1. CLUSTERS
In ICT Industry Development Policy
Tarek Salah Kamel
Capability Development Unit Manager
tsalah@itida.gov.eg
V2.0, 21st of Jan 2014
2.
3. What is a Cluster?
A geographically proximate group of interconnected companies and
associated institutions in a particular field, linked by commonalities and
complementarities – Michael Porter1
1Michael Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, Nov-Dec 1998.
4. What is a Cluster?
Features
Manifests an end product industry
Includes suppliers of specialized inputs. (Components, machinery, and providers of
specialized infrastructure)
Extends downstream to channels and customers
Extends laterally to manufacturers of complementary products. (Those having shared
activities, labor, technologies, channels or common customers)
Encompasses supporting institutions. (Financial, vocational training, trade
associations, research universities, standard-setting agencies)
17. European Cluster Observatory
Outcome
GDP per capita
Growth of GDP per capita (ppp)
GDP per capita (€)
Growth of GDP per capita (€)
Disposable income per capita
Long term unemployment rate
Population at risk of poverty
Life satisfaction rate
Happy Life Years
Land use with heavy environmental impact
Intermediate performance
Employment rate
Employment rate (female)
Employment rate (male)
Enterprises
Patents per million habitants
Apparent labor productivity
Competitiveness drivers: Specialization
High and med. high-tech. manufacturing employment
Knowledge intensive services employment
Observatory star rating
Observatory star rating in technology and knowledge-intensive
clusters
Employment in industries with high energy purchases
Competitiveness drivers: Firms behavior
Business R&D share of GDP
Business R&D personnel
Business investment
Employees per enterprise
New foreign firms
Patent collaborations
Patents with foreign collaboration
Competitiveness drivers: Business environment
Students in pre-vocational and vocational programs
Students in tertiary programs with academic orientation
Lifelong learning
Average wage
Public (government) R&D expenditure
Public (government) R&D personnel
Public (higher education) R&D expenditure
Public (higher education) R&D personnel
Total R&D expenditure
Total R&D personnel
Household broadband access
Internet trade
Part-time employment
Public sector, education and health employment
Human resources in science and technology
Population with upper-secondary or tertiary education
Skilled migrants
Multimodal potential accessibility
Population aged 15-34
Usual weekly hours worked
Trust in people
Trust in legal system
Fundamentals
Area
Population
Population density
Degree of urbanisation
Other
Regional Innovation Scoreboard
Hyperlink
18.
19. Clusters and Competitiveness
Within the same national or regional context we have a scale of clusters ranging
from highly dynamic and competitive ones to more static and uncompetitive ones.
20. What is Competiveness?
COMPETITIVENESS
“The Degree to which a nation can, under free and fair market conditions, produce
goods and services that will meet the test of international markets, while
simultaneously maintaining or expanding the real income of its citizens”
(US Council on Competitiveness Definition)
22. Productivity and High-Tech Competition
The term High-Tech has created the misconception that only a handful of
businesses compete in a sophisticated way, which distorted the thinking about
competition
There is only low-tech companies … Those failing to use world-class
technologies to enhance productivity and innovation.
Modern competition depends on Productivity
And Productivity is strongly influenced by the quality of local business
environment
Clusters constitute the most important microeconomic foundations for
competition in advanced economies.
23. How Clusters affect Competiveness?
1. Clusters Increase Productivity
Efficient access to specialized inputs, services, employees, information, institutions,
training programs, and other “public goods”(local outsourcing)
Ease of coordination and transactions across firms
Rapid diffusion of best practices
Ongoing, visible performance comparisons and strong incentives to improve vs. local
rivals
Proximity of rivals encourages strategic differentiation
Agglomeration Economies Effects:
Specialized Workers
Specialized Suppliers
Important Customer Base.
Knowledge Spillover
Competitive Pressure
24. How Clusters affect Competiveness?
2. Clusters Stimulate and Enable Innovations
Greater likelihood of perceiving innovation opportunities (e.g., unmet needs,
sophisticated customers, combinations of services or technologies)
Presence of multiple suppliers and institutions to assist in knowledge creation
Ease of experimentation given locally available resources
25. How Clusters affect Competiveness?
3. Clusters Facilitate Commercialization and New Business Formation
Opportunities for new companies and new lines of established business are more
apparent
Spinoffs and startups are encouraged by the presence of other companies , commercial
relationships, and concentrated demand.
Commercializing new products and starting new companies is easier because of available
skills, suppliers, etc.
28. Clusters as Economies of Agglomeration
Congestion costs
Rising input costs
Increased localized competition
High administrative costs
29.
30. Birth, Evolution, and Decline
1. Cluster Birth Factors:
Clusters Roots can be traced historically to:
Research done in a nearby university (MIT and Harvard area of clusters)
Location comparative advantage. (Dutch Transportation Cluster)
Sophisticated local demand. (Israeli Irrigation Equipment Cluster)
Pollution problems. (Finland Environmental Cluster)
Prior existence of supplier industries
Existence of innovating companies that stimulate the growth of many others.
(Minneapolis Medical Device Clusters due to Medtronic)
Just a chance event (Telemarketing Cluster in Omah
31. Birth, Evolution, and Decline
2. Cluster Evolution:
Once a cluster begins to form, a self-reinforcing cycle promotes its growth, especially
when local institutions are supportive and local competition is vigorous
As the cluster expands, so does its influence with government and with public and
private institutions
A growing cluster signals opportunity and its success stories attract the best talents
Entrepreneurs take notice and migrate in from other locations
Specialized suppliers emerge; information accumulates; local institutions develop
specialized training, research, and infrastructure.
Eventually the cluster broadens to encompass related industries
This requires a decade to develop depth and real competitive advantage
32. Birth, Evolution, and Decline
2. Cluster Evolution:
The evolution of clusters thus
emanates from both deterministic
forces (legacy, culture, history)
and voluntaristic forces (as played
on the firms level).
There is also the constructive
forces, which will impact the
development and competitiveness
of the cluster, of which one type
emanates from policy
implementing conscious efforts to
improve the microeconomic
business environment of a region.
33. Birth, Evolution, and Decline
3. Cluster Decline Factors:
Both external and internal factors
External Threats:
o Technological discontinuities as an external threat
o A shift in buyers needs, creating divergence between local needs and needs
elsewhere.
Internal Threats:
o Over-consolidation, mutual understanding and cartels undermine local rivalry.
o Regulatory inflexibility
o Low quality of supporting institutions. (Schools and Universities)
o Groupthink among cluster participants (Too inward looking generates
collective inertia to perceive radical innovation)
o Government suspends or intervenes in competition
o Increase in the cost of doing business
39. Clusters and Economic Development
Poor Countries lack well-developed clusters
Economic activities are centered around capital cities suffering diseconomies of
agglomeration
Policy makers in developing economies must focus on foundations:
o Improving education and skills levels
o Building technology capacity
o Opening access to capital markets
o Improving quality of institutions
o Expand internal trade among cities and neighboring countries
Government policies may work against cluster formation. Government subsidies distort
competition. Restrictions on industrial locations and subsidies to invest in distressed
areas can disperse companies
Specialization and dispersion of economic geography are much more productive than
huge diversified cities
40. Implications on the Strategic Agenda of Companies
1. Choosing Locations
Globalization may entail productivity penalties
Locational decisions must be based on total systems costs and innovation potential, not
on input costs alone
Every product line needs a home base, and the most vibrant cluster will offer the best
location for it
It’s better to move groups of linked activities to the same location rather than to spread
them across numerous ones.
2. Engaging Locally
Agglomeration benefits must be reaped by the company itself
The company must actively establish a local presence within a cluster
Foster collaborative relationships with governmental bodies and supporting institutions
41. Implications on the Strategic Agenda of Companies
3. Upgrading the Cluster and Working Collectively and Collaboratively
Initiatives to improve local human resources. (scholarships and internships to local youth)
Forming local trade associations to be a platform for open innovation and knowledge
generation
Clusters offer a constructive way to change the dialog between public and private investors
43. Implications on the Industrial Policy
The economic performance of a region is not only explained by the degree of
specialization, but also involves other aspects of the broader microeconomic business
environment, such as labor quality, research and education, and access to venture
capital and advanced infrastructure.
Governments should strive to create the microeconomic foundations that improve
productivity and Competition. Productivity and Innovation will ultimately determine the
competition performance and relative competitiveness.
Cluster formation should focus on the competitive advantage and specialization, not just
imitation.
To follow a context-aware model of industrial policy development … Who does what in
each region and how can be enhanced evenly not selectively.
50. Principles for Cluster Policy
Neutral across clusters
Enhancing productivity of multiple firms/institutions
Facilitating/capturing linkages and externalities
Facilitating the flow of information/knowledge across actors
Engaging the private sector, not just government
Preserving and enhancing market competition, not retarding it
53. The Cluster Initiative Performance Model (CIPM)
The CIPM is based on three drivers
affecting the performance:
The social, political and economic
setting within the nation
The objectives of the cluster
initiative
The process by which the cluster
initiative develops
54. Objectives
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide. (51 IT Clusters)
55. Objectives
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide. (51 IT Clusters)
57. Who takes the lead
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.
58. Financing
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.
59.
60. References
1. Michael Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, Nov-Dec 1998.
2. Michael Porter, “The Competitive Advatnage of Nations”, Harvard Business Review, March-April 1990.
3. “The European Cluster Observatory, EU Cluster Mapping and Strengthening Clusters in Europe”, European Commission,
Industry and Enterprise, Europe INNOVA, 2009
4. http://www.clusterobservatory.eu/index.html
5. ÖRJAN SÖLVELL, “Clusters: Balancing Evolutionary and Constructive Forces”, 2009
6. Tarek Salah, “Towards an Innovation-Driven Economy in Egypt, Industry Policy Development Recommendations from
The Italian National Innovation Support System”, Research Project Report in the higher education course on SME
Governance and Development, Italy, 2012
7. Cristina Boari, “Economics of Industrial Districts”, SME Governance and Development course materials, Bologna
University 2012.
8. Tarek Salah &Tarek Khalil, “Competitiveness of the Arab States in Science, Technology , and Innovation“, IAMOT 2009
conference, Orlando, USA.
9. Michael Porter. “The Competitive Advantage of Nations, States and Regions”. Advanced Management Program April 15,
2009.
10.Michael Porter, “Clusters, Innovation, and Competitiveness: New Findings and Implications for Policy”, Stockholm,
Sweden 22 January 2008
11. Povl A. Hansen and Göran Serin, ”The European ICT clusters: an overview of selected ICT clusters in Europe”, Roskilde
University, 2010
12.G. Lindqvist, Ö. Sölvell., C. Ketels, ”The Cluster Initiative GreenBook”, stockholm, August 2003
13.”Next Generation Economic Clusters”, ATKearny, 2011
14. Christian H. M. Ketels, “Clusters and the New Growth Agenda: Implications for Iceland”, Institute for Strategy and
Competitiveness , Harvard Business School, 2010
15. P. Martin, T. Mayer, F. Mayneris, ”Natural clusters: Why policies promoting agglomeration are unnecessary”, 4 July
2008. http://www.voxeu.org/article/natural-clusters-policies-promoting-agglomeration-are-unnecessary
61. Thank You
Capacity Building
Department
Information Technology Industry
Development Agency (ITIDA)
66. A Cluster Policy: Two Opposing Approaches
Agglomeration is the central policy lever.
As agglomeration rises, competitiveness will
naturally follow as cluster effects set in
Policy debate is around attracting new
companies through incentives – tax rebate
and free infrastructure.
Needs early intervention to improve the
clusters upon which the economic
development is centered.
Competitiveness is the central policy lever.
As Competitiveness rises, Agglomeration will
naturally increase as the cluster becomes more
attractive for new entrants
Clusters are tools to implement policies and
not ultimate objectives.
Policy debate is within innovation policy,
regional policy, and SME development policies.
Policy intervention is on enabling collaboration
and channeling resources in optimum ways.
68. A Cluster Policy: Debates
Government cluster policy interventions using subsidies and large funds may be harmful
to the cluster and generates a distortion to the free market competition
Government cluster policy interventions to change location of enterprises could lead
them away from forming the optimum cluster
Cluster policy uses industry-specific policy instruments and activities. As such, it can
become a politically convenient cover for what then in reality is nothing else but
traditional distortive industrial policy
Many governments are under intense political pressure to ”do more” rather than
upgrading the general business environment
While there is no systematic evidence that a government role per se is negative for
Cluster Initiatives, government cannot create clusters and can easily impose conditions
that hurt competitiveness
An effective cluster policy mobilizes all clusters, not just the one that’s supposed to drive
future economic development.