Ruben Gaetani dives into the research, revealing why dragging everyone back to their cubicles could stifle the very creativity you’re trying to spark.
Show notes
[0:00] Downtown offices are in the midst of an identity crisis. As vacancy rates rise, some leaders are demanding workers return to their towers to strengthen culture and innovation.
[1:11] Meet Ruben Gaetani, an assistant professor at the University of Toronto, who specifically looks at how office location influences innovation strategy.
[2:22] What is conventional versus unconventional innovation, and how do they differ?
[3:48] You’re most likely to see unconventional innovation in dense, urban environments, while conventional innovation thrives in the suburbs. But why?
[5:53] How should leaders be thinking about office location in relation to their innovation strategy?
[6:44] Don’t discount conventional innovation: it plays an important role in company growth.
[7:27] But don’t get stuck chasing iterative innovation; make sure you have a strategy for unconventional ideas too.
[10:21] If you’re calling people back to their downtown office cubicle, ask yourself: What kind of innovation am I actually chasing…and is an office tower really helping my team meet strangers?
[11:48] Downtowns might be dense, but they are not the dense, urban environments that Ruben is talking about. Instead, he says companies chasing unconventional innovation should look for places that encourage random encounters.
[13:07] If innovation is the goal of your office strategy, there are some questions to keep in mind.
[13:48] Post COVID-19, it’s a great opportunity for businesses and policy makers to reflect on how companies influence their surroundings, and vice versa; Ruben has some not-so-great research to share.
[14:36] What can policy makers do to alleviate this negative gentrification of innovative tech clusters?
[15:26] And why should business care? “We have been observing in some instances, tech firms, innovative firms are consider by the public opinion as responsible for these negative effects they have on local communities. It reduces their ability to attract talent if a location is extremely segregated. And it reduces the amount of diversity and richness of interactions that firms have in their geographical location.”
Megan Haynes: Downtown offices are in the midst of an identity crisis. As organizations continue to grapple with a hybrid workforce, real estate investors across North America are sounding the alarm as more and more companies vacate their costly downtown footprints. One Wall Street Journal article went so far as to call the downtown office “toxic” to investor portfolios.
As of Q2, 2024, overall office vacancy in Canada was at an all time high of 18.5 per cent — with pundits saying not to expect a drop in that number anytime soon.
Companies and politicians are increasingly calling for staff to return to office. In June 2024, Toronto mayor Olivia Chow met with Bay street firms to encourage them to bring their teams more frequently to help bring some vibrancy back to the once busy financial district. And company CEOs like RBC’s Dave McKay have lauded the in-person experience as crucial, not just for company culture but longer-term success and innovation.
But is getting people back to their downtown cubicle enough to make your company innovative? And what role does your office location play in innovation anyways?
Ruben Gaetani: The role that cities play in fostering unconventional innovation is by facilitating the random, informal encounters that underlie these novel combinations of existing knowledge.
I am Ruben Gaetani. I am an assistant professor of Strategic Management at the University of Toronto Mississauga, with a cross appointment to the Rotman School of Management. A big part of my research revolves around two questions that are critical to firm strategy. The first one is how a firm's location choice affects a firm's innovation performance. And the second one is how a firm's innovation activities affect the local community and the local urban environment.
MH: As companies look critically at their office footprints in a hybrid/work-from-home world, Ruben has some food for thought.
Welcome to the third season of the Executive Summary, I’m Megan Haynes, editor of the Rotman Insights Hub.
Musical interlude
MH: It’s important to start by defining the two types of innovation. The first is conventional.
RG: Conventional innovation has this property of building upon existing ideas that are very commonly and very frequently used in combination.
MH: Think of conventional innovation as iterative. It takes a product or process and improves upon it. You can also have unconventional innovation, which Ruben defines as:
RG: Unconventional innovation usually leads to the creation of completely new products, completely new designs. Unconventional ideas are typically produced by teams or through a process of idea exchange and recombination among people with very different knowledge backgrounds recombining pieces of knowledge, existing ideas from technologically disconnected fields — technological fields that will not frequently and commonly talk to each other.
MH: Think of the distinction like this: Conventional innovation is each new generation of Apple iPhones. They’re lighter, have improved battery life or better picture quality. The Uber app — which combined taxis, apps and the concept of the gig economy, three separate worlds — that’s unconventional innovation.
And how we get to these types of innovation comes down to how employees exchange information with people, and with whom they’re having those exchanges.
Looking at patent data from 2002 to 2014, Ruben and his colleagues found that dense, urban environments are – unsurprisingly perhaps — hubs of unconventional innovation.
RG: If you think about what the process that leads to an unconventional innovation looks like, it requires an exchange of ideas, an exchange of knowledge among people who typically not talk to each other, perhaps because they come from completely different backgrounds, they have different objectives, and perhaps they don’t belong to the same formal or professional networks.
MH: Essentially, when you’ve set up shop in a dense urban area, you’re far more likely to bump into — and exchange ideas with — people from completely different backgrounds than you, and that’s where that recombination of disparate technologies thrives. In comparison, Ruben’s research shows that conventional innovation tends to come from a perhaps surprising place: suburbs.
RG: A lot of the innovation is conventional, and because of that, it tends to happen in low dense environments. To make this conventional innovation effective and efficient, you need internal scale. You need large research teams. You need physical capital, machinery, office space, and having this in a high-density environment might be extremely costly.
MH: In comparison, a large campus on the outskirts of town, or a big factory in suburban business park gives you the physical space to play around with — and improve on — your products and processes, all at a reduced cost. And, according to Ruben’s research, that space is crucial to the iterative innovation process.
So what does this mean for organizations thinking through their office footprints, and how can leaders think more purposefully about the role location plays in their innovation strategy, particularly as they grapple with the desire to call employees back to their offices?
Musical interlude
MH: The first question leaders need to ask themselves is what kind of innovation matters most to my organization?
RG: Conventional innovation is overwhelmingly produced by established firms. So large firms, publicly traded firms. These are firms that already have their product. They need to make continuous marginal improvements over those products. Small firms, younger firms tend to produce unconventional ideas, because they need these new products, these new designs, in order to enter the market.
MH: So, smaller organizations and startups tend to benefit most from being located in a dense urban space since that’s where unconventional innovation happens.
And once your company gains some traction – maybe you had a successful product launch, or perhaps your organization landed a couple big clients – it might be time to start thinking about finding some affordable real estate.
RG: Conventional innovation is very important. The fact that we're calling it conventional seems to suggest that it's kind of lower quality or not as important. It is extremely important. Because once we have a very creative and novel idea, we have to make it work, improve the performance of the product, improve its design, make it work technically, reduce its cost of production — these are all things you can achieve through conventional innovation, and that’s incredibly important.
MH: This is what some companies excel at — think CPG organizations always introducing limited flavours or packaging; or tech companies unveiling their latest update. And that’s why you tend to see so many of these firms on the outskirts of cities. That’s not to say unconventional innovation isn’t important or valuable for larger firms.
RG: You can get stuck with conventional innovation. It is one of the risks. There is only as much incremental improvement that you can implement on a product until the next improvement gives you very little value.
MH: So, firms that specialize in iterative innovation still need to think about truly novel ideas. Some companies recognize the value in truly random encounters on the innovation process, and try to replicate the experience of being in a dense urban environment on a suburban campus.
RG: Part of this was done, for example, by redesigning the layout of office spaces in a way that encourages informal interactions among people. Now this is great, and it can lead to some outcomes that resemble what firms can achieve when they are in a real, dense and diverse environment. However, there are a couple of caveats to keep in mind.
MH: The first, he says, is that you’re still limiting interactions to people already in your organization, so you’re missing gaining insights from strangers on the streets.
RG: And the second issue is that just providing a place for people to interact won't be enough to really foster that exchange of ideas that then results in novel inventions. And the reason is that, in addition to giving people a space to have coffee together and have some random chats, you also have to provide them with incentives — either formal or informal incentives — to really pursue the novel ideas that come out of those discussions.
MH: Other larger more established organizations have turned to the tried-and-true “if you can’t beat ‘em, buy ‘em” approach, acquiring smaller companies that excel at unconventional innovation, and then bringing their conventional expertise to scale the products — think Google’s purchase of the thermostat company Nest, or Apple’s recent acquisition of AI firm DarwinAI.
The other trend Ruben sees is the downtown innovation hub, staffed with an R&D team dedicated to coming up with unconventional ideas. In theory, your downtown team works to create truly novel ideas to bring to market, while your suburban campuses continue to perfect and grow your existing fleet of products or processes.
There are some challenges with this approach, such as overcoming the natural silos that form when you spread people across locations.
RG: There is the risk when a firm invests in a downtown location that that's going to be something that is expensive and just turns out to be a bad strategy that leads nowhere in terms of actual outcomes.
MH: That’s not to say all businesses should get out of downtown. There are plenty of other reasons companies may want to be located in a city centre — access to a richer talent pool, proximity to clients or other industry players, for example.
But, if you’re a business committing to a downtown office – and frankly, using the need for in-person innovation to justify bringing your teams back to that office - Ruben says it’s worth remembering that just being downtown, doesn’t mean you’re encouraging innovative conversations.
RG: Dense locations tend to confuse density with very tall buildings that are really not what we think about when we think about informal interactions and random meeting with people. In many cases, actually, those kinds of environments discourage meetings.
MH: If you think about it, those office towers dotting Toronto and Vancouver’s financial districts can actually act more like really tall suburban campuses — you have a business spread on multiple floors of a single tower, and employees usually only interact with others in the company, and often only with those on the same floor. They also tend to be significantly more expensive than suburban locations, and aren’t necessarily set up the same way to encourage iterative innovation.
So what does quote-unquote “good” density that encourages innovation even look like? And importantly, can you create a positive relationship between innovative companies and their surrounding areas?
Musical interlude
MH: We’ve been talking a lot about dense urban locations, but let’s step back and contextualize what that even means when it comes to encouraging innovation.
RG: It is a location that promotes mixed-use real estate, so a mixture of office space, residential locations, shops, restaurants. Places where people can just spend time and meet people.
MH: In short, it’s a walkable, inviting space that encourages people to linger and gather. And, as we look to a post-COVID working world, it’s a good opportunity for policy makers and industry leaders to really think about the symbiotic relationship between their office and their location.
RG: I think we are in the middle of a readjustment after COVID. The shock was very big and very quick, and so it's hard to understand how things are going to change in future years.
MH: We don’t know how knowledge exchanges between mostly remote teams will change both conventional and unconventional innovation at this time — it’s too early and fully remote or mostly remote organizations are still trying to figure out the right processes to encourage that exchange of ideas.
But we do know how it has historically worked, and if innovation is the goal of your office strategy, there are some questions to keep in mind. If you’re a politician, why bother calling for businesses to bring people back to their downtown offices if you aren’t giving them a reason to get out of their towers and wander over their lunch breaks or linger after work? And if you’re a CEO looking at unconventional innovation, if you’re not creating incentives for employees to actually and have chance encounters or collaborate with people from totally different fields, why bother mandating a five-day return to office? On the flip side, if conventional innovation is your jam, it might be worth trying to decide if your downtown space is the best use of your resources…or perhaps it’s time to explore some cheaper suburban options and use that savings to invest in better processes or staff?
Which brings us to Ruben’s other important research. Innovative companies have an impact — often negative — on the surrounding areas. In a 2023 study, he and his colleagues looked at how innovative tech companies cluster — and how that impacted the local neighbourhood profiles.
RG: And what we found is that between 1990 and 2010 in the United States, cities that had the largest expansion in their tech sector, were the ones that had the largest increase in economic segregation.
MH: It’s not surprising. Successful tech innovation means companies can afford to pay higher salaries. At higher salaries, employees can often afford to move closer to work, bringing with them demand for more expensive amenities, increasing rental prices, and pushing people who are lower income out of those neighbourhoods. Policy makers probably play the biggest role in mitigating these segregating effects.
RG: for example, investment in transit infrastructure can make a big difference. based on our finding, a big part of this increase in segregation has to do with the fact that people who are interested in employment opportunities in tech firms change their location choices to reduce their commuting to these employment opportunities.
MH: Politicians and policy makers can also ensure a certain percentage of rental units in neighbourhoods are earmarked as affordable housing options, which can help reduce the upward pressures on rent brought on by higher-income earnings; and they can invest in local amenities — like ensuring the quality of schools in non-gentrified neighbourhoods stays at the same level as those nearby tech clusters, which tend to get a boost from higher taxes collected from those high-income earners. And businesses should be supporting this. Because if left unchecked, this income segregation absolutely has a negative impact on innovation - and thus, growth.
RG: We have been observing in some instances, tech firms, innovative firms are considered by the public opinion as responsible for these negative effects they have on local communities. It reduces their ability to attract talent if a location is extremely segregated. And it reduces the amount of diversity and richness of interactions that firms have in their geographical location.
MH: And, in the end, whether you’re creating opportunities for rich interactions between peers to pursue effective product iterations, or with strangers to encourage unconventional ideas, company leaders need to remember that it’s how you encourage knowledge exchanges that really drives innovation forward.
Musical outro
MH: This has been Rotman Executive Summary, a podcast bringing you the latest insights and innovative thinking from Canada's leading business school.
Special thanks to assistant professor Ruben Gaetani. Join us next month as we chat with professor Alberto Galesso about how an effective IP strategy can make or break an organization. This episode was written and produced by Megan Haynes. It was recorded by Dan Mazzotta, and edited by Avery Moore Kloss.
For more innovative thinking, head over to the Rotman Insights Hub, and subscribe to this podcast on Spotify, Apple or Amazon. Thanks for tuning in.