Periodic Synopses of Research Insights
Harvard Professor Michael Porter joined the Monitor Group in a comprehensive evaluation of South Carolina's economic strategy in 2003. By the close of the year, the final report shocked economic development leaders in the Palmetto State by criticizing its low-cost economic strategy and challenging the South Carolina Council on Competitiveness to overhaul the state's economic development policies. Not surprising, given Porter's association with cluster strategy, the report called for leveraging clusters to raise regional productivity and innovative capacity."Porter's cluster strategy and industrial targeting," by Douglas Woodward and Paula Guimaraes in Targeting Regional Economic Development (Stephan J. Goetz, Steven C. Deller and Thomas R. Harris, editors. 2012).
The authors of this article challenge the all-too-common wholesale adoption of cluster strategy asserting that "We will see that Porter's extensive research does not advance any novel or advanced technique for targeting industries." Further, evidence is presented that economic development practitioners are confused and unable to articulate the differences between cluster strategies and industrial targeting.
This article is a foundational critique of the well-intentioned but unexamined, misunderstood and even blind application of Porter's research in practice.
Words Jumping Off the Page:
"[Porter's] actual argument is that it is not what a region produces, but how productively and efficiently it produces higher-value products. By extension, getting the industry mix through targeting does not really matter, for firms in any industry can develop innovative, competitive clusters and continuously upgrade productivity."
"The rivalry among US states for new capital investment even verges on fiscal fratricide, with escalating incentives offered to companies that make large investments."
"...targeting industries for new capital investment alone will not create competitive economic improvement according to Porter. Instead, Porter's studies reveal that competitive countries and regions require an innovative environment in addition to appropriate incentives and capital investments."
"Porter argues...the question is not what a country or region produces but how to make what it produces better."
"The LQ [location quotient], a widely used technique for identifying regional industrial targets, is actually a misleading way to look at clusters."
"With location quotients, most analysts are merely looking for measures of regional specialization, not clusters."
"To summarize, the employment of location quotients employed in Porter's cluster mapping project are rudimentary attempts to quantify traded clusters. However, they have an advantage over more sophisticated approaches because they can be readily calculated and easily explained to non-specialists and used by practitioners who may have limited formal training in economics. They are limited in their usefulness for targeting, however, and not even effective in identifying clusters."
"From South Carolina to Singapore, policy-makers now believe that competitive economic strategy entails building innovative clusters. Surprisingly, however, Porter rejects cluster initiatives that involve explicit industrial targeting. Instead, he vehemently argues for upgrading the innovative capacity of all clusters."
"Finally, Porter's strategy rejects a top-down government agenda that guides development. Instead, he argues that a cluster activation should be advanced by the private sector, perhaps with local government acting as a facilitator. Clusters with strong collaborative institutions are likely to be most successful."
"The Motor of Urban Economies," in Keys to the City by Michael Storper (2013).
This month's focus on the (ab)use of clusters in economic development continues with a look at what research tells us about the emergence of successful urban economies. Many regions and cities manage to lead in wealth creation and desirable quality of life without being home to strong, easily identifiable clusters. Storper's chapter introduces ideas that are certainly shocks to the economic development establishment. As suggested above and argued further in future posts, a critical understanding in the use of clusters is that it is NOT what a region makes, rather what its people do/know. Saying it again: Look for the clustering of many functionally similar types of work, rather than a single or related industry.
A second and even bigger shock to the predominant view of economic development (and virtually every Chamber of Commerce in America): Small businesses are NOT the nucleus of an urban economy. Yes, you read that right. The nucleus of a thriving and sustained economy is found in the tradable sectors. Think of opening a bee hive. The visual of the swarming worker bees makes it tempting to ignore their ultimate reason for being: They exist because there is a queen and their job is to nurture future worker bees and the emergence of a future heiress. So too, in an urban economy, the tradable industries (where products/services create a flow of value/money from outside the geographic area) are the anchor around which local industries grow and survive.
Although certainly not alone (see future summary of Jennifer Clark's research and a recent white paper offered on Thinkspot.co), Storper offers evidence for the deagglomeration (spreading out) of industries, which adds to the warning that clusters are far more complicated than current economic development practice accommodates.
Words Jumping Off the Page:
"However big the locally serving sector might appear at any given moment in time, it will always shrink if the tradable jobs go away, as cities such as Detroit know all too well."
"The most recent episode of massive spreading out is the globalization of manufacturing, which has been made possible by the decline of trade costs for manufactured goods that occurred in the second half of the twentieth century (Glaeser and Kohlhase 2003). As a consequence, production systems have been increasingly unbundling themselves into different territories (Baldwin 2006)."
"Even Silicon Valley and Wall Street are not mostly the brains--the conception, design, and innovation centers--of far-flung production systems for their final outputs."
"The pace of basic technological changes and innovations in trade costs (logistics or management) are not the same from one industry to another. So there is no single pathway or life cycle for production as well as the spatial organization of production."
"…it still makes sense to concentrate transport hubs, even if they don't have to be on coasts and rivers, and it still makes sense to concentrate a lot of local infrastructure to serve firms and households."
"An intelligent global world is emerging," in Intelligent Cities and Globalisation of Innovation Networks by Nicos Komninos (2008).
The first decade of the 21st Century heralded the arrival of "smart cities," a next generation, if you will, of metropolitan areas where the innovation engine driving the economy is enabled by digital networks and even artificial intelligence. Nicos Komninos identifies two key factors: (1) a local/regional innovation system and (2) the presence of a digital information and knowlege management environment. For communities still struggling to establish its innovation system, the good news is that innovation is still the demonstrated catalyst for improving a region's quality of life. The bad news is that your trailing position may only get worse if you continue to linger as many global communities are hitting warp speed by leveraging digital networks and online services.
Words Jumping Off the Page:
"Local innovation systems comprise a physical space (the agglomeration of people, organisations, and infrastructure), and an institutional space based on a relationship of trust, communication, knowledge flow, untraded exchange and partnership." [Note: Read that sentence again as it contains the check list of attributes your community needs to succeed in an economy soon to be dominated by smart cities.]
"The classic solution is clusters, groups of collaborating organisations located in a relatively small geo-graphical unity. Within a cluster, research and innovation capacities improve due to the specialisation and cooperation of its members. Individual clusters combine within wider regional systems of innovation."
"Thanks to the development of communication and information management technologies, these systems of innovation have acquired a new dimension--a digital one--which complements and enriches the two previous ones, the physical and institutional ones."
"Cities are being transformed into intelligent communities under teh pressure for incessant innovation within global cooperation networks."