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Transcript of TCIOceania16 Upgrading Australia’s Competitiveness: The Role of Cluster-based Economic Development
Upgrading Australia’s Competitiveness: The Role of Cluster-based Economic Development
Christian H. M. Ketels
3rd TCI Oceania Cluster Conference, Adelaide, 1-3 June 2016 "Driving (Regional) Competitiveness through Innovative Clusters to Bolster National Prosperity"
Upgrading Australia’s Competitiveness: The Role of Cluster-based Economic Development
Dr. Christian H. M. KetelsInstitute for Strategy and Competitiveness, Harvard Business School
President, The TCI Network
Adelaide, Australia2 June 2016
2 Copyright 2013 © Christian Ketels
The Lucky Country…
Australia outperforming its peers, fueled by..• Past policy reforms• China-driven natural resource-boom• (Partial) isolation from US/European crises
Source: IMF, 2016
3 Copyright 2013 © Christian Ketels
…Loosing Steam…
0
0.5
1
1.5
2
2.5
3
3.5
4
LaborMobilization
LaborProductivity
GDP Population Prosperity
Prosperity Decomposition, Australia, 2000 - 2016
2000-072008-152016 (ex)
Source: The Conference Board, Total Economy Database, May 2016
Average Annual Growth Rate, %
4 Copyright 2013 © Christian Ketels
…and Even Falling Behind?
0
0.5
1
1.5
2
1996-2015 2016-2020 (IMF proj.)
GDP per Capita Growth
Australia G7
Average Annual Growth Rate, %
Source: IMF, 2016
5 Copyright 2013 © Christian Ketels
Drivers
External
• China’s growth and natural resource demand is slowing, probably structurally
• Advanced economies are (slowly) working their way towards recovery
Internal
• Australia has few obvious new growth sectors
• A combination of Dutch Disease and the effects of distance and modest absolute market size have decimated traditional manufacturing
• Australia has solid but stagnant competitiveness fundamentals
6 Copyright 2013 © Christian Ketels
Australia’s Competitiveness Fundamentals over Time
Openness ofProduct Markets
Cost of Doing Business
Overall Competitiveness
• 2008: Rank 13 • 2013: Rank 8
• 2010: 81% • 2016: 80%
• 2010: Rank 15 • 2015: Rank 22
7 Copyright 2013 © Christian Ketels
A Closer Look at Australia’s Competitiveness
Macro (16)
Political Institutions (31)
Human Development (26)
Rule of Law(20)
Demand Conditions (30)
Related and Supporting Industries (29)
Context for Strategy and Rivalry (23)
Factor Input Conditions (20)
Micro (22)
Capital (12)
Admin.(19)
Logistics (31)
ICT(20)
Innovation(19)
GDP pc (10)
Index (19)
Social Infra-structure and Pol. Institutions (21)
Macroeconomic Policy (25)
Business Environment Quality
(22)
Company Sophistication
(23)
Sour
ce: W
orld
Eco
nom
ic F
orum
Glo
bal E
xecu
tive
Opi
nion
Sur
vey
2014
, ISC
ana
lysi
s, 1
44 c
ount
ries
Strategy(25)
Internationalization (21)
Organization(15)
Skills(25)
Significant advantage
Moderateadvantage
Neutral
Moderate disadvantage
Significant disadvantage
8 Copyright 2013 © Christian Ketels
…And How it Translates into Economic Composition
Economic Complexity Index, 2013
AUSTRALIA
Source: Atlas of Economic Complexity, 2016
HIGH LOW
9 Copyright 2013 © Christian Ketels
Australia’s Competitiveness Challenge 2016
• What will be Australia’s positioning in the Asian/Oceanic and global economy in the future?
• In what sectors and markets will companies from Australia be able to successfully compete?
• What policies can help Australia build sustainable competitive advantages in specific areas?
• What role can cluster-based economic development approaches play in addressing these questions?
11 Copyright 2016 © Christian Ketels
…with a Stable Set of Core Building Blocks …
Collaboration & Rivalry
Related Variety
Critical Mass
Proximity
12 Copyright 2015 © Christian Ketels
… in a Changing Economic Environment
Rising Knowledge-Intensity
Lower Trade Barriers
Globalization of production sites
Falling Transportation/Communication Costs
Accelerated Technological Change
Clusters are a critical facet of modern economies
Clusters are a key aspect of urbanization
Clusters are becoming more specialized
Clusters are becoming more connected
Agglomeration Dispersion
Globalization of markets
14 Copyright 2015 © Christian Ketels
Types of Industries and the Nature of Competition
EMPLOYMENT
INCOME
PATENTS
36% 64%
51% 49%
91% 9%
Local Industries• Present everywhere at
similar levels• Serve exclusively the local
market• Little exposure to cross-
regional competition • Important for jobs, but
lower wages; growth potential limited by size of the local market
Traded Industries• ‘Spiky’ across space; 2/3s of all
traded industry employment is in strong clusters
• Serve national and global markets• Exposed to competition from other
regions and nations• Critical for prosperity through
higher wages, productivity, and innovation; growth potential set by the global market
Traded vs. Local Share of the U.S. Economy
15
Employees 50,000 =
Traded Cluster Composition of the Massachusetts Economy
Note: Clusters with less than 1,000 employees not shown.Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Overall change in the Massachusetts Share of US Traded Employment: -0.13%
Massachusetts Overall Share of US Traded Employment: 2.65%
Added Jobs
Lost Jobs
Employment 2003-2013
Massachusetts National Employment Share, 2013
Change in Massachusetts Share of National Employment 2003-2013
Business Services
Education and Knowledge Creation
(-.66%, 6.9%)
Marketing, Design, and Publishing
Performing Arts
Electric PowerGeneration
and Transmission
Video Productionand Distribution
Distribution and Electronic
Commerce
Financial Services
Information Technology and Analytical Instruments
(-.037%, 6.4%)
Hospitality and Tourism
InsuranceServices
Transportation and Logistics
Plastics
Food Processingand Manufacturing
Production Technology and Heavy Machinery
Aerospace Vehiclesand Defense
MetalworkingTechnology
Communications Equipment
and Services
Printing Services
Medical DevicesLighting and
Electrical Equipment
Biopharmaceuticals
Paper and Packaging
Downstream Metal
Products
ConstructionProducts
and Services
Upstream Metal Manufacturing
Textile Manufacturing
Downstream Chemical Products
Furniture
Vulcanized and Fired Materials
Automotive
Apparel
Wood Products
Livestock Processing
Fishing and Fishing Products(-1.7%, 5.6%)
Environmental Services
Upstream Chemical Products
Jewelry and Precious Metals(-2.7%, 5.0%)
Water Transportation
Nonmetal Mining
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%
16
Cluster Linkages: Massachusetts
Metal-working
Food Processin
g
Lighting
IT & Analytical
Instruments
Comm-unicationsEquip. & Services
Down-stream
ChemicalsBiopharma
Leather
Apparel
PrintingServices
FinancialServices
Insurance
Environ-mental
Services
BusinessServices
Education & Knowledge
Creation
MarketingServices
Music & Sound
Recording
Performing
Arts
VideoProductio
n
Hospitality& Tourism
Metal Mining
CoalMining
UpstreamMetals
Wood Products
Furniture
Tobacco
Aerospace
UpstreamChemicals
Trailers & Appliances
Textiles
Footwear
Forestry
Agriculture
PlasticsPlastics
Distribution& eComm.
LivestockProcessing
Fishing &Fishing
Products
Water Transport
Transport &Logistics
Vulcanized
Materials
Construction
NonmetalMining
Oil & Gas
Electricity
Down-streamMetals
Production
Metal-working Automotive
Paper &Packaging
Recreation& Electric
Goods
Jewelry & Precious Metals
Strong clusters above 90th percentile specialization
Other specialized clusters
Strong clusters above 75th percentiles specialization
Cluster Specialization
MedicalDevices
17 Copyright 2013 © Christian Ketels
Clusters Linkages and Regional Diversification
U.S. Military
CommunicationsEquipment
Sporting andLeather Goods
Analytical Instruments
Power GenerationAerospace Vehicles
and Defense
Transportationand Logistics
Information Technology
1910 1930 1950 19901970
Bioscience Research Centers
Climate and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
• Existing cluster portfolios have a significant impact on the evolutionary path of regional economies (Neffke et al, 2009; Boschma et al. 2011)
• Clusters provide a powerful analytical tool to understand diversification and the emergence of new economic activities
The San Diego Economy
Source: Porter, Monitor Company, Council on Competitiveness (2003)
18 Copyright 2015 © Christian Ketels
Clusters and Economic Performance
Prosperity Entrepreneurship Structural Change
• Wages• Productivity• Job growth• Resilience• Patenting
• New business formation
• Survival of new firms• Job growth in new
firms
• Path of structural change(emergence of new clusters)
Presence of Strong Clusters
19 Copyright 2015 © Christian Ketels
Putting Clusters into Context
(Creative) Skills
ComplexitySocial Capital
Innovation Systems
Entrepreneurial Ecosystems
Framework Conditions
Clusters
Urbanization
20 Copyright 2013 © Christian Ketels
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophisticationof Company
Operations andStrategy
Quality of the Business
Environment
State of Cluster Development
Endowments
Human Development and Effective
Public Institutions
Sound Monetary and Fiscal Policies
A Comprehensive View at Competitiveness
Source:: Delgado, Ketels, Porter, Stern (2012)
21 Copyright 2013 © Christian Ketels
Microeconomic Drivers of Competitiveness
Business Environment
• Skills, knowledge• Infrastructure• Efficient public
services• Access to capital• Competitive
markets• Rules and
regulations• Demand conditions
ClusterPresence
• Critical mass in specific groups of related and supporting industries
• Strengths of linkages and cluster dynamics
CompanySophistication
• Quality of companies’ operational practices
• Nature of companies’ competitive advantages
22 Copyright 2013 © Christian Ketels
Upgrading Competitiveness: Principles
• There is no silver bullet
• Many things matter
• What matters most depends on what you already have
• Every location is different, but all adhere to the same economic principles and dynamics
• You can’t change everything at once, even if all has to change eventually
• Change requires action by many
23 Copyright 2013 © Christian Ketels
Economic Development: Prevailing Approaches
Entrepr.Eco-
systems
Clusters
Mixed
Economic Gardening
Big Game Hunting
The Next Big Thing
Picking Winners
Firm/Sector Focused
New
Existing
Framework Conditions
Build it and They Will
Come
Place Making
Open for Business
Business Environment Focused
Narrow
Broad
24 Copyright 2013 © Christian Ketels
Economic Development: Prevailing Approaches
Framework Conditions
Economic Gardening
Big Game Hunting
Build it and They Will
Come
The Next Big Thing
Picking Winners
Place Making
Open for Business
Firm/Sector Focused
Business Environment Focused
Entrepr.Eco-
systems
Clusters
Mixed
New
Existing
Narrow
Broad
High Risk
Lack ofcompetitive advantages
Interest group capture
Limited potential
Limited potential
Often not creating specificcompetitive advantages
High Risk
How to get it right?
25 Copyright 2015 © Christian Ketels
Two Opposing Approaches to Cluster Policy
MORE (Agglomeration)
BETTER (Competitiveness)
FINISH
• High risk• Traditional
‘industrial policy’
• Long-term impact• New model of public-
private collaboration
20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels26
Types of Government Interventions in Clusters
• Direct intervention at the firm level– Attraction of firms– Subsidies, directed credit
High short-term impact/High distortion/low productivity impact Long-term impact/Low distortion/high productivity impact
• Intervention into the market– Provision of monopoly
rights; Entry/trade barriers– Demand subsidies
• Investments in the cluster-specific business environment– Specific to the cluster– Benefiting the cluster but part of a
general upgrading strategy
• Enable collaboration with and within the cluster– Support for cluster initiatives– Active engagement with the
cluster in setting and implementing policies
27 Copyright 2013 © Christian Ketels
Target Public Policy at Clusters
Clusters
Specialized Physical Infrastructure
Environmental Stewardship
Setting standards
Science and TechnologyInfrastructure (e.g., centers, university departments, technology transfer)
Education and Workforce TrainingBusiness Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of public policy and public investments towards economic development
EntrepreneurshipMarket Information and Disclosure
28 Copyright 2016 © Christian Ketels
Cluster-Based Entrepreneurship Policy
• A growing number of regions support entrepreneurship through incubators, risk capital, and other mechanisms
• Start-ups share many needs that such efforts can help address
• Linking them to clusters and cluster organizations can significantly enhance their economic impact
• Entrepreneurship is much more likely to spurn the emergence of high-growth companies if it occurs in clusters
• Clusters reflect location-specific advantages that enhance new firms’ likelihood of entry, survival, and growth in related fields
• Cluster organization can enable easier access to the many types of industry-specific partners and assets that new companies need
Source::Stern/Guzman (2016), Delgado et al. (2014)
29 Copyright 2015 © Christian Ketels
What are Cluster Initiatives?
• Upgrading of company operations and strategies across a group of companies
• Strengthening of networks to enhance spill-overs and other economic benefits of clusters
• Upgrading of cluster-specific business environment conditions
Cluster initiatives are collaborative activities by a group of companies, public sector entities, and other related institutions with the objective to improve the competitiveness of a
group of interlinked economic activities in a specific geographic region
30 Copyright 2013 © Christian Ketels
Clusters, Cluster Initiatives, and Performance
CLUSTERPRESENCE
CLUSTEREFFORT
ECONOMICPERFORMANCE
+ =
+ =
+ =
20150409 – MOC 2015 – Session 19
31 Copyright 2015 © Christian Ketels
Supporting Emerging Clusters: Identification
Context for Firm Strategy and Rivalry
Related and Supporting Industries
Factor(Input)
Conditions
Demand Conditions
• Sophisticated and demandinglocal customers and needs– e.g., Strict quality, safety, and
environmental standards– Consumer protection laws
• Local rules and incentives that encourage investment and productivity
– e.g. incentives for capital investments, IP protection, corporate governance standards
• Open and vigorous local competition− Openness to foreign competition− Strict competition laws
• Access to high quality business inputs– Human resources– Capital availability– Physical infrastructure– Administrative
infrastructure (e.g., business registration, permitting, transparency)
– Scientific and technological infrastructure
• Availability and depth of suppliers and supporting industries
• Presence of Institutions for Collaboration (IFCs) that support productive coordination and collaboration among actors
Business Environment Strengths Existing Cluster Portfolio
• External intelligence (technology, market needs) is critical• Choice under uncertainty
Assessment criteria• Existing bridgeheads, market opportunity, leadership
Metal-working
Food Proces
sing
Lighting
IT & AnalyticalInstrumen
tsComm-unication
sEquip. & Services
Down-stream
ChemicalsBiopharm
a
Leather
Apparel
Printing
Services
Financial
Services
Insurance
Environ-
mental Service
s
Business
Services
Education &
Knowledge
Creation
Marketing
Services
Music &
SoundRecord
ing
PerformingArts
VideoProduc
tion
Hospitality&
Tourism
Metal Mining
CoalMining
UpstreamMetals
Wood Produc
ts
Furniture
Tobacco
Aerospace
UpstreamChemical
s
Trailers & Appliance
s
Textiles
Footwear
Forestry
Agriculture
PlasticsPlasticsDistribution&
eComm.
LivestockProcessin
g
Fishing &Fishing
Products
Water Transport
Transport &Logistic
s
Vulcanized
Materials
Construction
NonmetalMining
Oil & Gas
Electricity
Down-streamMetals
Production
Metal-working
Automotive
Paper &
Packaging
Recreation
& Electric Goods
Jewelry & Precious Metals
Strong clusters above 90th percentile specialization
Other specialized clusters
Strong clusters above 75th percentiles specialization
Cluster Specialization
Medical
Devices
32 Copyright 2015 © Christian Ketels
Current Status of Cluster Policies and Programs
• Many countries and regions, especially within the OECD, have cluster-related policy programs
• Spending on cluster-related programs is meaningful, but only a modest percentage of total spending per policy area
• Funding is tilted towards existing strengths, but many efforts exist without established critical mass
• Cluster programs are often run by a range of ministries or agencies; there is limited coordination between programs
• Funding for strengthening collaboration is always a part; other elements differ significantly
• Design principles differ widely across many dimensions
20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels33
Modes of Cluster Policy
Fund operation of cluster initiatives/
sectoral plans
Create/task backbone organizations to mobilize clusters
Deploy policy funds through cluster
initiatives/networks
Use cluster initiatives/networks as
organizational infrastructure for policy action
Policy for Clusters Cluster-based Policy
Basque
GermanyFrance
SwedenUS
Catalonia
Korea
Austria
Mexico
Colombia
Sporadic: Create
stronger linkages
Tactical: Deliver programs more effectively
Strategic: Choose & design
better policies
34 Copyright 2016 © Christian Ketels
Resources &Capabilities
• Quality of staff• Budget and tools• Governance
Narrow model• Focus on networking• Limited resources• Limited impact
Systemic model• Cluster initiatives as
key channel for delivering policy action
• Moderate operational resources, strong influence on other investment streams
• High impact possible
What Drives the Success of Cluster Initiatives?
Context
Activities
• Cluster strength• Business
environment conditions
• Firm sophistication• Collaboration
culture, trust
IMPACT
• Activities aligned with the needs of firms• Activities aligned with actions of partners• Effectiveness of implementation
35 Copyright 2014 © Christian Ketels
The Role of Government at Different Levels
National
Regional
Local Making it happen
Orchestrating a strategy
Setting the stage
• Success is the result of effective collaboration across different levels of government, building on their respective roles and capabilities
36 Copyright 2013 © Christian Ketels
Towards an Economic Strategy for a Location
BusinessEnvironment
ClusterPortfolio
Positioning
• The specific value the location provides as a place to do business in the national and global economy
• Activities focused on existing and emerging clusters that draw most benefits from and emphasize the location’s value proposition
• Activities to upgrade cross-cutting business environment conditions that are most critical for the location’s value proposition
Outcome Ambitions
Implementation Architecture• Responsibilities, resources, capabilities, and coordination
37 Copyright 2013 © Christian Ketels
Developing a Cluster-Based Economic Strategy
Diagnostics Choice Action Plan
• What is the profile of our performance?
• What business environment conditions do we offer?
• What clusters do we have? How are they positioned?
• What business environment conditions do we want to offer?
• Which type of companies and skills do we aim to attract with these qualities?
• What are the priorities for action?
• Who is going to do what?
• How do we deploy our resources?
• What channels and platforms can we use?
38 Copyright 2013 © Christian Ketels
Making it Happen:The Need for New Partnerships
Old Model
• Government drives economic development through policy decisions and incentives
New Model
• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations
• Cluster organizations are effective tools to organize public-private dialogue
39 Copyright 2013 © Christian Ketels
Implications for Australia
• Australia has a strong economy, rooted in robust underlying competitiveness
• The combination of strong demand for Australian natural resources and a policy focus on cross-cutting framework conditions, especially the openness of markets, has left the country with few competitive advantages and clusters outside a narrow range of areas
• The country would benefit from shifting towards the exploration and systematic development of positions in a broader range of fields
• A cluster-based approach is a powerful way for Australia to identify and implement such a strategy, based on a new model of public-private collaboration