Cluster-based Economic Development: How it Matters for ... · Cluster-based Economic Development: How it Matters for Firms in Emerging Industries Dr. Christian H. M. Ketels Institute

Cluster-based Economic Development:

How it Matters for Firms in Emerging Industries

Dr. Christian H. M. Ketels Institute for Strategy and Competitiveness, Harvard Business School

President, The TCI Network

Canberra, Australia

31 May 2016

[email protected]

2 Copyright 2014 © Christian Ketels

Company Success and Location Biotechnology in the U.S.

Source: US Cluster Portal, Institute for Strategy and Competitiveness

• In many industries leading

companies concentrate

in a few ‘hotspots’


Why do Companies End Up Co-Located?

• Access to skills

• Access to knowledge

• Access to suppliers

• Access to markets

• Cost of doing business

What activities?

What strategy?

What industry?

Value of

these factors

depends on …

…but has to be weighted against the costs of congestion and rivalry!


Skills

Knowledge

Suppliers/Partners


Clusters: An Established Concept….


…with a Stable Set of Core Building Blocks …

Collaboration

& Rivalry

Related Variety

Critical

Mass

Proximity


… in a Changing Economic Environment

Rising

Knowledge-Intensity

Lower Trade Barriers

Globalization of production sites

Falling Transportation/

Communication Costs

Accelerated

Technological Change

Clusters are a critical facet

of modern economies

Clusters are a key aspect of

urbanization

Clusters are becoming more

specialized

Clusters are becoming more

connected

Agglomeration Dispersion

Globalization of markets


9

The Evolution of Clusters

Factors that trigger

cluster emergence:

• Natural resources,

location

• Unique (combination of)

business environment

conditions

• Anchor firms

• Existing (related)

clusters

Critical Mass-effects:

Long periods before

dynamics set in…

Evolutionary Forces:

Growth/Investments by Firms

Local Rivalry, Spill-Overs

Market Dynamics

Technological Trends

Constructive Forces:

Joint actions to improve the

business environment

Government policies to

strengthen the cluster

Decline vs. Re-birth

Challenges of Lock-In and

Congestion, Opportunities of

Capabilities and Social Capital

Time

Cluster

Strength

Stagnation and Demise:

Failure to Generate

Sustainable Competitive

Advantages


• Numerous linkages through research networks,

global value chains, and companies present

in multiple locations

Global Map of Biotech Clusters Competition, Collaboration, and Specialization

Source: MBBNet


Identifying Clusters of Related Industries

EMPLOYMENT

INCOME

PATENTS

36% 64%

51% 49%

91% 9%

Local Industries

• Present everywhere at

similar levels

• Serve exclusively the local

market

• Little exposure to cross-

regional competition

• Important for jobs, but

lower wages; growth

potential limited by size of

the local market

Traded Industries

• ‘Spiky’ across space; 2/3s of all

traded industry employment is in

strong clusters

• Serve national and global markets

• Exposed to competition from other

regions and nations

• Critical for prosperity through

higher wages, productivity, and

innovation; growth potential set by

the global market

Traded vs. Local Share of the U.S. Economy

12 LSConsolidated-20030806 2003 Life Sciences Summit

Research Organizations

Biological

Products

Specialized Risk Capital VC Firms, Angel Networks

Biopharma-

ceutical

Products

Specialized Business

Services Banking, Accounting, Legal

Specialized Research

Service Providers Laboratory, Clinical Testing

Dental Instruments

and Suppliers

Surgical Instruments

and Suppliers

Diagnostic Substances

Containers

Medical Equipment

Ophthalmic Goods

Health and Beauty

Products Health Services Provider

Educational Institutions Harvard University, MIT, Tufts University,

Boston University, UMass

Cluster Organizations MassMedic, MassBio, others

Analytical Instruments

Among National Leaders (1–5)

Established Position (6–20)

Significant Presence (21–40)

Less Developed (41+) Note: Competitive position based on relative employment

Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Massachusetts Life Sciences Cluster Competitive Position by Sub-Cluster

13

Clusters in Renewable Energy: Sub-segments

Producers

Users

Deploy more sustainable

energy systems

Succeed in a growing market

with societal benefits

Traded industry

• Offer products and services to other

locations

• Driven by unique set of local

knowledge and skills, including

related clusters

Local industry

• Draws on local and global products

to serve local markets

• Driven by local demand, the local

context for strategy and rivalry, and

presence of local services

Solar panels; wind turbines

Related technical and business

services

Utilities; operators of wind and

solar parks

Local services

14

Employees 50,000 =

Traded Cluster Composition of the Massachusetts Economy

Note: Clusters with less than 1,000 employees not shown.

Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.

Overall change in the

Massachusetts Share of US

Traded Employment: -0.13%

Massachusetts Overall

Share of US Traded

Employment: 2.65%

Added Jobs

Lost Jobs

Employment

2003-2013

Massachusetts National

Employment Share, 2013

Change in Massachusetts Share of National Employment 2003-2013

Business Services

Education and Knowledge Creation

(-.66%, 6.9%)

Marketing, Design, and Publishing

Performing Arts

Electric Power Generation

and Transmission

Video Production and Distribution

Distribution and Electronic

Commerce

Financial Services

Information Technology and Analytical Instruments

(-.037%, 6.4%)

Hospitality and Tourism

Insurance Services

Transportation and Logistics

Plastics

Food Processing and Manufacturing

Production Technology and Heavy Machinery

Aerospace Vehicles and Defense

Metalworking Technology

Communications Equipment

and Services

Printing Services

Medical Devices Lighting and

Electrical Equipment

Biopharmaceuticals

Paper and Packaging

Downstream Metal

Products

Construction Products

and Services

Upstream Metal Manufacturing

Textile Manufacturing

Downstream Chemical Products

Furniture

Vulcanized and Fired Materials

Automotive

Apparel

Wood Products

Livestock Processing

Fishing and Fishing Products (-1.7%, 5.6%)

Environmental Services

Upstream Chemical Products

Jewelry and Precious Metals (-2.7%, 5.0%)

Water Transportation

Nonmetal Mining

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%

15

Metal-

working

Food

Processin

g

Lighting

IT &

Analytical

Instruments

Comm-

unications

Equip. &

Services

Down-

stream

Chemicals Biopharma

Leather

Apparel

Printing

Services

Financial

Services

Insurance

Environ-

mental

Services

Business

Services

Education &

Knowledge

Creation

Marketing

Services

Music &

Sound

Recording

Performin

g

Arts

Video

Productio

n

Hospitality

& Tourism

Metal

Mining

Coal

Mining

Upstream

Metals

Wood

Products

Furniture

Tobacco

Aerospace

Upstream

Chemicals

Trailers &

Appliances

Textiles

Footwear

Forestry

Agricultur

e

Plastics Plastics

Distribution

& eComm.

Livestock

Processing

Fishing &

Fishing

Products

Water

Transport

Transport

&Logistics

Vulcanize

d

Materials

Construction

Nonmetal

Mining

Oil & Gas

Electricity

Down-

stream

Metals

Production

Metal-

working Automotive

Paper &

Packaging

Recreation

& Electric

Goods

Jewelry &

Precious

Metals

Cluster Linkages: Massachusetts

Strong clusters above

90th percentile specialization

Other specialized

clusters

Strong clusters above 75th

percentiles specialization

Cluster Specialization

Medical

Devices


Clusters Linkages and Regional Diversification

U.S.

Military

Communications

Equipment

Sporting and

Leather Goods

Analytical Instruments

Power Generation

Aerospace Vehicles

and Defense

Transportation

and Logistics

Information Technology

1910 1930 1950 1990 1970

Bioscience

Research

Centers

Climate

and

Geography

Hospitality and Tourism

Medical Devices

Biotech / Pharmaceuticals

Education and

Knowledge Creation

• Existing cluster

portfolios have a

significant impact on the

evolutionary path of

regional economies

(Neffke et al, 2009;

Boschma et al. 2011)

• Clusters provide a

powerful analytical tool

to understand

diversification and the

emergence of new

economic activities

The San Diego Economy

Source: Porter, Monitor Company, Council on Competitiveness (2003)


Cluster Linkages and Emerging New Clusters

Environmental Industries

Source: European Cluster Panorama, 2014


Economic Geography and the Industry Life Cycle

Number of

locations

Heterogeneity

of locations

1

New ideas come from many

places; ‘nursery’ cities

best to translate them into

successful companies

2

Agglomeration forces

(path dependency +

locational advantages) lead

to emergence of strong,

dominant clusters

3

Maturation allows de-bundeling

of activities; churn among

clusters as new value chains of

connected & specialized

clusters emerge to reduce costs


How Important are Clusters?

• Close to 40% of advanced economy employment are in economic sectors that

‘cluster’

• In these sectors, productivity, productivity growth, and patenting are significantly

higher than in the average of the economy

• Roughly 25% of this employment is in strong clusters; i.e. regional clusters with

significant critical mass

• There is significant variation in terms of cluster presence and cluster portfolio

composition across regions


Clusters and Economic Performance

Prosperity Entrepreneurship Structural Change

• Wages

• Productivity

• Job growth

• Resilience

• Patenting

• New business

formation

• Survival of new firms

• Job growth in new

firms

• Path of structural

change(emergence

of new clusters)

Presence of Strong Clusters


Putting Clusters into Context

(Creative)

Skills

Complexity

Social Capital

Innovation

Systems

Entrepreneurial

Ecosystems

Framework

Conditions

Clusters

Urbanization

22

• Clusters emerge naturally

• Clusters emerge and develop in a

context deeply affected by policy

choices

• Collaboration within clusters

provides benefits but requires

purposeful collective action

• Policies for upgrading business

environment conditions can be

more effective if they are cluster-

specific but require information

sharing and collective action

• Cluster-based policies enable

informed decision making and

collective action

What role for policy?


Two Opposing Approaches to Cluster Policy

MORE (Agglomeration)

BETTER (Competitiveness)

FINISH

• High risk

• Traditional

‘industrial policy’

• Long-term impact

• New model of public-

private collaboration

20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels 24

Types of Government Interventions in Clusters

• Direct intervention at the

firm level

– Attraction of firms

– Subsidies, directed credit

High short-term impact/High distortion/low productivity impact Long-term impact/Low distortion/high productivity impact

• Intervention into the

market

– Provision of monopoly

rights; Entry/trade barriers

– Demand subsidies

• Investments in the cluster-

specific business environment

– Specific to the cluster

– Benefiting the cluster but part of a

general upgrading strategy

• Enable collaboration with

and within the cluster

– Support for cluster initiatives

– Active engagement with the

cluster in setting and

implementing policies


Current Status of Cluster Policies and Programs

• Many countries and regions, especially within the OECD, have cluster-related

policy programs

• Spending on cluster-related programs is meaningful, but only a modest

percentage of total spending per policy area

• Funding is tilted towards existing strengths, but many efforts exist without

established critical mass

• Cluster programs are often run by a range of ministries or agencies; there is

limited coordination between programs

• Funding for strengthening collaboration is always a part; other elements

differ significantly

• Design principles differ widely across many dimensions


Modes of Cluster Policy

Fund operation of

cluster initiatives/

sectoral plans

Create/task backbone

organizations to

mobilize clusters

Deploy policy funds

through cluster

initiatives/networks

Use cluster

initiatives/networks as

organizational infrastructure

for policy action

Policy for Clusters Cluster-based Policy

• Impact • Mission • Selection • Dialogue

Basque

Germany

France

Sweden

US

Catalonia

Korea

Austria

Mexico

Colombia

Sporadic:

Create

stronger linkages

Tactical:

Deliver programs

more effectively

Strategic:

Choose & design

better policies


The German Leading-Edge Cluster Program

• Program to support innovation

in leading German clusters

• Competitive selection of 15

clusters in total

• Involvement of leading

companies, universities, and

many SMEs

• Public funding of EUR 40m per

cluster, with private funding at

least at the same level

• New programs offer again

competitive access to funding

for specific activities, like

internationalization


The Role of Government at Different Levels

National

Regional

Local

Making it happen

• Develop Innovation Districts to enhance

dynamism of interaction

• Provide ready real estate for companies

Orchestrating a strategy

• Mobilize resources for research,

infrastructure

• Encourage the provision of relevant skills

• Attract related and supporting industries

Setting the stage

• Creating a market

• Creating predictable demand conditions

• Provide basic research funding

• Success is the result of effective collaboration across different levels

of government, building on their respective roles and capabilities


What are Cluster Initiatives?

• Upgrading of

company operations

and strategies across

a group of

companies

• Strengthening of

networks to enhance

spill-overs and other

economic benefits of

clusters

• Upgrading of cluster-

specific business

environment

conditions

Cluster initiatives are collaborative activities by a group of companies, public sector

entities, and other related institutions with the objective to improve the competitiveness of a

group of interlinked economic activities in a specific geographic region


Resources &

Capabilities

• Quality of staff

• Budget and tools

• Governance

Narrow model

• Focus on networking

• Limited resources

• Limited impact

Systemic model

• Cluster initiatives as

key channel for

delivering policy action

• Moderate operational

resources, strong

influence on other

investment streams

• High impact possible

What Drives the Success of Cluster Initiatives?

Context

Activities

• Cluster strength

• Business

environment

conditions

• Firm sophistication

• Collaboration

culture, trust

IMPACT

• Activities aligned with the needs of firms

• Activities aligned with actions of partners

• Effectiveness of implementation


Cluster Efforts in Cleantech

Water Technology Renewable Energy

Production

Energy Management/

Saving

Bioeconomy Waste Management/

Circular Economy

Resource Efficiency

across Clusters:

E-Mobility, etc.

32

The Role of Cluster Efforts in Emerging Industries

• Make sure that your industry

becomes economically viable

– Work with government to create an

effective market

– Work with research community to

achieve progress on technology

– Work with firms to develop complete

industry value chains

• Network-focused

• Involve relevant partners irrespective

of location

• Make sure that your location is well

positioned to become a leading player

– From user to producer of knowledge,

technology, and services

– Cluster-specific business environment

in the region

– Cluster depth and breadth

– Strengths of linkages, presence of

institutions for collaboration


Firms in Clusters: How do they Engage?

Bystanders Participants Drivers Sceptics


Firms in Clusters: Who Benefits?

From

Co-Location

From

BE Upgrading

From

Collaboration

Participants

Drivers

Bystanders

Sceptics


Picking a location: Where do we locate which activity in sync

with our strategic position?

Improving a location: How do we improve the value of our location

in supporting our strategic position?

Leveraging a location: How do we derive strategic benefits from

the characteristics of our location?

Location Strategy

A Strategic Approach to Clusters


Companies in Cluster and Competitiveness Efforts

Naranya,

Monterrey (Mexico)

Create a dynamic environment to

attract partners, entrepreneurs,

and employees

Dow Chemical/BMW/…,

Mitteldeutschland (Germany)

Ensure attractiveness for further

investments by headquarters

Magna Steyr,

Styria (Austria)

Ensure capabilities at

regional supplier network BHP Billiton,

Chile

Ensure social and economic

sustainability of investment


Implications

• The transition towards a renewable energy-based economy requires

systemic changes beyond individual technologies, policies, or firms

• Clusters and cluster organizations play an important role in developing

new solutions and business models

• They require a supportive policy context with predictable market

demand and resources to support research and innovation

• SEEREE can play an important role in this process in Australia,

connecting the Innovation District with the broader cluster and the

policy community

• SEEREE can create an environment where firms are more likely to

succeed; it needs strong private sector engagement to be effective

Cluster-based Economic Development: How it Matters for ... · Cluster-based Economic Development: How it Matters for Firms in Emerging Industries Dr. Christian H. M. Ketels Institute

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