Michael Luger Professor of Public Policy, Planning, and Business Director, C 3 E

1. Cluster PresentationtoNational Economic & Social Development Board (NESDB)Bangkok, ThailandMay 24, 2006 Michael Luger Professor of Public Policy, Planning, and Business Director, C3E The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

2. My experience in cluster analysis and cluster-based planning • Teach • Publish refereed articles on topic • Write reports for clients, mostly in NC; see www.c3e.unc.edu (elaborate) • Advise and lecture in many states and nations • NAS, EU, NZ, AUS The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

3. Smart Places for Smart People: Using Cluster-Based Planning in the 21st-Century Knowledge Economy Michael Luger Professor of Public Policy, Business, and Planning and Director, Carolina Center for Competitive Economies www.c3e.unc.edu The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

4. Smart Places for Smart People • The title refers to a growing understanding within the economic development and policy communities that the U.S. cannot compete with low-cost, low-skilled countries for old-economy jobs, but rather, must turn to high-skilled, high-value added jobs appropriate for an advanced, increasingly high-tech economy. • The challenge is to find the right types of jobs that can transform all communities into smart places. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

5. Summary • Cluster-based planning is widely used to address challenges faced by regional, state, and national economies • It has a valid conceptual basis in regional economics going back to Marshall • Its recent popularity can be attributed to its use around the world by Porter and associates • Despite unavoidable technical/data problems, cluster-based planning has been a useful “mode of inquiry” that successfully brings together business, government, and education leaders around common economic problems The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

6. Summary • But, economies today are markedly different than in Marshall’s time, or even in the latter 20th–century • The “standard” approach to cluster-based planning is rooted in the “old economy,” missing opportunities consistentwith the “new economy” of the 21st- century The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

7. Summary • The central point of presentation: cluster-based planning today must be different from in the past because of the realities of the “new economy.” Specifically, • recognize that regional clusters are not appropriate for all parts of a region, but need to be stepped down to fit the capacity of individual communities, and • define clusters in more than the traditional way (i.e., as industrial subgroups linked with other industrial subgroups due to trading relationships) The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

8. Summary • I describe an innovative approach consistent with these principles by one of the country’s smart regions: the Research Triangle of North Carolina. • Leaders commissioned cluster-based planning effort that identified strong and growing targets for recruitment and expansion. • Rather than stopping there, task force formed a research consortium to implement the plan in a way that recognized intra-regional differences in capacity, and the ever-changing technology content of businesses. • The consortium redid and and stepped-down Porter’s analysis to the sub-regional level, and defined clusters around occupations and technologies, as well as industry codes The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

9. Outline • Brief description and critique of standard approach to cluster-based planning • What the “new economy” requires of cluster-based planning • The North Carolina case model The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

10. Description and critique of standard approach to cluster-based planning • Description of technique • Starts with national benchmark clusters, created via factor analysis of input-output coefficients, using 4-digit SIC/NAICS industries The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

11. Description and critique of standard approach to cluster-based planning The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

12. Description and critique of standard approach to cluster-based planning • Description of technique • Usually using employment data by county aggregates, asks to what extent those clusters are present in the region • Constructs LQs and changes in LQs • Identifies regional clusters that are growing in employment nationally The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

13. Description and critique of standard approach to cluster-based planning The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

14. Description and critique of standard approach to cluster-based planning • Allows discussion of pros and cons of different cluster priorities and supporting policies The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

15. Description and critique of standard approach to cluster-based planning • This graphic raises questions for the public and private sectors, based on values and political agendas: • How, if at all, should existing clusters be reinforced? • Should declining clusters be saved? How? • How, if at all, should emerging clusters be encouraged? • How many resources, if any, should be put into potential clusters? The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

16. Description and critique of standard approach to cluster-based planning Cluster analysis is not particularly scientific • Cluster analysis often consists of ad hoc construction of industry agglomerations of interest to policy-makers, planners, other cluster advocates • invoked to legitimize policy choices that would otherwise have been made (CHT, good or bad?) • Existing and emerging clusters can be identified in the data; potential clusters cannot • “capacity” vs. “ambition” in cluster-based planning The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

17. Description and critique of standard approach to cluster-based planning Cluster analysis is not particularly scientific • Even so-called technical approaches are assumption-based, data-specific, and subjective • Requires assumptions about the uniformity across places of trading relationships • Requires judgment in the application of the econometric technique commonly applied • Outcomes depend on datasets (years, level of detail, and benchmark regions) • Technical approaches do not name clusters; researchers do The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

18. Description and critique of standard approach to cluster-based planning Name this cluster The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

19. Description and critique of standard approach to cluster-based planning • The “standard” technical approach to cluster development identifies appropriate clusters for large regions, or for networks of regions, without differentiating for differences in sub-regions’ • infrastructure • labor force The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

20. Description and critique of standard approach to cluster-based planning • The “standard” technical approach to cluster development leads to false positives and false negatives in recruiting The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

21. Description and critique of standard approach to cluster-based planning • The last two criticisms (that cluster analysis… • does not recognize differences within regions, and • focuses on industrial code assigned to businesses) • are inconsistent with realities of the 21st-century “new economy” The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

22. What the “new economy” requires “The New Economy is about the transformation of all industries and the overall economy. . . [and] represents a complex array of forces. These include the reorganization of firms, more efficient and dynamic capital markets, more economic "churning" and entrepreneurial dynamism, relentless globalization, continuing economic competition, and increasingly volatile labor markets.” Rob Atkinson, former VP of PPI The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

23. What the “new economy” requires • These forces have at least two consequences that are played out at the local level: • a growing disparity between the dynamic new economy locations and the more static old economy locations. • breakdown of traditional definitions of industry. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

24. What the “new economy” requires • In light of the regional differences just shown, Porter’s recommendation to consider for the region such clusters as: • Environmental sciences • Biotechnology and information technology • Telecommunications and medicine • Biotech and agri-business did not get buy-in from many of the 16/19 counties in the region, but not in the core. All they saw in this list was some prospects for agri-business The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

25. A smart region responds • We redid the Porter study with more recent years of data, and a step-down to three sub-regional areas Most appropriate industry clusters based on their existing competitive advantage and their prospects for job growth The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

26. A smart region responds • We redid the Porter study with more recent years of data, and a step-down to three sub-regional areas The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

27. A smart region responds • We then analyzed occupational needs of these clusters to see if appropriate supplies are in each of the sub-regions The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

28. A smart region responds • Third, we sought to give economic developers in the region real companies to recruit and retain, minimizing the false positives and negatives. Example: The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

29. A smart region responds But, • False positive: some businesses in the electronics components industry will have no linkages locally, and are a waste of time to go after The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

30. A smart region responds And, • False negative: businesses not in the “missing components” column of industries is connecting with other IT businesses and would value co-location, but is missed by recruiters

31. A smart region responds • Cluster businesses in a third way: by shared technology/application area, to add another filter The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

32. This two-way screen will reduce false positives. • It also provides a new basis for the region to market itself to the world.. Flushing out of the brush companies that could not have been foreseen as linked to the region (reducing false negatives) The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

33. Additional thoughts • N.C. example represents an outstanding model of business-government-university partnering in economic development • The very concept of clusters is one of networks.. Whether those networks are among trading partners, employers and workers, or among technical personnel advancing a technology • I did not specify “small” vs. “large” businesses, but size matters in cluster-based planning • Small businesses value, and benefit most, from the cluster services and support that are provided The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

34. Additional thoughts • Entrepreneurship: • CED, KFBS, and NCCCS have been key members of working group and task force in cluster study, pro-actively advising on how different clusters would provide e-ship opportunities • Provide courses and training to potential entrepreneurs • RPTF (2001) established rural venture fund and led to creation of Rural E-ship Institute to provide guidance and funds to displaced and underemployed workers, and others, in region • Golden LEAF The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

37. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

38. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

39. Rural mini-hubs The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

40. Key projects that set the stage • Vision 2030 (1999) • ICRCs (2000) • Cluster plan for RTRP (2003) • Research park planning, design, and impact (ongoing) The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

41. Mini-hub feasibility study (2002) The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

42. The mini-hub idea • The idea to create focused, critical masses of economic activity that can serve as “growth poles” for their region gave rise to RTP and other research parks in the US. • Gov. Hunt advanced the creation of “Triangle East” to create a growth impulse in Wilson-Rocky Mount-Zebulon • Similar ideas were floated in the Vision 2030 report and by the Rural Prosperity Task Force The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

43. What is a “mini-hub”?What is it not? • It is a sizable real estate development suitable for target businesses • It is not a typical industrial park Industrial parks typically provide utilities and shell buildings for a broad range of low- to medium-skilled businesses. Generally, few other services are provided. A mini-hub is focused on target industry clusters, and provides enhanced services and facilities appropriate for those related businesses. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

44. A mini-hub is not a traditional industrial park. Neither is it intended as a pure research or technology park, like RTP or Centennial campus. The mini-hub is a “mid-tech park” – focusing on businesses that use skilled labor to make advanced products, rather than on R&D. • Processing, manufacturing, and some back-office activities (sophisticated call centers, data processing and storage/retrieval) might be appropriate tenants. • Spin-offs from RTP and Centennial campus (and elsewhere), seeking less expensive space and access to appropriate labor. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

45. Kerr-Tar Hub: An “Enhanced” Technology Park • Special facilities • Incubators or accelerators • Testing/research labs • Advanced IT capability • Shared meeting and conference space • Specialized services • Industry-specific workforce training • Marketing/export promotion • Regulatory review/adherence • Business assistance The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

46. A mini-hub is connected to other resources in the region • To the RTP and Centennial campus, to universities…. • To other mini-hubs that might be developed The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

47. A mini-hub schematic mini- hub mini- hub Central hub mini- hub mini- hub 3 important connections: to the central hub, to each other, and to traditional parks The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

48. A mini-hub is a regional resource, not an economic development tool for a single county • Because it is higher-end and enhanced it requires more investment • If successful, it would generate more benefits than otherwise would have occurred, which would be shared by all investors The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

49. Why would a mini-hub pay off for this region? • It would be more visible to prospects than the scattered traditional industrial parks • The joint efforts of the counties, the state, the RTRP, site selection consultants, … and • The appropriateness of the model to emerging business clusters … should lead to more locations than even would locate in the sum of all industrial parks. The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise

50. The involvement of several counties kicks in the Lee Act provision that a business locating in such a place qualifies for tax incentives due in the lowest tier (most distressed) county in the consortium … should also lead to more locations The Carolina Center for Competitive Economies (C3E) Kenan Institute for Private Enterprise