Clusters – driving sustainable growth: Think magazine

Posted on June 6, 2008 · Posted in Think

 

Clusters – driving sustainable growth

 

By Paul Gosling

 

Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing business,” argues Professor Michael Porter of Harvard University.

By placing the analysis and promotion of industrial clusters at the heart of contemporary economic policy, Professor Porter has both changed the way the modern economy is seen and ensured that he is regarded as one of the most significant academics in the field of economic theory and consultancy. He has literally changed the way the modern economy is considered.

Industrial and commercial clusters are now recognised as a major driver of the economy. The European Union has changed its structural fund priorities to support the emergence and reshaping of clusters. The UK’s regional development agencies see clusters as the primary means of raising the performance of weaker areas. And Saudi Arabia has committed itself to the creation and expansion of clusters as the basis for an ambitious, massive, economic expansion programme. All these countries are keen to learn from the experience of the United States, where economic growth and cluster performance have been closely linked.

 

Despite the widespread keenness by governments and their agencies to use cluster development as an economic tool for growth, there is not a common, universal understanding of what constitutes a cluster, how they can be best supported or whether their use is appropriate in all circumstances. “There is also concern about whether these concepts that have proved effective and been observed in North America and Western Europe can be applied in other types of economy,” explains Dr Christian Ketels, Principal Associate at Harvard Business School’s Institute for Strategy and Competitiveness. Ketels follows in Professor Porter’s footsteps as perhaps today’s leading cluster analyst.

 

Professor Porter suggested a ‘diamond’ of factors that produce an effective cluster. These include the physical circumstances such as infrastructure and local skills; local demand and regulatory environment; competitiveness environment, such as tax structure, competition laws and strategies of competitors; and the presence of related and supporting industries. The strength of a cluster will depend on the conditions of all these factors.

 

Cluster development is strongly affected by the relationship between the public and private sectors, says Ketels. “A strong overall business environment and trust between public and private leaders are among the strongest predictors of dynamic, self-sustaining, regional cluster development. The most successful cluster initiatives are public-private partnerships.”

 

Ketels argues that while clusters’ success depends ultimately on the entrepreneurship of the private sector, this can only be realised if the economic fundamentals are in place, with low regulation and a free market economy. Having the right knowledge and skills environment can help, too. “While government policies or investments – for example, in research, universities and infrastructure – may be present, they have often not been applied with the specific objective of cluster development,” explains Ketels.

 

But even when all the factors for success are present, it may still take time before success comes. It might look as if the high-tech cluster in Cambridge in England – often called Silicon Fen – is a new thing, but it began in the 1980s. Walter Herriott is managing director of St. John’s Innovation Centre in Cambridge in the UK, which through its partnership with Cambridge University’s St John’s College is at the heart of the city’s knowledge industries cluster. There are, he says, two ways of creating clusters.

 

One approach – that of Cambridge – is to build on the knowledge and strong research base of the locality, to produce a genuinely indigenous and entrepreneurial specialist cluster. The second – adopted at Sophia Antipolis at the French National Institute for Computer Science and Automation – is to attract multinationals of a common specialism into an area and build the research and skills infrastructure around them, to eventually inspire the indigenous businesses and entrepreneurship. But this can take 10 years, as it has at Sophia, argues Herriott.

 

The concern that I have had is that people think they can replicate the Cambridge cluster in other places,” says Herriott. He believes that without the existing knowledge base of an academic and research centre, such as Cambridge, it is not sufficient simply to persuade multinational companies specialising in complementary activities to locate in the same place. A support infrastructure – including research excellence, local skills, logistics and relevant venture capital – must also be built up.

 

If you have got the ability to manipulate state funding into an area then you can bring in a number of multinational companies and they may, or may not, create indigenous clusters,” explains Herriott. “You can create knowledge-based clusters – but unless you are doing more than just attracting businesses you are just creating an inward business environment.”

 

Many locations attempt to launch completely new clusters,” agrees Ketels. “This is the most difficult approach and the track record shows a poor success rate where governments identify an opportunity to promote a cluster that might – like life sciences – be located almost anywhere and they try to ‘buy’ whatever factors are necessary to attract success. The multitude of interactions within a successful cluster is just too complex to be recreated from scratch by government design. A better strategy is to improve the overall business environment – for example, by upgrading skills, making finance available and improving the physical infrastructure, streamlining rules and regulations, supporting sophisticated local demand and opening-up an area to foreign investment and competition.”

 

In Saudi Arabia, the Kingdom’s investment authority SAGIA has put cluster development at the centre of the country’s 10×10 strategy, aiming to place it in the world’s top 10 globally competitive investment destinations by 2010. Through the use of economic cities as homes for globally leading clusters, SAGIA aims to use its 10×10 business environment improvement work to fast track the country’s drive towards competitiveness. The goals are achievable as the Kingdom believes that its internationally-respected expertise in energy management and exploitation provides the basis for cluster development in other strategically picked sectors, regardless of their relationship with energy.

 

There is a huge potential in the Kingdom for a number of clusters, beyond oil,” says David Maggs, a partner in Monitor, an economic strategy and cluster consultancy, co-founded by Professor Porter, which is advising SAGIA. “What is important is to be clear about what is to be done and who needs to do it, harnessing the potential that exists, not only in terms of natural endowments, but also in terms of the potential for innovation that resides within a young and dynamic population.

 

The macroeconomic situation in Saudi Arabia is very favourable at the moment. This country has already made huge progress over the last few years. Momentum has already begun in clusters like education and ICT – and as they continue to develop they will provide strength to other clusters. Education is key to building truly competitive clusters. It is very helpful for the Kingdom that other Gulf States are also making strides forward with clusters, which will help the health of the Gulf as a whole.”

 

Four initial industrial clusters have been announced, in automotive engineering, construction, appliances and logistics. Early in 2007, several other potential clusters will be declared – probably in education, ICT, knowledge-based industries, health, logistics, energy support services and financial services. These clusters will be strongly connected to the massive investment in the new Economic Cities.

“The economic city projects are in line with our strategy to promote investments into the country’s sectors that propose the best competitive advantages, namely, energy, transportation and knowledge-based industries,” explains SAGIA Governor Amr Al Dabbagh. In so doing, these investments are being made to support cluster development, building regional centres of expertise. And the approach is being backed by substantial inward investment. Microsoft, Cisco and Agility each have investment programmes in the hundreds of millions of dollars orientated to building specialist clusters.

 

Dr. Khaled Al Daher, General Manager of Microsoft in the Kingdom, says: “Microsoft is committed to developing the ICT sector and putting Saudi Arabia among the top countries benefiting from this dynamic sector. Our strategic cooperation with SAGIA comes on the level of sharing visions and launching initiatives that enhance ICT in the Kingdom. Together, we are working on developing initiatives that lay foundation to a healthy knowledge-based economy for the benefits of our country and people.”

  1. This approach was recently reinforced by Microsoft founder Bill Gates when he gave the keynote address to the 1st Global Competitiveness Forum in Riyadh. Saudi Arabia is well placed to benefit from the energy and human resources of the country, building on its energy expertise, allying this to ICT and further strengthening this by exploiting local universities that are producing education “in the same league as the best US Universities”, said Gates.

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  3. In particular, suggested Gates, the Kingdom could ally its cluster expertise in ICT with that of its understanding of the energy industry. There would be a time when “software developed here in the country”, relevant to the energy sector, would mean the Kingdom’s “value added developed very quickly”, he argued.

 

Another priority sector is plastics, again developing a new focus from the established raw material base of the Kingdom. A ‘plastics valley’ will form a core element of the King Abdullah Economic City, using a local infrastructure geared to the needs of the plastic industries. “This would be a major boost for plastic manufacturers and will increase Saudi Arabia’s stake in the global plastic market considerably in the near future,” says SAGIA’s Amr Al Dabbagh. It is expected that the development will help raise Saudi Arabia’s stake in the global plastic market from its current one per cent to at least 15 per cent by the year 2020.

 

Cluster development will take place not only in the industrial sectors – tourism too will be a major focus for investment and growth. Madinah’s role in attracting pilgrims will also see a further expansion of the city as a tourism hub. “We are proud to work on a project that promises to be one of the largest in the hospitality sector in the Islamic world and a celebration of our history and culture,” says Dr. Ghassan Al-Sulaiman, Chairman of Siraj Capital, a major investor in Madinah. “Driven by increasing Umrah and Hajj visitors, religious tourism figures are expected to grow 240% from their current level to 34 million visitors per year by 2025.”

Cluster investment is coming from indigenous and multinational businesses, SAGIA and international investment banks. A $100m venture capital fund has been established by Intel Capital and SAGIA, while the Swicorp Joussour consortium, backed by Swicorp investment bank and SAGIA, will have $5bn to invest in energy-related projects. Similar investment schemes are being developed for other sectors, all expected to support the development of clusters.

Significantly, major investment is also being made in the logistics sector. Agility – the Kuwait-based firm, known until recently as PWC Logistics – is investing nearly $1bn over the next five years in developing its infrastructure in the Kingdom, with commitments both within the main potential logistics clusters in the Prince Abdul Aziz ibn Mousaed and Jizan economic cities, and in what Agility calls the ‘hubs and nodes’ around the country.

 

The Kingdom of Saudi Arabia is a critical market for the region and in general,” says Essa Al Saleh, Agility’s managing director for corporate development. Given the size and location of the Kingdom, it is “absolutely critical” that the logistical infrastructure, including clusters, provides importers and exporters with an efficient service, says Al Saleh.

 

For Agility, cluster development in the Kingdom makes sense in two ways. “It organises the market around certain areas where you are supported by infrastructure: you get then the major investors in those clusters. It makes it easier for you to build investments and achieve economies of scale.” Those investments can then be leveraged by bringing together a range of complementary businesses, argues Al Saleh.

 

With businesses and government equally committed to supporting clusters, it is clear that cluster support is much more than a passing fad. It is a strategy that will be seen as a permanent part of economic development policy both in the Kingdom and the rest of the world.

 

Silicon Valley

California’s Silicon Valley is the world’s most famous and most successful industrial cluster. Its history can be traced back to 1891, with Stanford University’s location there. Subsequently, communications and technology businesses were drawn to the region’s research culture and skills, with Hewlett-Packard formed in the 1930s and IBM and NASA locating research facilities there in the 50s. By the 1960s Silicon Valley was well on its way to becoming an internationally renowned R&D centre for what was about to become a high tech revolution. Stanford Research Institute demonstrated for the first time the application of the computer mouse, windows systems and computer networking in 1968 – the year in which Intel was founded in Silicon Valley. By this time, the valley had formed the ‘critical mass’ of research, skills, investment, infrastructure and entrepreneurship that marks out a true industrial cluster. During the 1970s, Silicon Valley was the centre of a series of exciting innovations and developments – the floppy disk; the exponential increase in microprocessor power; database technology; and home computing. It is no surprise that the Valley has produced Microsoft, Cisco, Apple, Sun Microsystems, Yahoo!, Google, Netscape and many other giant high tech companies.

The Economic City clusters

 

The Kingdom has announced an initial five new Economic Cities that will be the centres of economic and cluster development. The economic cities will include King Abdullah (north of Jeddah), Prince Abdul Aziz ibn Mousaed (at Hail), Madinah and Jizan.

 

The King Abdullah Economic City will be one of the world’s largest seaports, with a cluster development strategy based on its transportation links and the Kingdom’s energy expertise, backed by an industrial complex, education zone, financial island, resort areas and residential district. A major cluster focus will be a ‘plastics valley’.

 

The Prince Abdul Aziz ibn Mousaed Economic City will host clusters around the linked sectors of logistics, transportation and packaging, as well as retaining its importance in mining and agriculture, supported by a new agriculture research institution. Madinah is to developed as a centre for knowledge-based industries (KBIs), with a high tech business park and biotechnology and other research centres. A national and regional financial centre will be created in the new King Abdullah Financial District in Riyadh.

 

Case study

 

Galway, Ireland

 

Galway is a small city of less than 70,000 residents, geographically marginalised on the west coast of Ireland. Yet it is a dynamo of the successful Irish economy, driving forward the country’s advanced ICT and medical devices industries. It employs about 40% of the people involved in the research, development and production of medical devices in Ireland.

 

The trigger for the remaking of Galway as a research-orientated centre for industrial clusters came with the closure of the manufacturing capacity of Digital Electronics Corporation in 1993. At one point it had 1,800 employees and many local companies were dependent on their trade with DEC. The closure badly hit the area, but had the positive effect of stimulating the Industrial Development Agency to produce an economic development plan for the city and surrounding region. Working with the Galway Chamber and Enterprise Ireland, IDA opened incubation units to support the generation of new SMEs. Those units have subsequently grown into the Galway Technology Centre, currently hosting 35 businesses. Development has been backed by the creation of specialist venture capital funds.

 

Eventually, these SMEs and the inward investors attracted by the IDA achieved a ‘tipping point’ where factors came together to stimulate the establishment of a self-sustaining cluster. “There was co-operation [within] the cluster,” says Chris Coughlan, past president of the Galway Chamber and a senior manager at Hewlett-Packard. “Multinationals worked with the SMEs in the area – so there were a lot of synergies.” In the case of the bio-medical devices, traditional local metal-bashing businesses refocused themselves into specialist supply companies for the sector – and have since become recognised as major suppliers to the industry across the world.

 

Research institutions grew alongside the inward investment and new SMEs. Now both university and college are recognised as research centres of excellence, which build the local R&D base and help provide the necessary skills. A Digital Enterprise Regional Unit (DERU) has helped develop the symantec web (machine recognition of the web) and the local Regeneration Medicine Institute (REMEDI) specialises in gene therapy and stem cell research.

 

One factor that observers agree has been fundamental to the take-off of clusters in Galway and elsewhere in Ireland has been the country’s adoption of macroeconomic policies that stimulated investment and enterprise. On the back of this and major European Union investment, Ireland has moved from being the poorest country in the EU to becoming one of its richest.