Industrial Clusters: Rationale, identification and public policy. Alex Bolland

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1 Industrial Clusters: Rationale, identification and public policy Alex Bolland Over the last few years, the cluster concept has been of interest to policy-makers at all levels, from the World Bank, national governments, regional development bodies to city authorities. They have been keen to find a form of industrial policy that focuses on the promotion of successful, competitive economies. This has been stimulated largely by the work of Michael Porter (The Competitive Advantage of Nations 1990, 1998) where he suggested that governments may have a role to play in facilitating and supporting the development of competitive industrial clusters. The DTI has recently finished a report on Business clusters in the UK. The report is called, Business Clusters in the UK A first assessment and was published in February The aim of the report was to identify and map clusters in the UK with a view to ascertaining what the relevant policy issues are associated with clusters. The DTI s approach to mapping clusters is then contrasted with that of Bergman, E. and Feser, E in their paper, National Industry Cluster Templates: A framework for applied regional cluster analysis. 1. Rationale for the DTI s research into clusters. Research into the cluster phenomenon can be traced back to 1890 when Alfred Marshall initiated the idea that economic success depends (in part) on industrial specialisation and concentration. He argued at this time that growth in the nineteenth century was attributable to the development of localised industries (e.g. textiles in Lancashire, cutlery in Sheffield, pottery around Stoke on Trent). He added that this was reinforcing as subsidiary industries would arise, it would lead to a creation of a pool of skilled labour, the development of specialised machinery, and there would be a spillover of knowledge and technology between local firms. He also added that these areas had an industrial atmosphere where customs, traditions and practices associated with the industry were institutionalised in the social and cultural fabric of the area. These environments increased the competitiveness of that industry and produced advantages in production and trade. This argument was taken further almost a century later (by scholars such as Porter, M., Krugman, P., Fujita, M., Venables, J.). Due to technological overspill, reduced transaction costs, input-output linkages and local labour supplies, theories emerged that these industrial agglomerations enabled increasing returns. The argument that developed was that the more geographically localised an industry is within a given nation, the more internationally competitive that industry is likely to be. Porter was particularly influential and his term industrial cluster has become the standard concept in this field. What Porter calls a cluster, is also called industrial districts, new industrial spaces, regional industrial complexes etc by other authors, according to the specific characteristics of the agglomerations in question. Gradually more emphasis was put on the soft externalities of these agglomerations such as the social, institutional and cultural foundations of clusters, and other untraded interdependencies among firms making up the cluster. These include spillovers of knowledge and the notion of collective learning was identified in playing a crucial role in promoting innovation and entrepreneurial dynamics in clusters (some authors refer to learning regions ). 1

2 Porter s cluster concept originated when he researched international competitiveness in He argued that, leading exporting firms in a range of different countries are not isolated success stories but belong to successful groups of rivals within related industries. He said that there is a diamond of four factors that interact, the outcome of which is high productivity growth. The four factors are: 1. firm strategy, structure and rivalry 2. factor conditions 3. demand conditions 4. relating and supporting industries The systemic nature of this diamond produces clustering. He found that these interactions are magnified and intensified if there is geographical concentration of the leading rivals in the industry. Porter defined clusters as: Geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions (e.g. universities, standards agencies and trade associations) in particular fields that compete but also co-operate. (Porter 1998 P.197) Porter argues that while co-location is not a sufficient factor for cluster formation, it does magnify the power of domestic rivalry which is the spur to continuous innovation and improvement. Clusters are seen to raise economic growth by: 1. Raising productivity by allowing access to specialised inputs and employees, by enhancing access to information, institutions and public goods and by facilitating complimentarities. 2. Increasing firms capacity for innovation by diffusing technological knowledge and innovations more rapidly. The competitive pressure within each cluster increases firms incentive to innovate. 3. Stimulating higher rates of new business formation as employees become entrepreneurs to spin-off ventures. As the cluster typology is very flexible and elastic authors have attempted to clarify the concept by identifying various cluster typologies (such as: Vertical Production Chain, Aggregation of connected sectors, Regional clusters, Industrial Districts, Networks ) Other authors have attempted to classify them according to: their stage of development (clusters undergo lifecycles). cluster specialisation (some clusters have a distinguishing sectoral feature by which they can be identified); geographical configuration (there are multi-location clusters, hub and spoke arrangements etc.); geographical scale (considers if the cluster is small and localised e.g. high-tech in Cambridge, or spatially extensive and diffuse such as Silicon Valley in the US). The DTI has attempted to classify clusters according to their stage of development, depth, employment dynamic and significance geographically. These are each explained as follows: Stage of development refers to whether the cluster is embryonic which signifies that it is small in relation to the UK but has growth potential; established implying there is room for more growth, or mature where further growth would be difficult. Cluster Depth considers the number of industrial linkages. They can be deep, shallow or unknown. A deep cluster would be made up of a considerable number of components including institutions. 2

3 Employment dynamics considers if employment in the cluster is growing, declining or stable. These are calculated based on employment change between 1991 and If the change is +/- 10%, it is deemed as being stable. Significance geographically classifies the clusters according to whether their competitiveness is on a regional, national or international scale. 3

4 2. DTI Methodology Industries are defined by what they make and not their technology (e.g. software, engineering), or main market (e.g. defence, healthcare). It can however be the technology or market that links a group of industries to form a cluster. The report acknowledges that this can be a difficult distinction to make, particularly looking at biotechnology. Biotechnology is not sold, but it is an enabling technology and an industry in itself. It may be hard to distinguish between the pharmaceutical industry and some parts of the medical devices industry. The concept also applies to all industries and not those just making high tech products. For example a food cluster may arise from links between agriculture, food processing, feed manufacturing, food processing equipment manufacture, logistics and retailing. The competitive advantage of agriculture and food processing are interdependent and affected by the performance of other industries. The focus is therefore stated as being on interdependence. As geographical location is assumed to be a defining characteristic of a cluster, measuring the degree of relative spatial concentration of industries across the country is a basic element to the DTI approach to identifying and mapping clusters. Using employment data (from NOMIS, IDBT and D&B) at 5-digit SIC codes 1, regional high points were identified, where industries account for at least 0.2% of the regional workforce and which are at least 25% more concentrated than the average (LQ>1.25). This was computed at the regional level (NUTS 1). These high points were then grouped to form the basis of a cluster. The remaining industries were then examined to see if groupings of industries emerged which should belong to the identified clusters or could be combined to form a cluster in their own right. LQs were then computed at the Local Authority District (LAD) level 2 to see if there were significant local concentrations of specific industries and if any sub-regional clusters emerged. These preliminary findings were tested further in regional discussions (included higher education institutions, RDAs, Bank of England regional agents). In these discussions nominations were sought which were tested using the DTI methodology. An activity analysis was also carried out where larger companies were examined to find out the specific nature of their products or services. This gave clues as to the potential linkages and relationships (e.g. is the region s hollow glass industry making products relevant to the region s food industry etc.) 3. Findings The preliminary research identifies 154 clusters with 8 to 18 per region (these are not necessarily all clusters and may turn out to be industrial concentrations when further research is carried out). A relatively high number were found in London and the South East. Generally those in the North are more manufacturing based (automotive, textiles, metals) and in the south they are service-based (software, business services, R&D). Some clusters, such as Creative Industries are present in nearly all regions, whereas others are unique. These include motor-sports in the South East and nuclear fuel processing in the North West. They can vary considerably in size, e.g. the financial services cluster in 1 4-digit SIC NOMIS data was used particularly in assessing the growth of clusters. D&B data was used to capture some industries and clusters that are not easily identified through SIC codes. These are largely hightech industry and Creative Industries. However it was found that the results from this were congruent with SIC based estimates. D&B data was also used to try to get below SIC codes to explore cluster linkage. 2 At the LAD level, LQ over 5 where employment represents more than 1000 jobs were taken into account. The number of firms were also identified as well as LADs that have more than 0.2% of an industry s employment. This was to reveal degree of geographical concentration within the region. 4

5 London employs 465,000 and is located in 25 industries whereas in Yorkshire & Humberside it employers 31,000 in just 7 industries. For most regions, cluster job creation is no better than the regional average. Exceptions to this are London, the South East and Eastern regions where overall cluster job formation is greater than the regional average. The deepest clusters often perform the best. The size of the region has an impact on cluster depth, but not on the number of clusters present. Of the 69 clusters found to be deep, 67% are growing. Those that are growing and are not deep tend to be embryonic (e.g. web design) or established (e.g. plastics in the North East). Those clusters that are established, deep, growing and international are concentrated in London and the South East (these clusters include: finance & business services, clothing, travel/entertainment/tourism, advertising and music in London, pharmaceuticals / biotechnology, R&D, Motor-sport and software/computer services in the South East). The strongest UK cluster is financial services in London. Many internationally competitive industries are not clustered. Some clusters can be described as spillover clusters. For example, are the financial activities in the South East that appear to be back office functions from the London cluster, really clusters? Other clusters span regions, such as the marine technology cluster that spans the south coast. Linkages It has been difficult to ascertain the extent of linkages within clusters, and with institutions such as higher education institutions and the report suggests that more research is needed in this area. However, it has been found that the presence of higher education institutions in the East Midlands has enabled Loughborough university to receive substantial investment to deliver training and research to the automotive cluster and clothing is well served by process engineering and design skills. In other regions, there appear to be less well defined relationships between research excellence and clusters. 4. Regions The next section will look at clusters within specific regions. The regions considered are: the South East, London, Eastern and the North East. London London has substantially more of its employment (over 40%) in its clusters than any other UK region. Several of its clusters are large, competitive and significant global players. All of its clusters have grown substantially during the 1990s except for property and real estate. In most cases cluster growth has significantly exceeded London s average employment growth. Most clusters contain a range of industries including manufacturing, a sector in which London is generally under-represented (the London Manufacturing Group has been established to address this). 5

6 Table 1 London Clusters Cluster Stage Depth Employment Significance Business Services established deep growing international Clothing established deep growing international Computer related services established deep growing regional Financial services established deep growing international Property and real estate established deep growing regional Travel, entertainment, tourism established deep growing international CREATIVE INDUSTRIES Advertising established deep growing international Music industry established deep growing international Photography established deep growing regional Publishing mature deep stable international TV, film, radio mature deep stable international Less Significant Clusters Stage Depth Employment Significance Leisure Software embryonic shallow growing international Web design/internet services embryonic deep growing national Jewellery mature deep stable international Pharmaceuticals established unknown growing international Biotechnology embryonic shallow growing international Oil/gas mature shallow stable international Antique dealing (AND exporting) established deep growing international Eastern The Eastern region is one of the most diversified regional economies according to the DTI s specialisation index. Its 10 clusters employ around one quarter of the workforce. The region has one of the UK s most extensive food/agriculture clusters with a considerable range of supporting and related industries including R&D. Table 2 Eastern Clusters Cluster Stage Depth Employment Significance Agriculture/Food established deep static national ICT/electronics established deep growing international Instrumentation established deep declining national Pharmaceuticals/Biotechnology established deep growing international Research and Development established deep growing international Activity Software development established deep growing international Less Significant Clusters Automotive established shallow growing national Financial Services established shallow growing national Furniture Manufacture mature unknown declining regional Marine Technology established shallow growing national Printing and Paper established deep growing national Tourism established unknown growing national South East There are 11 clusters identified for the South East, with a further 6 less significant clusters. The full list of clusters can be seen on Table 1. The clusters employ less than one fifth of the workforce. The DTI report explains this due to the region s large size and unequal geography. The region s main clusters contain industries that are widely thought of as 6

7 offering good growth prospects. Over the past decade employment growth in its largest clusters has significantly exceeded the region s overall employment growth record of 17% since Table 3 South East Clusters Cluster Stage Depth Employment Significance Agriculture/Food established deep growing national Civil engineering/construction mature shallow stable national Finance established deep growing national ICT established shallow growing international Knitwear mature deep stable international Oil/gas/offshore services mature deep growing international Shipbuilding and Engineering mature deep declining national Tourism established deep growing international Whisky mature deep stable international Wood & Paper products mature deep stable national Less Significant Clusters Biotechnology embryonic shallow growing international Chemicals mature shallow unknown national TV activities established shallow growing national North East The North East is one of the UK s more specialised regional economies. The analysis identified 9 clusters accounting for just over 50% of the region s over-represented industries, a figure that is low by UK regional standards. 17% of the region s workforce are employed in these clusters. Apart from the North West this is the lowest regional figure. The clusters are a product of the region s industrial history and several have experienced declining employment during the 1990 s (such as metal processing/ship repair, chemicals, electrical industrial equipment and clothing). The clusters tend to be small with relatively few industries and few supporting and related industries. Automotive is essentially one company plus suppliers. The DTI report suggests that with the exception of chemicals, the region has no distinctive cluster strengths with a dominant role within the UK economy. With the exception of chemicals, there do not appear to be strong linkages within the clusters. Table 4 North East Clusters Cluster Stage Depth Employment Significance Agriculture/Food mature shallow growing national Automotive (assembly) established shallow growing national Chemicals (organic) established deep declining national Clothing mature shallow declining national Electrical industrial Equipment mature unknown declining national Electronics established unknown growing national Furniture Manufacture mature unknown declining regional Metal processing ship repair & mature unknown declining national industrial equipment Plastics (primary, industrial products) mature shallow growing national The difference between the cluster typologies of the South East, London and Eastern compared with the North East region are striking. Many clusters are mature or declining in the North East by comparison, and the majority have national significance, compared with international significance with many of the southern clusters. The depth is also very 7

8 different, with the majority in the North East being either shallow or unknown, compared with deep in the south-eastern regions. There are also no new economy clusters in the North East. 5. Public Policy When considering the impact of public policy on clusters, the DTI report focuses on the impact of general government policies that have an indirect impact on industrial performance. For example, the impact of pubic policy on environmental industries can be great, depending upon the regulations on pollution control, clean air management etc. The government can therefore influence the demand for these products and services. A second example refers to the Biotechnology industry. This is a significant export trade, particularly to markets where health expenditure is high. Presently UK demand for these products lags behind that of France and Germany! Regional Policy Dilemmas Building cluster depth is important and preservation of existing linkages should be taken seriously as depth contributes to performance. In some clusters, linkages are unravelling or there are potential links not being exploited. A regional policy dilemma arises if there is a desire in other regions to develop similar clusters to those already successful as it risks undermining the already successful ones. This is especially profound in the case of the Creative Industries. London s Creative Industry cluster is globally competitive and they do not want it threatened even though there is scope for growth elsewhere, equally it would be difficult for regions to compete against such a cluster anyway. Should policy makers focus on new economy clusters or on existing strengths? It is important to consider the local economy, the need to build cluster depth, and to recognise that considerable strength may exist elsewhere. Should regions place emphasis on regional clusters serving the domestic market, or on established clusters servicing export markets? These established clusters are often in older, more traditional sectors, such as tractor manufacturing or quarrying and may not be job creators to the same extent as others are. Should smaller regions focus on fewer clusters or seek to expand the industrial base? It may be more risky to develop a fewer number of clusters, although it may enable increased depth. 6. An alternative approach to identifying clusters: Input/Ouput linkages The DTI report presents one method of identifying clusters, but it is important to be aware of other methods. Bergman, E. and Feser, E. carried out research into clusters in the US. They refer to the methodology of identifying and locating clusters by means of analysing Location Quotients and industry size as simplistic, particularly as it relies upon broad SIC categories. Their work analyses clusters beyond this anecdotal, descriptive approach. Bergman and Feser s research begins by explaining that the success of companies is dependent upon their suppliers and mutually beneficial relationships as the quality and 8

9 timing of inputs is critical to the success of individual companies. The input/output linkages of companies are therefore their focus of the study of clusters. Their approach was to look at detailed information on national inter-industry linkages to help them to identify potential linkages in US sub-regions. Extended buyer-supplier chains were estimated for the US manufacturing economy. These linkages assemble various major final-market producing sectors with their key 1 st, 2 nd and 3 rd -tier supplier sectors. 23 national clusters were identified, the templates of which were applied to develop a strategic view of a regional manufacturing economy. The case study used was South Carolina. The paper mentions several different definitions of clusters, however the authors here identify them as groups of technologically linked industries, irrespective of geographical location. This does not take into account one of the central aspects of Porter s definition, that of geographical concentration. It was found that input/output linkages are complex. One example described is that of the automobile industry which has inputs from a range of sectors such as the refrigeration and heating equipment industry and rubber and plastic hose and belting sectors. The number of component sectors in each cluster also varies dramatically from 116 in the metalworking cluster to 4 in the tobacco products sector. This is fairly obviously related to whether the cluster is a multiple final market product chain. The diversity of these clusters is shown by the fact that most of them are comprised of sectors from a variety of 2-digit level SIC industries, of which the vehicle manufacturing cluster is composed of 16. When the template was transferred to North Carolina groups of firms that are most likely to interact with each other formally and informally were presented. This aimed to reveal relative specialisations in the regional economy. It was found that although textiles is the largest single industrial employer with nearly ¼ of all manufacturing employers, using this methodology, metalworking, chemicals & rubber and vehicle manufacturing were found to be among the largest clusters. Where this method appears to be useful is when looking at the example of transportation equipment: this sector appears to be inconsequential as it accounts for only 2.5 3% of manufacturing value added and employment. It is only by considering the many industries that typically supply transport equipment to manufacturers that the potential significance of the vehicle industry to the state s economy becomes apparent. This research, it is argued, is useful for economic development strategies that seek to exploit or leverage direct and indirect inter-firm linkages (such as buyer-supplier and import replacement strategies, technology deployment, cross-firm networking). Clearly this approach to identifying clusters is useful as it may reveal that certain sectors of the economy are far more important than may initially have been viewed based on employment and value-added figures. Including input-output linkages enables a different picture of clusters to be identified, which has direct implications for public policy. 7. Regional public policy: the case of the South East England Development Agency (SEEDA) As a reminder, Porter said that governments and regional bodies could provide a facilitating and supportive role in creating the environment critical to cluster success. This section aims to examine an example of regional public policy addressing clusters. 9

10 SEEDA s Economic Strategy has certainly taken on board the cluster terminology with the word appearing three times in its strategic priorities. The report outlines the different programmes that SEEDA wishes to see implemented in the South East region. These programmes address businesses, learning, the workforce, transport, the environment, communities and urban renaissance and the rural economy. For the purpose of looking at their strategy towards cluster development, SEEDA s business programme will be analysed. Having placed the South East economy in the context of the European economy, SEEDA s economic strategy focuses on the role the region in an international context. Each of the programmes named above are preceded with the term World Class Under the World Class Businesses programme, the report begins by explaining that the South East has the potential to be the country s engine of growth. It continues that high-growth and market responsive companies, from start-up through to maturity, hold the key to the future. The aims outlined in order to achieve the objective of attaining greater growth are compatible with the promotion of industrial clusters. They are to: - develop a world class competitiveness and enterprise infrastructure so that businesses can be competitive in the global market place; - increase technology transfer and innovation by developing closer links between the research base and business; - develop strategies for the growth of key sectors and business clusters of all sizes that are already here; and - foster and sustain national and international links and networks with leading edge businesses and institutions in order to maximise new market opportunities and develop leading edge technology processes and systems and specialist skills. Not only does SEEDA endorse the aims stated above, it also takes Porter s view a step further by stating that it aims to create clusters. The report argues that although the region has some established business clusters and others with potential for growth there are too few really dynamic clusters across the region. In order to develop existing clusters and develop new ones, SEEDA will be (has) recruiting leaders, practitioners and experts from various business sectors to form sector groups. Each group will develop a strategy to influence physical and intellectual infrastructure within the sector and develop opportunities for collaboration by showing knowledge and expertise. Action plans will be established to sustain regional clusters. The business sectors included in SEEDA s list include most of those clusters identified by the DTI. SEEDA is planning to provide the environment necessary to promote growing businesses through a network of Enterprise Hubs. A network of Enterprise Hubs are to be developed across the South East with a view to facilitating the development of clusters. Each hub will be built around 4 cornerstones. There will be a business champion who is a respected business leader; a hub director; flexible workspace/incubator space and strong links with universities. A second approach being undertaken by SEEDA is the attempt to connect people and organisations across the South East through the Wired Region programme. This will be a website portal providing news and information, including job market information, business opportunities, yellow page information ; an e-commerce High Street & Marketplace, which sells regional produce, supports supply-chain development, ensures access to business-tobusiness e-commerce for small businesses; a New Accessible Delivery Point for Learning and Skills Training including university for industry courses, courses with further education and higher education colleges and training providers etc. 10

11 This overview of SEEDA s strategy has shown how public policy is intervening with clusters in practice. As has been shown SEEDA s business development strategy is aware of the importance of clusters and addresses them directly in the strategy. All of the key characteristics of clusters are referred to, such as the importance of technology and innovation transfer, institutional links, and through the Enterprise Hub strategy, geographical concentration. Referring to some of the questions posed by the DTI report when considering public policy, it is clear that SEEDA is not aiming to develop its clusters purely for the local economy, but that the national and international dimensions are very important. Secondly, the SEEDA strategy is not only aiming to nurture existing clusters and to provide them with an environment vital for their success, but is also aiming to develop further business clusters. The strategy is not focussing only on new economy clusters, but also more traditional clusters (e.g. marine based technologies, food and drink, defence and aerospace) are included in their list of targeted business sectors. 11

12 BIBLIOGRAPHY Bergman, E.M. and Feser, E.J National Industry Cluster Templates: A framework for applied regional cluster analysis in Regional Studies Volume 34:1 Pp1-19 Castellachi, F., Herstad, S., Hildrum, J., Maurseth, P., 2000 Innovation, Time, Space (talk by Verspagen, B.) Report from the Innovation Studies Network Conference in Urbino. Centre for Technology, Innovation and Culture, Miller, P. et al 2001 Business Clusters in the UK A first Assessment: Volume 1, Main Report DTI report Miller, P. et al 2001 Business Clusters in the UK A first Assessment: Volume 2, Regional Annexes DTI Report Miller, P. et al 2001 Business Clusters in the UK A first Assessment: Volume 3, Technical Annexes DTI Report Porter, M The Competitive Advantage of Nations London: Macmillan SEEDA 1999 Building a World Class Region: An Economic Strategy for the South East of England 12