Kicox 2014 clusters creative economy 09 13-14 ck

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Transforming Korea into a Creative Economy: The Role of Clusters

Dr. Christian H. M. KetelsInstitute for Strategy and Competitiveness

Harvard Business SchoolPresident, TCI Network

KICOX 50th Anniversary15 September 2014

Seoul, South Korea

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Korea 2014

• One of the most impressive success stories of the last 50 years

– Economy

– Innovative capacity

– Global recognition

• But can the current model deliver progress for the next generation?

– Two-tier economy

– Middle class blues

– Demographics

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Korea’s Answer: The Creative Economy Action Plan Measures to Establish a Creative Economy Ecosystem

3 Goals

6 Strategies

24 Tasks

Changing the business

environment

Fostering collaboration

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Becoming A Creative Economy: The Role of Clusters

• Clusters, Creativity, and Economic Performance – what do we know?

• Cluster-based Economic Policy – what works?

• Implications for Korea and KICOX

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Clusters are the Building Blocks of Modern EconomiesRelated Industries + Geographic Proximity + Linkages

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Regional Economies have Distinct Cluster PortfoliosLeading Clusters by US Regions

Boston, MA-NHAnalytical Instruments Education and Knowledge CreationBiopharmaceuticalsMedical Devices

Los Angeles, CAEntertainmentApparelDistribution ServicesHospitality and Tourism

San Jose-San Francisco, CABusiness ServicesInformation TechnologyAgricultural ProductsCommunications EquipmentBiopharmaceuticals

New York, NY-NJ-CT-PAFinancial ServicesBiopharmaceuticalsJewelry and Precious MetalsPublishing and Printing

Seattle, WAAerospace Vehicles and DefenseInformation TechnologyEntertainmentFishing and Fishing Products

Chicago, IL-IN-WIMetal ManufacturingLighting and Electrical EquipmentProduction TechnologyPlastics

Denver, COBusiness ServicesMedical DevicesEntertainmentOil and Gas Products and Services

Raleigh-Durham, NCEducation and Knowledge CreationBiopharmaceuticalsCommunications EquipmentTextiles

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Pittsburgh, PAEducation and Knowledge CreationMetal ManufacturingChemical ProductsPower Generation and Transmission

San Diego, CAMedical DevicesAnalytical InstrumentsHospitality and TourismEducation and Knowledge Creation

Atlanta, GATransportation and LogisticsTextilesMotor Driven ProductsConstruction Materials

DallasAerospace Vehicles and DefenseOil and Gas Products and ServicesInformation TechnologyTransportation and Logistics

Houston, TXOil and Gas Products and ServicesChemical ProductsHeavy Construction ServicesTransportation and Logistics

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Linkages Across Clusters

Plastics

Oil and Gas

Chemical Products

Pharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & Electrical Equipment

Financial Services

Publishing and Printing

Entertainment

Hospitality and Tourism

Transportation and Logistics

Information Technology

Communi-cations

Equipment

Medical Devices

Analytical Instruments

Education and

Knowledge Creation

Apparel

Leather and

Sporting Goods

Agricultural Products

Processed Food

FurnitureBuilding Fixtures, Equipme

nt and Services

Sporting,Recreation

and Children’s Goods

Business Services

DistributionServices

Fishing & Fishing

Products

Footwear

Forest Products

Heavy Construction

Services

Jewelry &

Precious Metals

ConstructionMaterials

Prefabricated Enclosures

Textiles

Tobacco

Heavy Machinery

Aerospace Engines

Automotive

Production Technology

Motor Driven Products

Metal Manufacturing

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Quantifying the Importance of Clusters

• Close to 50% of U.S. private payroll, 96% of patents, and (by definition) 100% of exports are generated in economic sectors that‘cluster’ in specific locations

• In the US and Europe, roughly 15% of employment (45% of all cluster employment) is in strong clusters; i.e. regional clusters with significant critical mass

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Cluster Presence and Economic Outcomes

Prosperity Entrepreneurship Structural Change

Positive correlation between share of regional employment in strong clusters (breadth of clusters; related cluster strength) and:

• Wages• Productivity• Job growth/resilience• Patenting

Positive correlation between share of regional employment in strong clusters (strength of related cluster) and:

• New business formation in new/existing industries

• Survival of new firms• Job growth in new firms

Path of structural change (emergence of new clusters) in regional economies is driven by legacy of composition (portfolio of existing clusters)

e.g. Porter (2003), Greenstone (2008). Delgado/Porter/Stern (2012), Ketels/Protsiv (2013), Aharonson et al (2013)

e.g., Delgado/Porter/Stern (2011), Lindqvist/ Wennerberg (2008)

e.g., Neffke et al (2009); Boschma et al. (2013)

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Clusters and Business Environment Quality

WEAK Business Environment

STRONG Business Environment

Specialization measured by employment LQ

Impact of higher employment LQon wages

Source: Ketels/Protsiv, 2013

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3

2

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The Case for Cluster-Based Economic Development

• Clusters emerge naturally in the market process

BUT

• Collaboration within a cluster is beneficial yet not automatic; government can help to alleviate collective action problems

• Government policies are motivated by market failures, not the presence of clusters alone

BUT

• The effectiveness of these policies can be enhanced by focusing them on clusters, aligning them with the common needs of groups of firms

Encouraging collective action

in clusters

Organizing government policies

around clusters

12 Copyright 2013 © Christian Ketels

How Important are Cluster Initiatives?

• The European Cluster Observatory lists more than 2000 cluster initiatives and related organizations; a similar list in the US has a growing number as well

• The highest number of cluster initiatives (absolute, per employee) is in information technology and biotech

• Most OECD countries and many regions have cluster-related policy programs

• Spending on cluster-related programs is meaningful but only a modest percentage of total spending per policy area


Clusters, Cluster Initiatives, and Performance

CLUSTERPRESENCE

CLUSTEREFFORT

ECONOMICPERFORMANCE

+ =

+ =

+ =


What Drives the Success of Cluster Efforts?

Setting• Cluster with critical mass of existing economic

activities• Broader policy environment focused on

competitiveness upgrading

Organization

Activities

• Capabilities of the Cluster Initiative Manager• Private sector logic needs to drive the

organization, public sector critical to create the right environment

• Strategic action agenda grounded in understanding of the relevant market

• Operational effectiveness in individual activities

ExternalInternal

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Types of Cluster OrganizationsDifferent Models of Public-Private Engagement

MassMEDICBoston

Aerospace Hamburg

ClusterlandUpper Austria

• Founded by private sector-leaders on their own initiative

• Led by companies

• Core financing through membership fees

• Founded by companies in response to public program

• Led by companies

• Core financing through public programs

• Founded by public sector

• Run as quasi-public entity serving firms

• Core financing through public budget

Initiative

Operation

Funding

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Cluster Efforts and the Creative EconomyAction Domains

Channel to support effective upgrading of

the Business Environment

Platform for collective action to mobilize

creativity across all sectors of the

economy

Mechanism to strengthen specific

new groups of related creative

industries

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Translating the Cluster Approach to the Korean Context

• History of successful government-led development – Government provided sharp, market-based incentives– Development of industries in line with evolving competitive

advantages– Alignment of industry support with competitiveness upgrading

• National specialization in specific industries • Collaboration in chaebols instead of clusters of independent firms• Strong regional concentration of economic activity around Seoul

• The learnings from cluster research in other parts of the world are highly relevant to South Korea

• But the policy conclusions drawn will need to reflect the country’s specific circumstances

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Cluster Policy in Three Different Contexts

• Clusters have emerged in a market-driven process

• Cluster initiatives are bottom-up, often private sector driven

• Clusters have emerged in a market-driven processer

• Cluster initiatives are often public sector initiated

• Industry specialization has been driven by government policies

• Cluster initiatives are often public sector initiated

Government-driven

Market-driven

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Changing roles of the support organization

Changing demands on its skills and capabilities

Cluster Policy to Foster Innovation and CreativityFrom Hard Infrastructure to Soft Linkages

Dedicated infrastructureand incentives

Technology transfer and linkages

Cluster engagement and support

• From service provider to facilitator

• Developing a strategic positioning for the cluster

• Packaging of available policy instruments

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New Tasks for Korean Cluster Organizations

• Move beyond the geographical boundaries of industrial parks and the companies they host

• Strengthen two-way interaction between the cluster and government– What does government have to offer that the cluster can use?– What should government do to enhance the cluster’s

competitiveness?

• Facilitate collaboration among companies in the cluster

• Develop linkages to related clusters, at home and abroad

• Connect clusters to regional competitiveness efforts

• Move from providing cluster services to encouraging cluster efforts

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Korea Entering a New Era:

Is More Creativity Enough?

Korea’s Competitiveness Profile 2013

Macro (42)

Political Institutions (97)

Rule of Law (57)

Human Development (38)

Context for Strategy and Rivalry (80)

Related and Supporting Industries (27)

Demand Conditions(23)

Factor Input Conditions(26)

Micro (30)

Comm. (9)

Logistic. (12) Capital (80)Skills (27)

Innov (23)

GDP pc (26)

GCI (33)

Social Infra-structure and Pol. Institutions (51)

Macroeconomic Policy (1)

National Business Environment (32)

Company Operations and Strategy

(26)

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Significant advantage

Moderateadvantage

Neutral

Moderate disadvantage

Significant disadvantage

Admin (33)

CLUSTER


Observations on Korea

• Innovation performance is strong in specific industries

• Performance is strong on technology-driven innovation

• Performance is strong in innovation-driven economic outcomes

• The ‘Korean wave’ is one indication that the country’s culture combines discipline and repetition with significant creative capacity

Key challenges

• Dominance of large companies

• Regional imbalances within the country

• Level of academic excellence

• External linkages have grown, but remain limited relative to peers

• Increasing concerns about inequality

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Korea’s Current Challenge – Is More Creativity Enough? Putting Cluster Efforts into Context

• Korea is facing a broader transformation as an economy and society

• Korea does NOT lack the ideas or creativity for this transformation– Korea has made impressive strides in building its innovative capacity– Korean companies are competing globally on innovation and brand– The Korean Wave is one sign of the country’s creative power

• But Korea needs to overcome structural barriers that limit the potential for these assets to be fully utilized

The export-oriented industries remained overly dominated by a few

Korean MNCs

The domestic economy lacks dynamism and competitive pressure

for structural change

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Korea’s Current Challenge – Is More Creativity Enough? Putting Cluster Efforts into Context

• The government’s ‘Creative Economy Action Plan’ is already outlining an agenda that is much broader than ‘more creativity’

• But more clarity in communicating how Korea needs to change would be helpful to ensure impact…

• …and some additional efforts on opening up local industries and dominant companies might be needed

• Cluster efforts and support organizations like KICOX can then play a critical role in supporting Korea’s new growth path

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Back-Up

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New Tasks for South Korea’s Cluster Policy

• Existing Korean cluster efforts in science-driven special economic zones have achieved measurable success

• But achieving full impact in the future will require more than increasing the number and size of the existing efforts

• Encourage innovation in non-science driven areas

• Encourage the bottom-up emergence of cluster organizations

• Organize government activities in other policy areas (workforce skill upgrading, investment attraction, …) around clusters

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Creative Economy Action PlanSix Strategies

▲ Creating an economic ecosystem where creativity is fairly rewarded where business startups are easier (strategy 1)▲ Promoting venture capital firms and small-to-medium businesses playing a leading role in the creative economy and make inroads into global markets (strategy 2)▲ Creating the growth engine for pioneering new industry and markets (strategy 3)▲ Fostering the global creative human capital talent who have the vision and wherewithal to become a vital part of the creative economy (strategy 4)▲ Expanding the nation’s science technology and ICT innovation capabilities, which lay the foundation for the creative economy (strategy 5)▲ Initiating the creative economic culture that promotes the involvement of both government and people (strategy 6)

http://english.mosf.go.kr/eco/view.do?bcd=E0005&vbcd=N0001&seq=3289&bPage=1


Towards a New Mix of Corporate Models in Korea

• The Korean model is based on large business groups with scale and global reach

– This model was well placed to serve an economy in catch-up mode, where large scale, capital-intensive operations had to be build up

– Used suppliers essentially to keep costs low, drawing on their lower wage costs, etc.

• But the role of large MNCs is changing…– Increasingly the ‘orchestrators’ of global value chains– Best in leveraging and scaling innovations, not necessarily in creating them

• …and with it the demands on their SME suppliers and partners– Need to reach high quality to meet the operational demands of MNCs– Need to deliver create many of the innovations that the MNCs can market

• Is Korea changing in line with this model?

Kicox 2014 clusters creative economy 09 13-14 ck

Economy & Finance