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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
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’
3 Copyright 2014 © Christian Ketels
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!
4 Copyright 2014 © Christian Ketels
Skills
Knowledge
Suppliers/Partners
5 Copyright 2016 © Christian Ketels
Clusters: An Established Concept….
6 Copyright 2016 © Christian Ketels
…with a Stable Set of Core Building Blocks …
Collaboration
& Rivalry
Related Variety
Critical
Mass
Proximity
7 Copyright 2015 © Christian Ketels
… 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
8 Copyright 2015 © Christian Ketels
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
10 Copyright 2015 © Christian Ketels
• 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
11 Copyright 2015 © Christian Ketels
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
16 Copyright 2013 © Christian Ketels
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)
17 Copyright 2015 © Christian Ketels
Cluster Linkages and Emerging New Clusters
Environmental Industries
Source: European Cluster Panorama, 2014
18 Copyright 2014 © Christian Ketels
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
19 Copyright 2015 © Christian Ketels
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
20 Copyright 2015 © Christian Ketels
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
21 Copyright 2015 © Christian Ketels
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?
23 Copyright 2015 © Christian Ketels
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
25 Copyright 2015 © Christian Ketels
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
20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels 26
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
20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels 27
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
28 Copyright 2014 © Christian Ketels
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
29 Copyright 2015 © Christian Ketels
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
30 Copyright 2016 © Christian Ketels
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
31 Copyright 2015 © Christian Ketels
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
33 Copyright 2014 © Christian Ketels
Firms in Clusters: How do they Engage?
Bystanders Participants Drivers Sceptics
34 Copyright 2014 © Christian Ketels
Firms in Clusters: Who Benefits?
From
Co-Location
From
BE Upgrading
From
Collaboration
Participants
Drivers
Bystanders
Sceptics
35 Copyright 2014 © Christian Ketels
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
36 Copyright 2014 © Christian Ketels
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
37 Copyright 2014 © Christian Ketels
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