CLUSTERS. Balancing Evolutionary and Constructive Forces ÖRJAN SÖLVELL - PDF

CLUSTERS Balancing Evolutionary and Constructive Forces ÖRJAN SÖLVELL Clusters Balancing Evolutionary and Constructive Forces IVORY TOWER PUBLISHERS Karlavägen 70, 1 fl SE Stockholm Sweden

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CLUSTERS Balancing Evolutionary and Constructive Forces ÖRJAN SÖLVELL Clusters Balancing Evolutionary and Constructive Forces IVORY TOWER PUBLISHERS Karlavägen 70, 1 fl SE Stockholm Sweden First published in Sweden 2008 All parts of this publication may be reproduced, stored in at retrieval system and transmitted in all forms: electronic, mechanical, photocopying, recording, or other. Please make proper reference to this publication and its author. This book may be lent, resold, or hired out without the publisher s consent. Clusters Balancing Evolutionary and Constructive Forces ISBN Örjan Sölvell Second edition, January 2009 Printed by Danagårds Grafiska, Ödeshög CLUSTERS Balancing Evolutionary and Constructive Forces ÖRJAN SÖLVELL to Ingela, Frida & Christian Contents Preface... 7 Introduction... 9 Chapter 1: Four Perspectives on Clusters...13 Clusters One of Four Agglomerations Cluster Dynamics and Competitiveness Cluster Life Cycles Clusters and the Visible Hand...22 Clusters Evolutionary and Constructive Forces Part I EVOLUTION...31 Chapter 2: Why Clusters Matter...33 Clusters and Innovation Chapter 3: Cluster Evolution: Winter Car Testing in North Sweden Car Testing...40 The Hero Phase New Firm Formation and Transformation of Social Capital...42 The Full Diamond at Work...45 Global Reach Summary of Case Chapter 4: The Rise and Fall of Clusters Birth of a Cluster Growth of a Cluster Mature Clusters and Renaissance The Demise of Clusters...62 Part II Construction...63 Chapter 5: Cluster Policy, Programs and Initiatives...65 The Construction of Silicon Valley...67 Policy for Clusters or Cluster Policy Cluster Policies and Programs within the EU Cluster Initiatives (CI) Chapter 6: Cluster Program Evaluation Critical Issues in Program Evaluation Cluster Evaluation An Overview Evaluating a Cluster Program: Scottish Enterprise Improving the Business Environment...93 Evaluating a Cluster Initiative: Uppsala BIO Understanding Diverse Perspectives Chapter 7: Cluster Reconstruction: The Paper Province, Värmland and North-mid Sweden Background The Cluster Initiatives Take Form The Rise of the Värmland Model Motivation and Process Why Bother to Evaluate Cluster Initiatives? Method Development of the Model Measurable Results Increased Sales and R&D Actions Effects of the Assessment Summary of Case Conclusion The Porter Paradox Sound Construction and Reconstruction Take Evaluation Seriously A Final Word Bibliography...131 Preface This book is the outcome of many years of research around clusters, statistical cluster mapping, cluster initiatives, and cluster policy. The idea is to give the reader an overview of the field, and to show how clusters can be used as a constructive tool, not only for scholars but also for cluster practitioners, for industry, academic, and political leaders, and for civil servants working with clusters, regional development and innovation. The two main arguments of this book are: first, that clusters do matter, especially as environments for innovation; and second, that clusters evolve from both evolutionary and constructive forces. Both forces are bound by history and geography, and therefore every cluster has its own unique characteristics. Drawing upon our research, we want to offer some insights about cluster evolution and construction that can guide and inspire leaders and cluster practitioners around the world. The book is divided into two parts; the evolution of clusters (part I) and the construction and reconstruction of clusters (part II). The first part emphasizes the reasons why economic activity tends to agglomerate, causing clusters to take off, grow and ultimately decline. The second part analyzes policymaking and cluster initiatives, where social, political, and business leaders come together in a conscious effort to promote clusters and the regional business environment. We wish to draw a rather sharp distinction between the evolutionary forces of industry agglomeration and clustering, and the planning and active execution of cluster construction. Both of these phenomena are, of course, two sides of the same coin, but they tend to play out differently in distinct geographies and time periods. The basis for this book is found in a number of earlier works I have published alone or jointly with Christian Ketels and Göran Lindqvist. Examples of joint publications include The Cluster Initiative Greenbook (2003) and Cluster Initiatives in Developing and Transition Economies (2006), known informally as the blue book. It also draws upon data and analysis carried out together with my colleagues working for the European Cluster Observatory (www.clusterobservatory. eu). Göran Lindqvist and Sergiy Protsiv have been helpful with data collection, model construction and analysis at various stages of the research. Both are work- Clusters Balancing Evolutionary and Constructive Forces 7 ing on their doctorates at the Stockholm School of Economics (SSE), and both promise to make significant contributions in the fields that intersect International Business, Strategy and Economic Geography. This book represents the work of many people to whom I am indebted. Chapter 3 is based on a case that I have used for teaching cluster evolution, as well as the interplay between the diamond model, social capital and entrepreneurship. The case version was co-authored with Karin Larson and Marcus Lindén, both of whom were students at SEE. Chapter 5 is based partly on work that was carried out in cooperation with Harald Furre at Oxford Research in Norway. Chapter 6, which addresses cluster evaluation, was co-authored with Evert Vedung, Professor Emeritus at Uppsala University, and Agnetha Nilsson of Region Värmland. Madeline Smith wrote the section on Scottish Enterprise, while Robin Teigland and Per Lundequist wrote the section on Uppsala Bio. The Värmland case in Chapter 7 was written by Hemming Lindell, Gullers Group Information Counselors, Anders Thorén, Thorén & Stenberg Kommunikation, and Staffan Bjurulf, Region Värmland and SLIM. I would also like to thank Werner Pamminger, Clusterland Upper Austria, Anne T. Ballantyne, NRC Canada, David Pawera, the Regional Development Agency Ostrava, and Knut Senneseth of Innovation Norway for sharing their experiences and views on cluster program evaluation. I am indebted to Henrik Glimstedt at SSE, with whom I have had many constructive discussions over the years on how constructive forces shape society. This study would not have been completed without extraordinary support from Marie Tsujita Stephenson, Administrator for the Center for Strategy and Competitiveness (CSC) at SSE. Finally, I would like to thank my family Ingela, Frida and Christian to whom this book is dedicated for all support I have received when not working on the book. I am thankful for financial support from the Stockholm School of Economics Center for Strategy and Competitiveness, the European Commission DG Enter prise and Industry, and Region Värmland, one of the new constructive actors on the cluster scene. Stockholm, January Clusters Balancing Evolutionary and Constructive Forces Introduction It all began as an academic exercise. In the mid-1980s, Professor Michael Porter at the Harvard Business School was contemplating why some firms especially those based in particular nations, regions or business environments were able to achieve globally leading positions, while firms in other environments developed less sophisticated and innovative strategies. Even for firms based in regions with similar levels of prosperity, the differences in success, in terms of industries and market segments, were striking. If firms differed in their ability to innovate and upgrade, the differences between regions were similarly as striking. Some world-renowned clusters are obvious and widely recognized: film in Hollywood and Bollywood, wine in the Barossa Valley, IT and the Internet in the Silicon Valley, biotech in Boston, optical equipment and cars in Kanto and Kansai, Japan, financial services in Manhattan s Wall Street and inner London, automotive production in southern Germany, watches in Switzerland, and mobile communication in Stockholm. But, as Professor Porter and other scholars, particularly those within the field of Economic Geography, had shown earlier, the phenomena of clustering, industrial concentration and regional specialization were readily identifiable across the globe. Furthermore, clusters could be identified across industries: in high-tech fields and more traditional industries, in handicraft industries, in manufacturing as well as services, and in small- and large-firm dominated clusters. In short, local clusters with a global reach were easily identifiable throughout a range of industries. Professor Porter had decided to spend his sabbatical in 1986 travelling the world in order to better understand who the winners were in global competition. After being appointed to the President s Commission on Industrial Competitiveness by President Reagan in the mid-1980s, Porter began paying closer attention to competitiveness, the impact global competition exerted on the U.S. economy, and the role of government. His travels took him to Japan, Singapore, Italy, Sweden, Denmark, Germany and other far-flung destinations. Porter was accompanied by one of his graduate students, Michael Enright, who would later become a leading scholar on clusters and competitiveness. Clusters Balancing Evolutionary and Constructive Forces 9 Eventually, a team of more than 30 researchers from ten nations were assembled, and in August 1987 Professor Porter invited the group to HBS for a Seminar on the Competitiveness of Nations. A draft version of the Diamond model was taking shape. Three years later, the big black book The Competitive Advantage of Nations was published. Porter also used the book as the basis for a popular video set on competitiveness that covered a number of cases from around the world. A series of nationally focused books was later released, with topics including Sweden, Denmark, New Zealand, Canada and Japan. Throughout the course of the project, Porter had tried to capture and explain the microeconomic fundamentals that drive firms in particular locations to innovate and develop more sophisticated strategies. The phenomena he had observed stood in sharp contrast to the models portrayed in the classical competitiveness literature, in which competitiveness was regarded as a result of cost advantages such as low labor costs and aided by recurrent devaluations in many nations. Porter also turned away from other popular explanations of national success in particular industries, including aggressive industrial policy and cultural characteristics of management systems, such as Japanese management. Instead, he devised the diamond model, which identified four core drivers of competitive advantage. In this approach, competitiveness is seen as a function of specialized and advanced factors of production, sophisticated demand, intense rivalry and varied strategies among firms, and finally, the existence of supplying and related industries, i.e. clusters. In addition, Porter contended that external exigencies (war, natural catastrophes, and disruptive technological shifts) and government policy also played a role in the diamond model of competitiveness, impacting each of the four corners of the model in various, and often unforeseeable, ways. The title of the book implied that the unit of analysis was the nation. However, this turned out to be misleading. In fact, the whole point of the book was to show that no single nation is or can be competitive in everything. Instead, every nation has a range of competitive and uncompetitive industries, in line with what classical trade theory would predict. With the Japanese onslaught that was prevalent at the time, it was important to show that Japanese competitiveness was geared towards certain industries, or clusters, around consumer electronics, automobiles, computers, cameras, and the like, whereas Japan was uncompetitive in chemicals, aerospace, processed food, software and most services. But Porter pointed out not only differences in success in particular industries, but also the fact that competitiveness emanated from particular localities within nations. The power of the diamond model was enhanced by geographical proximity, and thus, in addition to firms, clusters were thrust onto center stage. 10 Clusters Balancing Evolutionary and Constructive Forces As we understand clusters today, they can be described along four key dimensions: type of agglomeration, level of dynamism, stage in the life cycle, and level of political involvement. Let us now consider these four dimensions in greater detail. Clusters Balancing Evolutionary and Constructive Forces 11 Chapter 1 Four Perspectives on Clusters Interestingly enough, the diamond model as such did not make a big imprint on the research community, or the policy community for that matter. However, the concept of clusters did. In addition to the focus on local rivalry, the cluster box of the model was the real novelty, or rather, a rejuvenation of old knowledge that had first been enunciated by the renowned economist Alfred Marshall in the late 19 th century. The cluster was composed of private firms, constituting the value system of buyers and suppliers, and also included firms in related technologies that shared certain factor or product markets. As the cluster model took hold, it was enlarged and expanded upon by different scholars to include other agents, such as universities, public agencies and public-private organizations. These variables would later come to be termed Institutions for Collaboration (IFCs) by Professor Porter and Professor Willis Emmons. Over time, as the cluster model gained more prevalence, it began to overlap with the diamond model, involving the qualities of the factor side, the demand side and firm strategies. Clusters One of Four Agglomerations As noted above, economic activity tends to agglomerate in certain places at certain times. In order to separate out different types of agglomeration economies, one can make a simple classification scheme delineating efficiency advantages (largely economies of scale) versus innovation advantages of clusters on the one hand, and agglomeration in general versus agglomeration of technologically related actors on the other. This division leads to four main types of agglomerations (see Figure 1, taken from Malmberg, Sölvell, & Zander, 1996). Clusters Balancing Evolutionary and Constructive Forces 13 Diverse activities Technologically related activities Efficiency & flexibility Cities Industrial districts Innovation Creative regions Clusters Figure 1. Four Types of Agglomerations The first type of agglomeration relates to general economies of regional and urban concentration that apply to all firms and industries in a single location (so-called urbanization economies), emanating from lowered transportation costs and the efficiency of large-scale operations of the agglomeration as a whole. These are the forces that lead to the emergence of larger manufacturing belts and metropolitan regions. City agglomerations attract a wide range of economic activity. More important cities, particularly capital cities, represent political power and markets for public projects, and are therefore attractive targets for headquarter functions of large corporations. A second agglomeration type involves economies that relate to firms engaged in similar or linked business activities, leading to the emergence of industrial districts. Such districts constitute a base for flexible production systems that can meet the demands of volatile markets (Piore & Sabel, 1984). In both cases, agglomeration economies have their roots in processes whereby linkages among firms, institutions and infrastructures within a geographic area give rise to economies of scale and scope; the development of general labor markets and pools of specialized skills; 14 Clusters Balancing Evolutionary and Constructive Forces enhanced interaction between local suppliers and customers; shared infrastructure; and other localized externalities. Agglomeration economies are believed to arise when such links either lower the costs or increase the revenues (or both) of the firms taking part in the local exchange. Presence in an agglomeration is, in other words, believed to improve performance by reducing the costs of transactions for both tangibles and intangibles. In Scott s view (Scott, 1983, 1988), the formation of agglomerations will be particularly intense where linkages and flows tend to be small-scale, unstable and unpredictable, and hence subject to high transaction costs. On the other hand, large-scale and more predictable and standardized flows, such as raw materials, components, products, or blueprints, are perfectly handled by global markets. In addition to these two types of agglomerations, which can be explained mostly by efficiency gains and flexibility, one can distinguish two other types of agglomerations that can be explained as centers of knowledge creation and innovation. In the academic literature, there is a debate about whether specialized regions with clusters (as modeled by Marshall, Arrow, Romer and Porter) perform better, or whether diverse city-regions, offering a multitude of skills, technologies, political and academic institutions, cultural inspiration and so forth (as modeled by Jacobs) are more conducive to innovation and upgrading. We hold that these models are not mutually exclusive, but rather are complementary to one another (Lindqvist, Protsiv and Sölvell, 2008). The first type we refer to as clusters, where sustained competitiveness is based on capabilities that are linked to a particular location (Porter, 1990; 1998). Clusters are not seen as fixed flows of goods and services, but rather as dynamic arrangements based on knowledge creation, increasing returns (Krugman, 1991) and innovation in a broad sense. In line with this view, more recent research approaches have come to focus on the importance of innovation as a means of trying to explain the emergence and sustainability of agglomerations. Thus, clusters are made up not only of physical flows of inputs and outputs, but also include the intense exchange of business information, know-how, and technological expertise, both in traded and un-traded forms. Such technological spillovers were actually at the core of Marshall s analysis in the early 20th century, but had been mostly forgotten until Paul Krugman and Michael Porter brought them back to central stage in the early 1990s. Several studies have confirmed knowledge externalities in clusters (Audretsch & Feldman, 1996, Jaffe, Trajtenberg, & Henderson, 1993). Many types of firms and organizations constitute the set of actors on the cluster stage. Here we have identified six main types: firms, financial actors, public actors, universities, organizations for collaboration and media (see Figure 2). Clusters Balancing Evolutionary and Constructive Forces 15 The last type of agglomeration relates to knowledge creation and creativity in a region without any sectoral boundaries. While Porter s main concern has been the existence and reproduction of clusters of technologically related firms, there are corresponding attempts to analyze the learning abilities and creativity of regional and urban agglomerations of the general type. Instead of specialization and spatial clustering of related industries, emphasis is placed upon the presence of a regional variety of skills and competencies, where the often-unplanned interaction among different actors can lead to new and sometimes unexpected ideas and creative designs, products, services and business concepts (Florida, 2002; Johannisson, 1987; Andersson, 1985). Industry Buyers Suppliers Related industries SMEs Services Public bodies Reg
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