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Searching for the Key Ingredients of Successful Economic Clusters

The creation and success of economic clusters need not rely solely upon luck.

In 2012, when Chicago Mayor Rahm Emanuel announced that he had assembled the ingredients for a cluster of companies specialising in electric vehicles and batteries, an article in The Economist magazine asked a pointed question: “Will Chicago’s energy cluster thrive? The city’s mayor has certainly assembled the necessary ingredients. But the problem with clusters is that they are often the result of historical accidents, rather than careful planning.”

In the current economic malaise besetting most western economies, clusters – or ‘geographic concentrations of interconnected companies’ – as business economist Michael Porter defines them – hold strong appeal. But the nagging question for policymakers is whether policies can create them.

Policymakers would certainly love to replicate the success of ‘Silicon Valley,’ the cradle of the IT sector in the US, where high-tech industries sprouted in proximity to Stanford University, giving the region a new identity and a new economy. Santa Clara County, which for some 200 years was largely an agricultural region, is now one of the most affluent counties in the US. The success of Silicon Valley has led other universities and local authorities to consider its lessons, in particular by finding ways to exploit the growth potential of valuable university human capital. In the UK, clusters have grown around the ancient universities of Oxford (Biotechnology) and Cambridge (IT); other University-based clusters include the University of Warwick’s Science Park and the Warwick Manufacturing Group, clustered around engineering and IT expertise particularly relevant to automotive fields.

Clusters have formed in other settings, often around specific sectors. For instance, a recent report for the UK charitable organisation Nesta maps the geography of clusters associated to parts of the ‘creative sector’ such as video game development. These are based around the availability of specific privately-provided infrastructures (such as server farms and highspeed communications), civic provision of framework conditions as local public goods (such as the Barcelona and Berlin game development clusters) and competitively-allocated regional initiatives (competitions for biotech and nanotech clusters). They may be specialised or based on the provision of a local microcosm of an extended value chain (from R&D and venture capital to post-production). However they share certain attributes, including the ability of enterprises and individuals in close proximity to one another to engage in fluid, productive and highly adaptive forms of partnership, and to share ideas and efforts on an informal as well as contractual basis. This produces a different balance of trust and competition than is typically found in larger markets, where connections between participants are sparser and less rich, and can therefore produce new and different business and market models beyond big cities.

Warwick research shows that many instruments of policy can affect the creation and success of clustered economic activity. No single policy holds the key; instead, a ‘policy portfolio’ of many interacting policy instruments provides effective catalysis. In the most successful cases, policy instruments combine to create new connections among different levels of government, policy areas and economic sectors (policy networks) leading to a dynamic coevolution of policy and the development of the local economy – though not always cooperatively

A ‘policy portfolio’ – not one single policy- provides the catalyst.

High value-added clusters such as those based on advanced technologies are typically located in close proximity to university research centres. The role played by universities is two-fold: they act as incubators for pioneering ideas and provide a flow of high-skilled labour. But universities alone are insufficient. An entrepreneurial environment and flexible administrative arrangements within the university are also key components, as a 2004 ‘Practical Guide to Cluster Development’ for the former UK Department of Trade and Industry shows.

In recent years a greater emphasis has been placed on the role of communications technologies in affecting clustered economic development. Increasingly, high-speed internet access is regarded as an essential business enabler. Ironically, however, the ubiquity of high-speed internet communication services should, if anything, diminish benefits at the margin from geographic clustering. Cisco coined the term ‘digital communities’ to describe clustering that relies on technology rather than geography. This risk of diminished benefits from local interaction can be seen in relation to “Smart Cities” initiatives at Community and National level. While communications infrastructures can be justified as local public goods, they facilitate remote access to suppliers and customers, which can weaken mutual dependence for those aspects of economic activity that are generally mediated through markets and contracts.

Nevertheless, face-to-face interaction remains extremely valuable. The incubation of ideas seems to require close proximity in person, hence the remarkable durability found in Silicon Valley and other high-tech clusters. Informal exchanges, long-term, highly-incomplete or unenforceable contracts and the creation and exploitation of societal capital are still provided efficiently at local level. They offer specific efficiency advantages (e.g. collaborative innovation) and may be reinforced by the need of local economies not only to reach out into remote markets but also to respond to entry into local markets by remote (and often much larger) competitors. Warwick research shows that the use of communications technologies does not always result in the death of distance. Some ICT-based services, such as cloud services, benefit from local provision of large-scale data centre infrastructures and the services they require. In addition, many ‘crossover’ applications, such as eHealth, eLearning and Smart transport require local and initially unstructured contacts to bridge the gaps between the ICT and the health, education, and business cultures. Moreover, the embedding of clustered activity in local economies creates a combination of economic strength and political will that can enable cluster initiatives to avoid the fate of many initially-attractive ICT fuelled prospects, which prove unsustainable as a result of subsequent security or privacy threats or high and uncontrollable levels of financial risk. The key findings emerging from studies of such disparate areas as cloud computing, the Internet of Things, gaming and eHealth are that geographic clustering can serve as an anchor or platform for the formation of technical, economic and societal networks that are more resilient in the face of global competition and more generative of innovation than traditional mass-market models.

Not all areas necessarily possess the endowments needed to facilitate clustered economic activity. Evidence suggests that areas with the best potential for successful, high-value clusters are those in and around universities with sufficient land (physical infrastructure) to accommodate developments such as science parks in close proximity to markets, with access to reliable transport and modern, high-speed internet communications. A highly-skilled labour force, often associated with universities, is also essential. In addition, it helps to have sufficient venture capital funding from both private and public sources.

More specifically:

  • Infrastructure costs are easier to share in clusters.
  • Diversity within a cluster leads to better infrastructure capacity utilisation and resilience.
  • Labour skill endowments are more sustainable if people can migrate to other jobs in the same sector without moving.
  • Unlocking skilled labour from specific employers leads to better knowledge flow among the firms.
  • Informal and fluid contacts (brain circulation as opposed to brain drain) leads to a less-rigid and more innovation-friendly financial environment.

But most importantly, cluster success requires not only endeavour, finance and planning, but good fortune and an environment within which the entrepreneurial spirit can flourish.

Earlier this year the European Commission recognised the importance of entrepreneurship and communicated its views as part of the wider 2020 Action Plan aimed at overcoming the current economic crisis in Europe. The Commission has argued that Europe needs more entrepreneurs in order to bring back growth and higher levels of employment. As the Commission has stated, ‘To thrive, entrepreneurs and (small- and medium-sized businesses) need specific, customised expertise that can help them develop competitive advantages and benefit from global value chains and shared management of human resources. Clusters, business networks and other types of association of enterprises can provide such supportive environments as they bring together the relevant actors from business, education, research and the public sector.’

Coming together in person or through digital communities is likely to play a central role in stimulating growth in Europe. Initiatives aimed at fostering clusters of economic activity will often appear local or regional in character, but in aggregate will form a much needed backbone to support a sustainable recovery. Our work suggests clusters exhibiting vibrant entrepreneurship are likely to be a much needed ingredient to promote economic growth in the future, just as they have in the past.

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