Networks, Clusters, Industrial Districts: Key Issues in Analysis and Promotion

1
Networks, Clusters, Industrial Districts Key
Issues in Analysis and Promotion

• Jörg Meyer-Stamerwww.mesopartner.com

2
Structure of the presentation

• Cluster definitions and typologies
• Obstacles to cluster initiatives
• -- and how to overcome them

3
Why cluster promotion?

• generally to enhance the competitiveness of
  companies, particularly SMEs
• specifically
• collaboration between companies
• to create economies of scale
• to stimulate innovation
• to create market power
• more effective government support
• alignment and coordination among government
  agencies
• closing gaps in support structure

4
Cluster definitions and typologies
5
What is a cluster?

• A geographical agglomeration of firms in the
  same or closely related sectors

• Passive cluster advantages
• Skilled workers
• Suppliers of inputs and capital goods
• Customers
• Low barriers to entry

• Active cluster advantages
• Strong, competent business associations
• Specialized, high-quality skills development
  effort.

6
A highly dynamic clusterCeramic tiles,
Castellón, Spain
CERAMIC TECHNOLOGY INSTITUTE
AUTONOMOUS GOVERNMENT SUPPORT
VERY ACTIVE BUSINESS ASSOCIATION
LOCAL GOVERNMENTS SUPPORT
NEW INFRASTRUCTURES INVESTMENT
CERAMIC PROMOTION INSTITUTE
CERAMIC DESIGN INSTITUTE
SPECIALIZED COURSES AT HIGH SCHOOLS
UNIVERSITY WITH SPECIALIZED COURSES
7
Inside the Castellón cluster
8
Why does a cluster emerge?

• Due to historical coincidence
• Due to the availability of key inputs (e.g. clay)
• Due to government interventions (often
  inadvertently)

• An example of historical coincidence
• Somebody starts a textile company
• As it grows, some employees quit and start their
  own textile company
• Sons of the owner fight over the inheritance and
  split the company
• As more companies are there, suppliers come in
  with local production
• As more skilled workers become available, new
  entrepreneurs come in to start their own textile
  or supply company.

9
An emerging clusterLingerie production in
Frecheirinhas, Ceará, Brazil

• Origin of the cluster Innovative idea of one
  entrepreneur
• getting ideas for fashion lingerie from European
  fashion journals (1992)

• Copied by other local entrepreneurs
• Late 2002
• 12 formal companies
• 15 informals
• about 500 employees
• 250,000 pieces / month

10
An emerging clusterLingerie production in
Frecheirinhas, Ceará, Brazil

• Mostly producing for the regional market
  (neighbouring provinces)

• LED in Frecheirinhas
• impossible until late 2002 -- political rivalry
• early 2003 mayor on trip to successful cluster
  in Minas Gerais
• result local government
• facilitates skills development
• develops business estate

11
Can a cluster be created?

• No!
• Clusters emerge due to the invisible hand of the
  market
• It is hard to conceive how a complex cluster
  structure might be created from scratch

• But
• Private sector actors or government may transform
  undercomplex agglomerations into clusters, and
  clusters into industrial districts
• There are examples of clusters which are due to
  government intervention
• Aerospace in São Paulo province
• Salmon in Chile
• Hsinchu high technology cluster in Taiwan
• Software in Bangalore / India (originally based
  on government defense and computer companies).

12
Cluster typologies

• Life-cycle typologies
• Michael Enright
• Jörg Meyer-Stamer
• Functional typologies
• Ann Markusen
• Altenburg/Meyer-Stamer

13
Michael Enrights typology of clusters

• Working cluster
• Latent cluster
• Potential cluster
• Policy-driven
• cluster
• Wishful-thinking cluster

• strong specialization and dense interaction
  between companies
• competitiveness based on interdependence
• critical mass of companies, but little
  interaction
• low degree of specialization
• agglomeration with little scope in activities
• little interaction and specialization
• chosen by government for support
• often recent industries, start-up companies
• policy-driven clusters without any critical mass.

14
A life-cycle typology of clusters (Jörg
Meyer-Stamer)

• Emerging cluster
• Growing cluster
• Mature cluster
• Declining cluster

• Based on historical coincidence
• Start-up companies
• New entries in main products
• New entries in supplies and services
• Increasing specialization
• Increasing collaboration strong rivalry
• Few entries, consolidation / takeovers
• Decreasing collaboration
• Outsourcing of non-core activities
• Decreasing number of companies
• Decreasing number of employees
• Fierce rivalry, little collaboration.

15
A cluster-typology according toAnn Markusen
16
Italianate Industrial District

• Sectoral specialization
• Dominance of small- and medium-sized firms
• Strong division of labor
• A high degree of specialization among firms
• Strong competition, especially via innovation
• Information network
• Highly qualified workers
• Socio-cultural basis for trust
• Active role of the state.

17
Hub-and-spoke clusters

• Presence of large, medium and small-sized firms
• Leadership role of large firms
• technology and innovation
• decision-making in collective action
• Many hierarchical relationships inside the
  cluster
• Strong tendency in the recent evolution of many
  Italian industrial districts.

18
Satellite clusters

• Reliant on firms elsewhere (contractors,
  customers, headquarters)
• Often result of cost-reduction strategies of
  firms in leading clusters
• Further strong tendency in the recent evolution
  of many Italian industrial districts
• Potential for emancipation (see Taiwan, Korea).

19
State-anchored district

• Occurs in government-dominated industries, such
  as armaments

20
The Altenburg/Meyer-Stamer typology Clusters in
Latin America

• Survival clusters
• Fordist clusters
• Transnational clusters

21
Key Features of Survival Clusters passive
advantages of clustering

• information spillovers concerning sourcing,
  marketing, and product design of competitors
• the availability of a semi-skilled labor force
• easy access to raw materials and machinery
• lower search costs for customers.

22
Survival clusters The features of world-class
clusters are absent

• low degree of specialization
• little inter-firm cooperation
• limited socioeconomic ties.

23
Survival clustersWhy is there little
specialization?

• too limited skills to enter forward / backward
  stages
• little capital.

24
Survival clustersWhy is there little
cooperation (1)

• First, there is little trust
• copying is major business strategy
• predatory behavior often pays off (business as
  survival activity, short time horizon)
• little social control in shantytowns with high
  turnover of inhabitants.

25
Survival clustersWhy is there little
cooperation (2)

• Second, there are further reasons
• no legal mechanisms to enforce informal contracts
• little available advanced factors / complementary
  assets
• low barriers to entry, thus excess supply and
  underutilization of capacities, ruinous
  competition.

26
The Vicious Cycle of Survival Clusters
Selection process does not work because exit is
no option negative incentive for firms with
potential to survive
Entry
Some success
Competition based on price-cutting
More entrants
27
Promotion measures for survival clusters

• Creating dynamism in the formal sector to stem
  the inflow into survival clusters
• Training measures for businesses
• Food/money-for-education programs.

28
Key features of Fordist clusters

• Strong growth in import-substitution era
• Hub-and-spoke structure
• Deep adjustment crisis after opening of the
  market
• High turbulence (exits and entries).

29
Promotion measures for Fordist clusters

• Creating active advantages
• Training
• Technology
• Export information
• Finance
• Strengthening business associations
• Overcoming un-cooperative behavior.

30
Key features of Transnational Clusters

• Multinational firms produce final products
• First- and second-tier suppliers are also
  multinationals
• Little demand for inputs from local producers
• insufficient quality / quality variance
• inability to meet scale and flexibility
  requirements.

31
Promotion measures for Transnational Clusters

• Attract more, complementary multinationals
• Upgrading of local suppliers, starting with
  simple inputs.

32
Six types of obstacles to cluster initiatives
33
What is the purpose of a cluster initiative?

• To increase the competitiveness of companies, and
  thus create income and jobs, by producing
• the same products more efficiently
• higher-value products
• Increased competitiveness can be based on
• increased specialization and interaction between
  companies
• attraction of specialized suppliers
• collective action
• visits to international fairs, joint stands
• skills development and joint learning
• technology development

34
Obstacles to cluster initiatives
Between firms
Firms xmeso institutions
Private sector x public sector

• Prisoners dilemma

35
Understanding relationships between competing
firms Prisoners dilemma

• Prisoners dilemma involving competing firms
• No ex-ante co-operation (joint crime)
• Long history of rivalry
• Established culture of defection
• Path-dependence Attempt to co-operate fails
  reinforces non-cooperative disposition.

• Conventional prisoners dilemma
• One crime, two prisoners in separate rooms
• No clear evidence
• No punishment if confession
• Result 1 None confesses, no / little punishment
  Co-operation
• Result 2 Both confess, both get punished
  Defection
• Repeated prisoners dilemma Co-operation emerges

36
Obstacles to cluster initiatives
Between firms
Firms xmeso institutions
Private sector x public sector

• Prisoners dilemma

• loss of secrets
• costs of cooperation transaction cost,
  opportunity cost, investment cost
• anti-trust risks

37
If we talk about cooperation ...

• ... we (consultants, resear-chers, SME promoters)
  think of
• collective efficiency
• learning-by-interacting
• joint upgrading efforts
• collective action to create locational advantages

• ... businesspeople think of
• joint purchasing
• joint sales
• eliminating competition!
• creating market power!
• attacking established power structures
• challenging powerful actors in the market
• powerful actors respond
• and kill the cooperation effort.

38
Obstacles to cluster initiatives
Between firms
Firms xmeso institutions
Private sector x public sector

• Prisoners dilemma

• Chambers hate clusterinitiatives because
  theycome under fire from non-cluster firms

• Local governance
• lack of credibility of cluster concept
• mistrust between private and public sector
• political rivalry

• Supporting institutionsthe usual problems, i.e.
• different rationales
• different goals
• different cultures
• different time horizons
• fuzzy evaluation criteria

• Global governance
• strong position of foreign buyers
• little commitment of local branch plants

• loss of secrets
• costs of cooperation transaction cost,
  opportunity cost, investment cost
• anti-trust risks

39
How can the obstacles be overcome?
Conventional approaches
40
Key questions at the beginning of a cluster
initiative

• What type of cluster is it?
• cluster initiatives are difficult in mature or
  declining clusters, and in satellite clusters
• Are there obvious gains to be expected from more
  collaboration among companies?
• Are there obvious gains to be expected from
  improved coordination between support agencies?
• What is the risk/benefit-ratio as perceived by
  companies?
• Are there powerful actors who might be
  interested, or decidedly disinterested, in a
  cluster initiative?

41
Possible sequence in a cluster initiative
...
Increased trust
Joint RD project
Increased trust
Joint stand at foreign fair
Increased trust
Joint training initiative
42
Criteria for initial activities to overcome a
non-cooperative culture

• they address immediate problems of firms
• they offer the potential of savings through
  economies of scale
• they do not touch what firms perceive as their
  core activities
• they open little or no latitude for predatory
  behavior

• cost and benefit
• cost and benefit
• trust
• trust

43
Cluster promotion in the view of systemic
competitiveness

• Meta-level
• Macro-level
• Meso-level
• Micro-level

• understand the logic of non-cooperation
• identify the existence of social capital
• identify and remedy unfavorable macro-economic
  conditions which hinder the cluster
• restructure and re-orient existing institutions
• create new support institutions
• attract complementary firms
• initiate co-operation initiatives
• which address immediate necessities
• which have a quick, visible impact
• which give little opportunity for opportunistic
  behavior
• which contribute to creating social capital

44
Practical examples
45
Again what are the objectives cluster promotion?

• generally to enhance the competitiveness of
  companies, particularly SMEs
• specifically
• collaboration between companies
• to create economies of scale
• to stimulate innovation
• to create market power
• more effective government support
• alignment and coordination among government
  agencies
• closing gaps in support structure

46
Create economies of scale

• Ceramic tile cluster in Santa Catarina, Brazil
• jointly maintained technical school
• lobbying for higher education course in ceramics
  technology at local university
• creation of a technology center to provide inputs
  and materials testing services to all cluster
  companies
• Ceramic tile cluster in Sassuolo, Italy
• joint transport operation within the cluster

47
Stimulate innovation through re-combination The
textile industry cluster initiative in NRW,
Germany
Globalisation
Information Technology
Textiles industry NRW Garments Home
textiles Technical textiles 330 Companies 39.000
Employees
Initial and ongoing training
48
SCOTLANDS CREATIVE MEDIA INDUSTRIES CLUSTER
ENABLING TECHNOLOGIES
Film, TV, Radio Music Studios
Telecomms
Computing
Electronic, Digital Optical Media
Print Media
Internet Online Systems
Distribution Channels
Markets
IPR Commercialisers
Content Originators
Schools
Education
Multimedia Distributors
Multimedia Producers
Consumer Electronics
Game Distributors
Games Producers
Retail Shops
Readers
Authors
Book Publishers
Libraries
TV/Radio Audiences
TV/Radio Channels
Film/TV/Radio Producers
TV/Radio Broadcasts
Music Buyers
Film Distributors
Film Producers
Filmgoers
Utilities/Public Sector
Cinemas
Newspapers/Magazines
Journalists
Edutainment
Internet
Record Labels
Musicians
Business
Advertising Media
Visitor Attractions
Advertising Agencies
Designers
Professional Services
Promotion Review
Marketing
Patent Agents
Media
IPR Lawyers
Critics
Accountants
Talent Agents
OTHER CLUSTER PARTNERS
UPGRADING INNOVATIVE BODIES
Libraries Museums
SAC
Industry Bodies
Government (SO,DCMS)
Art Music Schools
E-commerce users
Universities Colleges
Banks Financiers
Industrial RD
Education Authorities
Smart Cities
Key to shading
Relative Weakness
Relative strength
Broadly on par
Scottish Enterprise Creative Media Group Jan.
1999
49
Create market power

• Ceramic tiles, Santa Catarina, Brazil
• joint lobbying for access to natural gas pipeline
• Ceramic tiles, Castellón, Spain
• joint purchasing of telecom service, energy,
  transport services
• IT cluster initiative, Scotland
• joint purchasing of broadband capacity
• Fooddrink cluster initiative, Scotland
• joint acquisition of otherwise prohibitively
  costly market research reports

50
A leading-edge exampleCluster promotion in
Scotland
51
Key features

• linking cluster value chain promotion
• limited public support
• private sector-driven
• cluster development community building

52
The Scottish Cluster Approach
Stakeholders include partners in industry,
academia, education, research, government and
other appropriate institutions
53
Scotlands Food Drink Cluster 1999
Upgrading Innovative Institutions
No presence
Research Institutes e.g SABRIs
Weak
Medium
Universities
Training Providers
Strong
Imported Commodities/ Raw Materials
Colleges
Key driver
Rendering/ By Products
Fish Farming
Basic Processing
Customers
Food Brokers
Value Added Processing
Fish Markets
Multiple Retailers
Prepared Meats Fish
Meal Solutions
Discounters
Gourmet Foods
End Users
Independent/ Speciality Retailers
Red Meat
Auction Marts
Farmers
Abattoirs
Snacks
Consumers
UK Distributors
Bakery Confectionary
Food Service
Dairy
Feed
Non-Alcoholic Drinks
Further Processing Outwith Scotland
Specialist Growers
Vegetables
Beer
In Mkt Agents/ Distribs
Whisky
Overseas Markets
Cereals
Critical linkage - strong
Value Added Components
Critical linkage - medium
Critical linkage - weak
Infrastructure/services
QA and Food Safety
Marketing/ Design
Industry Bodies
Market Intelligence
Equipment Suppliers
Transport and Distribution
Specialist Consultants
Legislation
Packaging
54
Scotlands Food Drink Cluster 2010
Upgrading Innovative Institutions
No presence
Research Institutes e.g SABRIs
Weak
Medium
Universities
Training Providers
Strong
Imported Commodities/ Raw Materials
Colleges
Key driver
Rendering/ By Products
Fish Farming
Basic Processing
Customers
Food Brokers
Value Added Processing
Fish Markets
Multiple Retailers
Prepared Meats Fish
Ready Meals
Discounters
Gourmet Foods
End Users
Independent/ Speciality Retailers
Red Meat
Auction Marts
Farmers
Abattoirs
Snacks
Consumers
Wholesalers Distributors
Bakery Confectionary
Food Service
Dairy
Feed
Non-Alcoholic Drinks
Further Processing Outwith Scotland
Specialist Growers
Vegetables
Beer
In Mkt Agents/ Distribs
Whisky
Overseas Markets
Cereals
Critical linkage - strong
Value Added Ingredients
Critical linkage - medium
Critical linkage - weak
Infrastructure/services
Marketing/ Design
Industry Bodies
Market Intelligence
Equipment Suppliers
Transport and Distribution
Specialist Consultants
Legislation
Packaging
55
The Actions

• Develop Grow Leading Suppliers Processors
• Exploit Premium Market
• Advantage Through Innovation
• Build on Quality Standard
• Develop Capabilities of People
• Linkages Networks

56
Lessons learned

• No universal model
• Widest possible ownership is vital

57
Benefits to the Cluster Community

• Joint development and ownership of strategy with
  wide set of partners
• Increased industry confidence ambition -
  encouraging progression of new ideas spin-out
  companies
• Innovative solutions to commercialisation, skills
  shortages internationalisation
• Improved targeting of inward investment activity
• Higher national international profiles for the
  respective industries

58
Benefits for Scottish Enterprise

• Promotion of Network cohesion a philosophy of
  national delivery
• Dealings with the Scottish Executive are taken
  forward in a concerted manner
• Enables the Network to target its resources more
  effectively at community wide solutions

59
Scottish Enterprises Balanced Scorecard to
assess cluster initiatives

• Economic/Financial
• Levels of Investment
• Company performance
• Market performance - Global, UK, Home
• Employment levels/no. of Companies

• Knowledge Know how
• RD and Innovation
• International awareness/recognition
• Integration of academia business

• Skills
• Appropriate skills levels and structure
• Improved value /per employee
• Continuous learning and development

• Cluster Process
• Local connections networks
• Appropriate infrastructure
• International connectedness
• Industry Leadership

60
The goal