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. 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. What is a cluster? • A geographical agglomeration of firms in the same or closely related sectors

6. Lucena del Cid Villafamés Alcora La Pobla Tornesa Figueroles San Juan de Moro Borriol Ribesables Castellón de la Plana Villarreal Betxi Almazora Onda Vall d’Uixó Nules A highly dynamic cluster:Ceramic tiles, Castellón, Spain CERAMIC TECHNOLOGY INSTITUTE AUTONOMOUS GOVERNMENT SUPPORT LOCAL GOVERNMENTS SUPPORT VERY ACTIVE BUSINESS ASSOCIATION NEW INFRASTRUCTURES INVESTMENT CERAMIC PROMOTION INSTITUTE CERAMIC DESIGN INSTITUTE SPECIALIZED COURSES AT HIGH SCHOOLS UNIVERSITY WITH SPECIALIZED COURSES

7. a tile factory inside a tile factory clusteredfactory a glaze manufacturer Ceramic Industry Association Institute for Ceramics Technology Inside the Castellón cluster

8. 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. Why does a cluster emerge?

9. 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 An emerging cluster:Lingerie production in Frecheirinhas, Ceará, Brazil

10. 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 An emerging cluster:Lingerie production in Frecheirinhas, Ceará, Brazil

11. 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). Can a cluster be created?

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

13. 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. Michael Enright’s typology of clusters

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

15. Italianate Industrial District Hub- and- Spoke Satellite State- Anchored District State- anchored district A cluster-typology according toAnn Markusen

16. 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. Italianate Industrial District

17. 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. Hub-and-spoke clusters

18. 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). Satellite clusters

19. Occurs in government-dominated industries, such as armaments State-anchored district

20. Survival clusters Fordist clusters Transnational clusters The Altenburg/Meyer-Stamer typology: Clusters in Latin America

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 clusters:Why is there little specialization? too limited skills to enter forward / backward stages little capital.

24. Survival clusters:Why 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. 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. Survival clusters:Why is there little cooperation (2)

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

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. Conventional prisoner’s 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 prisoner’s dilemma: Co-operation emerges Prisoner‘s 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. Understanding relationships between competing firms: Prisoner’s dilemma

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. ... 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. If we talk about cooperation ...

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 • loss of secrets • costs of cooperation: transaction cost, opportunity cost, investment cost • anti-trust risks • Supporting institutions:the 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

39. Participatory approach Policy problem Policy problem Cluster definition Cluster definition Participatory analysis of local system Analysis Analysis Findings Definition of tasks and responsibilities Findings Policy implications Implementation: Cluster plus Policy design Policy design Participatory evaluation Implementation Implementation 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 R+D project Increased trust Joint stand at foreign fair Increased trust Joint training initiative

42. 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 Criteria for initial activities to overcome a non-cooperative culture

43. 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 Cluster promotion in the view of systemic competitiveness

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. Suppliers Industry/Commerce/ Imports Raw materials Services • Chemical Industry • Man-made fibres • Process chemicals Capital goods industry R&D / Innovation Garments Aerospace Furniture / interior design Construction Environment Automotive Customers Industry/Commerce/ Exports Medical 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. SCOTLAND’S CREATIVE MEDIA INDUSTRIES CLUSTER ENABLING TECHNOLOGIES Film, TV, Radio & Music Studios Telecomms Computing Electronic, Digital & Optical Media Print Media Internet & Online Systems IPRCommercialisers Markets ContentOriginators DistributionChannels Multimedia Distributors Schools Education Multimedia Producers Consumer Electronics Games Producers Game Distributors 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 Journalists Newspapers/Magazines Edutainment Internet Record Labels Musicians Business Designers Advertising Agencies Advertising Media Visitor Attractions Professional Services Promotion & Review Marketing Patent Agents Media IPR Lawyers Critics Accountants Talent Agents UPGRADING & INNOVATIVE BODIES OTHER CLUSTER PARTNERS Libraries & Museums SAC Industry Bodies Government (SO,DCMS) Art & Music Schools E-commerce users Universities & Colleges Banks & Financiers Industrial R&D Education Authorities Smart Cities Key to shading: Relative strength Broadly on par Relative Weakness 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 • Food+drink cluster initiative, Scotland: • joint acquisition of otherwise prohibitively costly market research reports

50. A leading-edge example:Cluster promotion in Scotland