CLUSTERSIn ICT Industry Development Policy

Tarek Salah Kamel

Capability Development Unit Manager

tsalah@itida.gov.eg

V2.0, 21st of Jan 2014

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.

What is a Cluster?

Features

Manifests an end product industry

Includes suppliers of specialized inputs. (Components, machinery, and providers ofspecialized infrastructure)

Extends downstream to channels and customers

Extends laterally to manufacturers of complementary products. (Those having sharedactivities, labor, technologies, channels or common customers)

Encompasses supporting institutions. (Financial, vocational training, tradeassociations, research universities, standard-setting agencies)

What is a Cluster?

What is a Cluster?

Microeconomic Business Environment

General Business Environment

Cluster

Firm

Position Within the Economic Business Environment

What is a Cluster?

Selected Industrial Clusters of Emilia-Romagna, Italy

2001, Invest in Emilia-Romagna

Leading Industrial Clusters of Emilia-Romagna, Italy

Automotive Mechanics Agro-Food Fashion Boating

Hyperlink

Tourism Cluster in Cairns, Australia

Boston Life Sciences Cluster

California Wine Cluster

Toronto ICT Cluster

Selected US Clusters

European Cluster Observatory

European Cluster Observatory

www.clusterobservatory.eu

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 ScoreboardHyperlink

Clusters and Competitiveness

Within the same national or regional context we have a scale of clusters rangingfrom highly dynamic and competitive ones to more static and uncompetitive ones.

What is Competiveness?

COMPETITIVENESS

“The Degree to which a nation can, under free and fair market conditions, producegoods and services that will meet the test of international markets, whilesimultaneously maintaining or expanding the real income of its citizens”

(US Council on Competitiveness Definition)

Productivity as a Determinant for Competiveness

Productivity and High-Tech Competition

The term High-Tech has created the misconception that only a handful ofbusinesses compete in a sophisticated way, which distorted the thinking aboutcompetition

There is only low-tech companies … Those failing to use world-classtechnologies to enhance productivity and innovation.

Modern competition depends on Productivity

And Productivity is strongly influenced by the quality of local businessenvironment

Clusters constitute the most important microeconomic foundations forcompetition in advanced economies.

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. localrivals

Proximity of rivals encourages strategic differentiation

Agglomeration Economies Effects:

Specialized Workers

Specialized Suppliers

Important Customer Base.

Knowledge Spillover

Competitive Pressure

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

How Clusters affect Competiveness?

3. Clusters Facilitate Commercialization and New Business Formation

Opportunities for new companies and new lines of established business are moreapparent

Spinoffs and startups are encouraged by the presence of other companies , commercialrelationships, and concentrated demand.

Commercializing new products and starting new companies is easier because of availableskills, suppliers, etc.

How Clusters affect Competiveness?

Clusters as Economies of Agglomeration

Clusters as Economies of Agglomeration

Congestion costs

Rising input costs

Increased localized competition

High administrative costs

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

Birth, Evolution, and Decline

2. Cluster Evolution:

Once a cluster begins to form, a self-reinforcing cycle promotes its growth, especiallywhen local institutions are supportive and local competition is vigorous

As the cluster expands, so does its influence with government and with public andprivate 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 developspecialized training, research, and infrastructure.

Eventually the cluster broadens to encompass related industries

This requires a decade to develop depth and real competitive advantage

Birth, Evolution, and Decline

2. Cluster Evolution:

The evolution of clusters thusemanates from both deterministicforces (legacy, culture, history)and voluntaristic forces (as playedon the firms level).

There is also the constructiveforces, which will impact thedevelopment and competitivenessof the cluster, of which one typeemanates from policyimplementing conscious efforts toimprove the microeconomicbusiness environment of a region.

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 needselsewhere.

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 generatescollective inertia to perceive radical innovation)

o Government suspends or intervenes in competition

o Increase in the cost of doing business

Life Cycle

Life Cycle

Growth of a Cluster

Life Cycle

Demise of a Cluster

Clusters and Economic Development

Poor Countries lack well-developed clusters

Economic activities are centered around capital cities suffering diseconomies ofagglomeration

Policy makers in developing economies must focus on foundations:

o Improving education and skills levels

oBuilding technology capacity

oOpening 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 distortcompetition. Restrictions on industrial locations and subsidies to invest in distressedareas can disperse companies

Specialization and dispersion of economic geography are much more productive thanhuge diversified cities

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, noton input costs alone

Every product line needs a home base, and the most vibrant cluster will offer the bestlocation for it

It’s better to move groups of linked activities to the same location rather than to spreadthem 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

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 knowledgegeneration

Clusters offer a constructive way to change the dialog between public and private investors

Role of Private sector in Economic Development

Implications on the Industrial Policy

The economic performance of a region is not only explained by the degree ofspecialization, but also involves other aspects of the broader microeconomic businessenvironment, such as labor quality, research and education, and access to venturecapital and advanced infrastructure.

Governments should strive to create the microeconomic foundations that improveproductivity and Competition. Productivity and Innovation will ultimately determine thecompetition performance and relative competitiveness.

Cluster formation should focus on the competitive advantage and specialization, not justimitation.

To follow a context-aware model of industrial policy development … Who does what ineach region and how can be enhanced evenly not selectively.

Shifting Roles and Responsibilities in Economic Development

Engines for Economic Development

Ecosystem Enablers for Clusters

Six ecosystem enablers facilitate access to local, regional and global markets

Ecosystem Enablers for Clusters

Economic clusters excel in differentiating enablers

Economic Cluster Development Cycle

Pre-requisite for building a value chain in a manufacturing cluster

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

Cluster Initiatives (CIs)

The Cluster Initiative Performance Model (CIPM)

The CIPM is based on three driversaffecting the performance:

The social, political and economicsetting within the nation

The objectives of the clusterinitiative

The process by which the clusterinitiative develops

Objectives

Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide. (51 IT Clusters)

Objectives

Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide. (51 IT Clusters)

Microeconomic Policy Intervention

Who takes the lead

Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.

Financing

Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.

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

Thank You

Capacity Building

Department

Information Technology Industry

Development Agency (ITIDA)

Supplement Slides

Microeconomic Business Environment

From the Competitive Advantage of Nations (Porter Diamond Model)

Microeconomic Business Environment

Determinants of Competitiveness

A Cluster Policy: Two Opposing Approaches

Agglomeration is the central policy lever.

As agglomeration rises, competitiveness willnaturally follow as cluster effects set in

Policy debate is around attracting newcompanies through incentives – tax rebateand free infrastructure.

Needs early intervention to improve theclusters upon which the economicdevelopment is centered.

Competitiveness is the central policy lever.

As Competitiveness rises, Agglomeration willnaturally increase as the cluster becomes moreattractive for new entrants

Clusters are tools to implement policies andnot ultimate objectives.

Policy debate is within innovation policy,regional policy, and SME development policies.

Policy intervention is on enabling collaborationand channeling resources in optimum ways.

A Cluster Policy: Debates

A Cluster Policy: Debates

Government cluster policy interventions using subsidies and large funds may be harmfulto the cluster and generates a distortion to the free market competition

Government cluster policy interventions to change location of enterprises could leadthem away from forming the optimum cluster

Cluster policy uses industry-specific policy instruments and activities. As such, it canbecome a politically convenient cover for what then in reality is nothing else buttraditional distortive industrial policy

Many governments are under intense political pressure to ”do more” rather thanupgrading the general business environment

While there is no systematic evidence that a government role per se is negative forCluster Initiatives, government cannot create clusters and can easily impose conditionsthat hurt competitiveness

An effective cluster policy mobilizes all clusters, not just the one that’s supposed to drivefuture economic development.

Sundial Model for Context-Aware industrial Policy Development

Cluster Topologies

Each has its own competitive advantage