Business Times - 16 Dec 2011

Riding the wave of business clusters

Though not a panacea for growth now, they can at times help stimulate success by providing inspiration and support


IT is worth remembering that the United States - still the world's leading industrial power - has perhaps done more than any other nation to push the idea of business clusters as drivers of economic growth.

Silicon Valley, the long-established hotbed of technology companies from Hewlett-Packard to Apple, and Hollywood, the even older centre down the California coast, are clear inspirations for groupings of similarly minded individuals and businesses all over the world, from South Korea, via the Middle East and Europe.

In the UK alone, policymakers are backing east London's Tech City and Manchester's MediaCityUK as important potential sources of future economic growth.

A clusters policy has been identified as part of the European Union's (EU) Lisbon Strategy for Jobs and Growth, and the European Cluster Observatory has identified 2,000 regional clusters spread among the 27 countries of the EU, Iceland, Israel, Norway, Switzerland and Turkey.

Singapore and Dubai have been cited as inspirations for MediaCityUK, while back in the 1990s officials in Seoul designated a 55-ha site outside the central business district as a centre for digital media. This has gone on to spawn the development of more than 10,000 small Internet, gaming and telecommunications businesses.

In addition, the Japanese carmaker Toyota inspired a different form of clusters - created by the end of the practice of large manufacturers doing everything in-house - by encouraging the setting up of groups of automotive suppliers within easy reach of its assembly plants. But for the most part, it all leads back to the US - home not just to Silicon Valley and Hollywood, but also all kinds of groupings, including the financial centre based around New York's Wall Street, the high-tech corridor outside Boston, the 'research triangle' centred on Raleigh-Durham, North Carolina, the Silicon Hills high-tech community outside Austin, Texas and so on.

The New York metropolitan area also has concentrations of possibly more surprising industries, such as food processing and transportation equipment. And not all these groupings are based on 'legacy industries'. New York State, in common with others, is making use of government initiatives to develop new clusters.

The country is also home to the 'guru' of clustering - Michael Porter, who as a professor at Harvard Business School might be felt to be at the centre of a sort of academic cluster centred on the Boston universities of Harvard and the Massachusetts Institute of Technology.

The origins of the term 'cluster' go back to the economist Alfred Marshall and his identification in 1890 of concentrations of specialised industries in certain localities that he called 'industrial districts'. Marshall was said to have been influenced by the medieval guild system, while such long-standing Italian concentrations as silk production around Como and spectacle-making in Belluno suggest that the notion is hardly new. But the idea was popularised by Prof Porter in his celebrated 1990 book, The Competitive Advantage of Nations.

At the heart of the concept's success has been Prof Porter's claim that clusters affect competition in three main ways - by increasing productivity of companies based in the area, by driving the direction and pace of innovation and by stimulating the formation of new businesses within the cluster. What this means is that - even in this time of globalisation - the local effect is still highly important.

Being close geographically and culturally creates the relationships and knowledge that are so important for the modern business, whether it is a computer graphics firm in London's Soho, an investment bank in the nearby City or a biotech business spun out of a university. In other words, businesses that are not forced to locate in certain places because of access to raw materials or cheap labour still tend to cluster because of that social aspect to human behaviour that so often eludes economists.

This is presumably why that currently much talked-about financial institution, the hedge fund, is typically not run from a Caribbean beach but from a select part of London or New York (or one of their leafier suburbs) - that is, close to the traditional money centres but in areas that offer more attractive lifestyles in terms of housing, restaurants and shops.

Indeed, many of the 'hedgies' based in London's Mayfair have started out in Regus's business centre in the area, thus making it the effective centre of a micro-cluster, in much the same way that business centres have helped boost the rapid growth of the film and creative sectors in Ealing, west London and Soho in the centre of the capital.

Prof Porter's theory is not without its critics, though. For example, Philip Cooke, professor in regional economic development at Cardiff University, has suggested that Prof Porter's definition of a cluster is so all-inclusive as to be almost meaningless.

He points out that efforts have been made to divide industrial districts into categories - ranging from the classic Marshall notion of groups of small firms linked by local investment, preferred suppliers, labour market loyalty and the likes of those that are effectively set up by governments and thus have little local involvement.

He also warns against assuming that the presence of many similar businesses in an area is evidence of a classic cluster. The state of New Jersey, for instance, has been home to the US headquarters of many global pharmaceutical companies, but they are attracted by tax breaks and lower rents than are payable across the river in New York rather than a desire to share facilities or otherwise interact.

Others have doubted whether clusters achieve the economic benefits for entrepreneurial businesses that have been claimed. A study of shoe manufacturing, for instance, has found that plants in concentrated areas of such activity failed at higher rates than isolated plants, while another report found that firms in clusters enjoyed higher survival rates but did not enhance job creation.

But a study published in 2007 by Karl Wennberg and Goran Lindqvist of the Stockholm School of Economics found strong empirical evidence that being located within a cluster has positive effects on the survival of new firms. The same research found that clustered firms created more jobs, higher tax payments and higher wages to employees.

Moreover, the National Endowment for Science, Technology and the Arts in November 2010 published a report, Creative clusters and innovation, which found that not only were Britain's creative industries thriving but that they were more widespread than thought and that their success was spilling over to other firms close to where they were clustered.

Clusters are not a panacea for policymakers looking for economic growth in these challenging times. But in certain circumstances they can help stimulate success through providing inspiration and support in much the same way that ambitious school pupils spur each other on.

Evidence suggests that factors behind successful clusters include an existing expertise or specialisation rather than one imposed from outside through stimulus or incentives; the presence of a university or other research centre with appropriate expertise; and public sector assistance - either directly or through conscious procurement. It is worth remembering that even Silicon Valley - the launching pad for so many technology stars and held up as the prime example of a private enterprise cluster - not only has a world-leading university in Stanford on its doorstep, it has also been the beneficiary of substantial investment by military and other government contractors.

The writer is the regional vice-president for Regus, Australia, New Zealand and South-east Asia. Regus is a provider of flexible workplaces

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