Archives

Clusters Policy: A future strategy for Australia

Lisa McPherson
Department of Industry, Tourism and Resources, Commonwealth Government of Australia, Canberra ACT

Abstract

The globalization of economic activity and the localization of industries have created innovation policy challenges for national and local governments. As a result, development policies based on clusters of firms and industries, drawing on economic principles which demonstrate the productivity benefits of clusters, have proliferated in developing and developed countries.

This paper analyses those trends, their applications and benefits, and outlines a policy framework for implementing a national clusters policy in Australia.

It concludes that a new generation of policy makers is required to move away from Australia's current laissez faire approach, to provide innovation policies which are strategic, proactive, flexible and enabling.

Keywords

development policy, cluster strategy, cluster economics, national innovation systems, knowledge industries, public-private sector cooperation

Article Text

History indicates that clusters have existed in one form or other since man invented trade (indeed historians point to the clustering of wool industries in medieval England and the cotton industry in the industrial revolution). As economies have become more complex and competitive, evolving business practices have also recognised the advantages of locating firms, sectors or industries near each other or near supply sources. Clustering as a policy tool however is a more modern concept and is largely attributed to Michael Porter from the Harvard Business School. In his classic work The Competitive Advantage of Nations (1990), Porter argued that in advanced economies today, regional clusters of related industries are the source of jobs, income, and export growth.

Porter defines a cluster as 'a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities' where, the 'value of the system ... as a whole is greater than the sum of its parts. He points out that relying on natural comparative advantages is no longer sustainable and the source of 'competitive advantage often lies outside a given company or even outside its industry, residing instead in the locations of its business units'. Increasingly therefore, it is regions rather than nations that are the major competing forces in world markets. The nature of competition and competitiveness now emphasises 'think global, act local' as a way of doing business and succeeding in the international marketplace.

The two seemingly competing tendencies, of the globalisation of economic activity and the localisation of industries have created policy challenges for national and local governments around the world. As a result in the last decade we have seen a proliferation of development policies based on clusters of firms and industries .Such policies have focused on various aspects of growth such as regional development, SME development, overall economic development, domestic capability building, national innovation systems, and growth of 'knowledge' industries.

In Australia the government has taken a laissez faire approach. Although there are some instances of local and state support for clustering initiatives there is no nationally accepted policy.

This paper discusses Australia's current position and the need to move to a proactive policy in order to stimulate and sustain high levels of economic growth. It recommends that to increase productivity we should consider following the lead of other prosperous countries and implement a national clusters policy. The paper touches on the wealth of theoretical economics that supports the principle of clusters and provides a brief history of cluster initiatives to date in Australia.

It also outlines the benefits that can be obtained from industry clusters and provides a framework for implementing a national clusters policy in Australia. The paper concludes that initiating a national clusters strategy will require a new generation of policy makers, as it requires a move away from generic 'hands off' policies to one that provides strategic enabling policies that must inherently be flexible in their nature and application.

Australia's current position

At the crossroads - should we now move to a more proactive strategic policy?

Australia's economic policies have undergone a period of rapid change (from the late 1980s and through the 1990s). These changes resulted in major structural adjustments to the way Australians conduct business. A series of microeconomic reforms have been implemented to increase efficiency, and reduce costs to users, for what were predominantly public sector services including water supply, roads, rail, ports, airports, telecommunication services, electricity and gas generation and distribution. Reforms have encompassed labour market improvements, national competition policy, and a new taxation regime.

This period of reform has provided us with a strong economic foundation that has enabled Australia to weather the 'Asian crisis' without any major damage. The government can for a moment congratulate itself on having stable macroeconomic policies - low inflation, low interest rates and responsible government finances. However, the question is 'what now?' Should government be complacent that it has got the 'fundamentals right' and therefore has 'done its bit', or should it be striving for greater growth by providing a new vision for Australia? Many would contend that Australia has well and truly been through the 'Reform Agenda' of dismantling and restructuring, and what is now needed is a move to an affirmative stage, or a 'Positive Agenda', where we build-on our strong foundation and increase the capability of Australian businesses.

Building productivity

A major goal of any national government is to raise the living standard of its inhabitants and improve the quality of life. It is well accepted amongst western governments that 'productivity determines prosperity'. The only way to have a prosperous economy is to create a high level of productivity throughout the economy, as a productive economy can pay high wages and increase general living standards. Improving productivity in today's climate basically means improving Australia's global competitiveness. Michael Porter (1998) puts this notion very succinctly as follows:

Competitiveness in a global economy

Porter contends that a nation can be prosperous and productive in virtually any field. He advises that governments should stop thinking that traditional industries are bad and that all nations must move into all things hi-tech. Instead the focus of government should be on boosting productivity capacity of the nation's economy through improving skills and technology. As an advanced nation however, we cannot rely simply on imitating others products (and try and produce them at a lower cost), rather we must develop innovative capacity to produce unique or better products and services. Therefore we need to first assimilate, attain and extend best practice from around the world, then we must take it one step further to gain higher productivity by developing our own best practice (by creating a unique and sustainable competitive position).

Porter asserts that there are two fundamental aspects of building a productive economy. The first is to create a sound and stable macroeconomic, political, and legal environment. No one can deny that the Australian government has achieved this aspect. However, Porter claims that 'from studying economic development around the world we know that having good macroeconomic policies is not enough. Macroeconomic policies do not create wealth. They make it possible or easier for firms to create wealth, but prosperity will not rise unless the microeconomic foundations of the economy are sound and improving.'

Consequently the second aspect of building a productive economy relies on getting the microeconomic business environment correct. Porter suggests there are four dimensions that are important. These four dimensions can be graphically represented by the 'Porter Diamond' (Fig. 1).

The Microeconomic Business Environment - Porter Diamond

The systemic nature of the diamond promotes clusters of competitive industries. These industries can be linked vertically, through buyer-seller relationships, or horizontally through common customers, technologies or distribution channels. Clusters generate synergies as benefits flow backwards, forwards and horizontally. The interconnections in the cluster, often unanticipated, lead to perceptions of new ways of competing and accessing new opportunities. The competition in the cluster and the threat of new entry, from either direct competitors or through vertical integration of suppliers or customer companies, provides an incentive to overcome firms inertia and stimulates an atmosphere of continuous upgrading.

Porter contends that clusters are the building blocks of a productive, innovative economy. A cluster is more than a single industry making a single product. Successful clusters involve a variety of related industries, suppliers and institutions all located in a geographical proximity. He purports that facilitating cluster development is a major role for government.

In assessing Australia's current position one could conclude that government has only focused on three of the dimensions of the diamond so far. Namely:

• opening up the economy to global competition (through tariff reductions and introducing national competition policy)
• microeconomic reform and restructuring of major inputs (such as gas, electricity, transport, telecommunications, finance, and the regulatory framework)
• supporting public sector research infrastructure and providing a strong education system (as a result both the government, and the Australian consumer, could be considered to be discerning customers with a high take up of innovative products)

However the final dimension of actually bringing the elements all together to facilitate strong industry clusters is still largely missing in Australia's current policy framework.

Theoretical support for Clusters Policy

The relatively recent work of Porter (1990) and Krugman (1991) has done much to revive interest in the economics of industrial clusters and remind economists that geography does matter. However, it is important to note that this is no 'flash in the pan theory', as this theme in fact has a long and distinguished history of economic analysis. The phenomenon of clustering is also well recognised by historians of the industrial revolution such as Mathias (1983).

Alfred Marshall was one of the first economists to write about clusters. He developed the concept of external economies from observing various industrial districts. In 1920 Marshall wrote 'when an industry has chosen a locality for itself it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another...and presently subsidiary trade grows up in the neighbourhood.'

The advantages of locating in a cluster, referred to by Marshall, are related to the availability of skilled labour and intermediate goods suppliers, and also to the easy transmission and discussion of new ideas or improvements.

It is this last concept, 'transmission of new ideas', that ensures that geography, and therefore clustering, may continue to be relevant even today in the electronic communication age. Pavitt (1987) noted that some economic analysis made the assumption that technological knowledge can be completely codified in the form of patents, blueprints, operating manuals, and so on. If this were true, then all such codified information could be transmitted worldwide at very low cost, and geography would not matter. However, Pavitt correctly observed that in reality 'most technology is specific, complex, often tacit, and cumulative in its development'. Such tacit knowledge is much harder, or even impossible, to transfer via electronic communications. It requires geographical proximity and face-to-face contact to maximise knowledge transfer of such sort.

Swann et al (1998) contend that subsequent studies of cluster phenomena emanate from five distinct traditions:

• The first is the subdiscipline of Urban and Regional Economics. This stems from the pioneering work on location theory by Weber (1928) and Losch (1954), and the related theory of 'growth poles' by Perroux (1950). The tradition of locational models within industrial economics is derived from Hotelling's (1929) study of ice-cream sellers on a beach.
• The second tradition is that of Economic Geography. Economic geographers have long been concerned with clustering, both at a theoretical and empirical level. The literature in this area is vast, however there are two reviews that summarise some of the most important issues from the economic geography perspective (Amin & Goddard (1986) and Conti et al (1995)).
• The third tradition is history. Both historians and economic historians such as Mumford (1961), Jacobs (1961 and 1969), Briggs (1968), Bairoch (1988) and others have studied clusters.
• The fourth tradition is an analytical styled development of the history approach in that it emphasises why 'history matters'. It could be considered the 'path dependent approach to economics'. It includes the work of Arthur (1989 and 1990), David and Rosenbloom (1990), Krugman (1991), Brezis and Krugman (1993).
• The fifth tradition is mainstream economics New Growth Theory, by economists such as Romer (1986 and 1990), Grossman and Helpman (1992). There are also empirical studies of regional spillovers by Jaffe (1986) and others.

There are also many empirical industry and technology studies that have made a substantial contribution to our understanding of clustering as a phenomenon. Recently various OECD work groups have conducted a substantial body of work. In contrast, very little research has been published on industry clustering in Australia .

Many European countries have adopted clusters policies. The European experience has found that the differences in patterns of agglomeration can be related to differences in local environment. The characteristics of clusters are highly dependent on the social, political, and economic environment of the region. However, from case study comparisons, there appears to be three properties that are common to all successful innovative clusters. These properties are:

• Formal and informal networking, allowing for effective transfer of technology and other organisational capabilities;
• Close user-producer collaboration allowing for production flexibility and joint development;
• Mobility and flexibility in the local labour market, allowing for low redundancy costs and easy adaptation to changes in products and processes.

Such flexibility in production and knowledge structures of firms and workers reflects Piore and Sabel's (1984) concept of 'flexible specialisation', which has much in common with Marshall's (1927) original concept of an 'industrial district'. However it is important to note that there is no single model that is pertinent to all clusters. Ultimately survival will depend on the ability to evolve and adapt to the forever changing global landscape.

Clusters Policy in Australia to date

Over the past century Australia has facilitated numerous clusters, many relied heavily upon rural and extractive industries (such as meat, wool, wheat, sugar, raw materials, steel, aluminium), but others stemmed from manufacturing industries (such as motor vehicles, whitegoods, printing and publishing, and textiles). However, Australian industry clusters reached their peak by 1970. The initial impacts of globalisation and other events in the early 1970s marked the beginning of a period of rapid decline in both Australian manufacturing and primary production.

The change in Australian economic policies in the 80s and early 90s accelerated the decline. The deregulation of the financial sector and the introduction of national competition policy exposed domestic industries for the first time to national competition. This was seen to have a major impact on regional industry employment, investment and development. The combined effects of globalisation and national reforms has produced a gradual hollowing out of core elements of many older clusters. Australia has seen many of its domestic firms that were integrated in the steel, textile and automobile industry clusters move offshore or close down. By the mid 90s many of the old industry clusters had been replaced by globally integrated business networks run by major multinationals.

Networking and innovation have since emerged as important platforms of public policy , in an effort to integrate Australian industries more into global business structures.

The Australian Manufacturing Report essentially introduced the concept of clustering, if not the exact terminology, by proposing regional industry partnerships involving core local industries working with other regional industries to strengthen networks, encourage innovation and development, and technology transfer. This was followed by the McKinsey Report Lead Local, Compete Global that was the first report to actually suggest clustering as a basis of industry and economic development. Subsequently, Paul Keating's Working Nation policy and several other initiatives led to commonwealth and state governments investigating and recommending a range of policies to facilitate the development of clustering as a means of stimulating regional industry development in Australia.

The federal Labour government introduced the 'regional development program' which adopted clustering as a means of fostering economic development. The program was run through regional development organisations in most states. However, following the change of government in 1996, commonwealth funding for the program ceased in 1999. Essentially, respective state governments are driving any current processes of facilitating industry clusters at much lower funding levels.

Enright and Roberts (2001) have prepared a useful breakdown of the various state and territory government initiatives to encourage clustering. This six page summary has been reproduced at Attachment A, to give the reader a more comprehensive understanding of the scope of activity currently taking place in Australia.

The paper highlights that there are significant differences in public policy support for clustering at all levels of government within and between the States - (South Australia and Queensland are the only two states that have strongly embraced the clusters framework, whereas NSW, Victoria and Western Australia have chosen to pursue attraction of MNCs to stimulate industry development).

The paper also indicates that while there is some strong interest and activity in regional areas the concept of clustering has been basically ignored for the major metropolitan areas of Sydney and Melbourne. Enright points out that 'It is in the metropolitan regions where some of the most difficult problems resulting from structural adjustment, and the greatest potential to develop clusters, are to be found.'

Although the current Coalition Government does not have an overarching industry 'clusters policy', there is some latent interest in the concept, with partial support already occurring for regional industry clusters. The Regional Summit 2000 produced several initiatives to support the development of regional Australia. The Regional Solutions Program and the Regional Assistance Program have supported clustering initiatives in regional Australia.

The National Innovation Summit 2000 gave tacit support to the value of industry clustering, but choose to continue support for the more generic programs to stimulate industry productivity through innovation support, such as the R&D Tax Concession and Start Grants Program. The Government has also focused on industry linkages with public sector research agencies and universities through the Cooperative Research Centres Program. Such programs are essentially market driven with funds provided on a competitive basis. Such programs are less holistic than a clusters strategy as they are more likely to add value to a particular firm or research area, rather than stimulate an entire industry cluster.

One of the main reasons this government has not fully embraced a national clusters policy is because there is still the fundamental philosophical debate between policy makers. The debate is 'whether clustering should be left to industries to drive, or whether governments should support initiatives to facilitate the development of local and regional industry networks and clusters?'

'[in the past] the accepted norm has been to argue that there is no role for government to play other than ensuring that necessary infrastructure is provided effectively at low cost and that markets are distortion free. Extreme proponents of this view argue that any form of government assistance creates distortions and is therefore to be avoided at all cost. Unfortunately, this view ignores the reality that the world's competitive markets are full of distortions. Successful players - companies and countries - are those who exploit them most quickly and skilfully.' 'If there is a role for public policy then it must focus on tailored solutions rather than blanket paradigms. Success is achieved in different industries in different ways. Neither the pure level playing field nor the protection for infant industry approach is adequate in a world of increasing complexity. [Australian government needs to] help equip Australian firms to compete internationally.'

George Pappas, Boston Consulting Group

However, numerous studies now indicate that successful economies need both. Industry needs to be the main driver of clustering for the concept to be successful, but OECD studies would support that government has a role as a catalyst for action, a network facilitator, an honest broker, and an institution builder.

Why should we adopt a Clusters Policy?

With Australia's small population it is obvious that for firms to be successful they cannot simply cater for the domestic market but must strive to compete in the large global market.

As John Stuckey, from McKinsey and Company, said (1998) 'Even a small share of a global sliver can be worth billions. However, the only way to win a global sliver is to have strong intangible assets, such as knowledge, brand, reputation and special relationships. They increase your ability to identify and exploit attractive slivers.'

Clusters policies enables local regions to build those special relationships and gain those intangible assets of knowledge, brand and reputation, which enable them to compete in the world market.

The benefits to be found in industry clusters can include:

One of the criticisms of Australia's policy approach is the short-term focus of its previous policies, which react to problems in the economy as they emerge rather than being proactive in preventing the problems. A clusters policy would involve indicative planning to clarify longer-term strategic objectives. Such planning would help to lengthen the policy horizon and would provide an increased certainty for the industrial community, which would assist it to co-ordinate industrial investment in the future.

Steps to implementing a national Clusters Policy

Initiating a 'national' clusters strategy in Australia is not going to be an easy task due to our tri-level system of government and the coordination problems that it engenders. However, the economic benefits that could accrue to the nation, by having strong industry clusters, should be the focal point for triggering collaborative behaviour by all parties.

Any serious clusters strategy must be considered a long-term initiative as substantial benefits from clustering typically takes 5-10 years to accrue. Consequently any government truly committed to establishing sustained economic growth and improved social well being for Australia should seek bipartisan support. In addition, a successful clusters strategy would not simply be an industry department policy, as it also includes activities that relate to the majority of other government departments (ie education, training, research and development, regional development, small business, industrial relations, regulations, finance and taxes, agriculture, defence, health etc). Therefore a successful policy would need 'whole of government' endorsement. Such a policy would probably need to originate as a recommendation from the Prime Minister's Science, Engineering and Innovation (PMSEIC) which has broad ministerial membership.

That said, an 'idealised' clusters process may include the following steps:

Adapted from LEEDs workshop paper

It is also essential to understand that each cluster will have unique attributes and development requirements. Therefore it is not a simple case of directing the same policies at the various industries, or even copying the same policies other countries have adopted for their respective industries. What is needed to support clusters is a well developed set of generic public policies based on addressing market failure, that are flexible enough to adapt to the individual needs of specific clusters. Action Agendas would provide an appropriate avenue for identifying the necessary adjustments to programs and policies that could promote industry clustering.

A new generation of policy makers

The OECD clusters focus group reported in June 2001 that 'for clusters policies to be successful, a 'new breed' of policy makers is needed. They need to combine the analytical skills required to obtain an in-depth understanding of the innovation dynamics and innovation style of a particular cluster and the flexibility to decide on their most appropriate role (including the decision that there might not be a role to play!) to foster innovation and economic growth. This mostly requires a trajectory of experimentation and constant policy learning as policy making related to clusters involves a great deal of 'trial and error'. Clusters policy makers need to be able to mix and switch between various roles and need a certain persuasiveness and perseverance.'

Clusters policies could be considered extremely demanding for policy practitioners, as they have to be able to:

• Straddle the gap between cluster analysis and policy implementation, ie to be able to combine a fairly pragmatic action-orientated approach, but also to be able to reflect on policy making as well
• Understand the whole set of policy tools available, and know which tools to use and when;
• Handle various complex clusters programs and projects, ie switch between various clusters which might have very different needs in terms of support and steering
• Act in various capacities, ranging from secretariat, program managers, dialogue facilitators, change agents, institution builders, regulation reformers, etc
• Withstand the pressure to use clusters policies for traditional interventionist industrial policy purposes.

In conclusion

Clearly a clusters approach cannot be put into practice overnight. Not only is the clusters approach demanding in terms of the time and skills it requires of individual policy makers, it is also demanding as it has to fit into the framework of existing government policies and budgets. The clusters approach is an organising framework in which the various types of policy that affect clusters come together. This implies a need to maintain co-ordination between various government jurisdictions, whilst not necessarily offering an immediate policy fix or standardised set of policy programs.

Consequently, clusters-based policy making has been described as a 'multidimensional balancing act between analysis and policy actions allowing for bottom-up initiatives and top-down steering.'

The burning question is, are we ready for the challenge?

'Policy development is a continuous process. We cannot afford to be complacent in addressing challenges generated by ongoing changes in the world. We must meet the challenges and make the best of the emerging opportunities.'

Russell Higgins, Secretary of the Department of Industry, Science and Resources (1998)

* The views expressed in this paper are those of the author and do not necessarily reflect the views of the Department of Industry, Tourism and Resources.

Toggle references

Navigate: Archives | Contents | Top of page

Related Publications from eContent Management