The concept of business clustering is a theory born in the classrooms of Harvard University in the 1990s by Professor Michael Porter. It is a concept that has travelled well and has since become a buzzword for investment agencies across the globe as well as a core tenet of any regional economic development strategy. In fact, the accepted wisdom that business clustering is one of the most effective routes towards economic prosperity is rarely questioned today. And though much has been written in academic circles about the benefits of business clustering for a location, there is still a question mark around how beneficial it is for companies to be located so closely to their major competitors.
The contemporary definition of a cluster is hard to pin down as the word is used to describe anything from a university campus on science park to a major established industry centre such as California’s Silicon Valley. Generally speaking though, the term is applied to any critical mass of companies working in the same or related fields, in the same geographical location. Mr Porter’s definition goes a step further to include industries and institutions in one location, from suppliers to universities to government agencies, that enjoy unusual competitive success in a particular field.
The field of cluster research is notorious for the variety of definitions, says Göran Lindqvist of the European Cluster Observatory at the Centre for Strategy and Competitiveness within Stockholm’s School of Economics. The European Commission launched the European Cluster Observatory in 2007 to provide information about clusters, cluster initiatives and cluster policy in 32 countries. The organisation has come up with a number of case studies from laser technology clusters in Vilnius and wood processing in Latvia to Malta’s tourism cluster and Bratislava’s automotive manufacturing cluster.
“The variation in definitions is a source of critique against the concept itself,” says Mr Lindqvist. But, he says, if we are perfectly happy to talk about ‘markets’ or ‘cities’ without any agreed definition of what they are, why not clusters? Defining a cluster is also difficult because geographical size can vary; a cluster can be confined to a single Italian village, or span several regions and even straddle national borders.
Despite a common belief that industry clusters are good for local economies, it is still not clear what the concept means from a company perspective. Those companies that regard locating in a business cluster as important say such a location increases their productivity, drives innovation and fosters an entrepreneurial spirit which ultimately leads to new business creation. Despite globalisation enabling more flexible business operations – thanks to open markets, improved transportation and massive strides in communication technology – locating in a cluster is still thought by some to be a critical factor in creating a genuine sense of community in business and encouraging competition. Yet others say that locating in a cluster is simply not a necessary ingredient for success and can even have its disadvantages in terms of competition for staff.
Though there is ample evidence that areas with agglomerations of certain firms are more likely to attract FDI, Mr Lindqvist admits that at a company level there is less data available and fewer studies on such benefits, although there are quite a few companies providing anecdotal evidence of the positive effects of clusters on a firm’s performance.
He believes that new firms survive longer and perform better, create more jobs pay better wages and pay more taxes the stronger the cluster is around them. They provide greater access to human and informational resources, closer cross-industry relationships and financial incentives, which would otherwise be more difficult to exploit.
How true are cluster myths?
For some companies, the existence of suppliers and partners is a major draw to a location, but does a company really need to locate within an industry cluster in order to be successful?
Proximity to suppliers and partners is a draw for many companies deciding to locate within an industry cluster. But it is still only a contributing factor for some and its importance needs to be weighted against many other considerations.
One critical factor for the oil and gas industry is the requirement to locate where the raw product originates. That said, regional head of drilling and production for GE Oil & Gas in Aberdeen, Matt Corbin, says there are many factors that determine the choice of a supplier and, even though location is certainly one of these, it would not come before quality of service or the product. So proximity to suppliers is not a major draw.
Mr Corbin believes there are very definite advantages of being located within an industry cluster as it enables the sharing of resources such as talent, and the ability to partner closely on development projects. “However, it is not a fundamental requirement in order to be successful,” he says.
Another company based in Aberdeen’s oil and gas cluster is oil giant Chevron, which established a global technology centre in the city in 2007. The company followed an intensive process to determine the optimum locations for its network of technology centres around the world, says technology centre manager David Wagner. The company’s research determined that Aberdeen in the UK and Perth in Australia were the logical choices for its most immediate needs. Both locations are major areas of mature industry operations and growth and constitute established business clusters. Selection criteria included locations in which the company had existing business operations, opportunities to gain access to new technology development and where technical talent was locally available.
The benefits of locating in a mature cluster such as Aberdeen include the ability for greater collaboration among the company’s workforce and it also strengthens key alliances with universities, industry bodies and national laboratories as well as advancing technologies with industry partners, says Mr Wagner. “We have successful operations in many remote or non-clustered locations, but industry clusters do provide better and more cost-effective opportunities for workforce collaboration, partnering and alliance engagement,” he adds.
The biotechnology triangle
The benefits to a company of locating in a cluster may vary from sector to sector. Certainly in the biotechnology sector, the networking opportunities which arise from locating in a cluster are invaluable, says Janita Good, partner and head of life sciences at law firm Osborne Clarke. Ms Good uses the example of the UK’s life sciences golden triangle of Oxford, Cambridge and London, a region which plays host to the majority of the county’s biotech companies, though not exclusively. “Most of those companies would say they are feeding off each others’ experiences because who you know in the industry is very important,” says Ms Good.
The network of companies in a life sciences hub might want to partner with a pharmaceutical company but to do so it is critical to know the right person within that company; and physical proximity is how they do it, says Ms Good. “If they go into the wrong part of a global multinational company they simply won’t get the business,” she says.
A start-up life sciences business needs to partner in order to share the risk of getting a drug to market or validate their technology. Without appropriate partners, such a company will never reach a revenue generating stage. “Partnering in the life sciences sector is therefore much more important than, say, a software business with a three-year development period before it generally hits revenues,” adds Ms Good.
The UK’s life sciences golden triangle is the location for some sophisticated networking and partnering organisations, which are very well attended. “It would be much harder to set up a well- attended network without the physical proximity,” says Ms Good, who though specialising in the UK life sciences sector believes that it if it is working in the golden triangle, it is likely to work elsewhere.
Clustering can be helpful for businesses in some sectors more than others. The same differentiation could be made for different geographical locations. In some unfamiliar markets, it might make sense for a company to locate within a cluster for the simple fact that it needs a supported launch in an unfamiliar and difficult-to-navigate foreign market.
Locating within an industry cluster, particularly where a company does not have an established employee network, can help with the sometimes difficult job of hiring experienced staff. When aerospace parts manufacturing firm Pfw opened a factory in Izmir in Turkey, the company decided to locate the facility in the Aegean Free Zone, an industrial park designed specifically for the purpose of creating an aerospace industry cluster.
Managing director of Pfw Turkey, Jurgen Viehrig, says at that point the company did not have any expansion experience outside of its home country of Germany. In 1997, the company was essentially just a manufacturing cell of 500 employees with little in the way of support functions. But by 2003, the manufacture of simple aerospace parts in Germany had become globally uncompetitive so Pfw took its first step abroad to Turkey. “The free zone was very attractive because we were not experienced in outsourcing and it was easy for us to start our expansion in the Aegean Free Zone,” says Mr Viehrig. The firm now has a facility of 110 staff after being one of the first companies to locate in the free zone. The organisation works to improve relationships between the university and local businesses to strengthen education and skills. Mr Viehrig says he has 200 applicants for each job advertised and is convinced that the facilities in the free zone, such as childcare, good working conditions and a pleasant work environment, make the company an attractive employer compared with what is on offer from other companies in the area. “All the international companies in the free zone are very attractive for the local people here,” he says.
Creating a cluster
Can an industry cluster be engineered or does a genuine industry cluster evolve organically? Special economic zones are government-conceived strategies for developing industry clusters, but what level of benefit do they provide for a company looking to launch a new facility?
Sukhendu Pal is a managing partner of business consultancy Centrix. He has led a number of cluster initiatives including setting up computer giant Oracle’s development and support centre in Bangalore, India, in 1991 and later Citigroup’s regional processing centres in Asia-Pacific, eastern Europe and Latin America in 1996.
Mr Pal believes clusters tend to be man-made rather than developing organically, and that both the private and the public sectors have roles in developing these clusters. He says that in particular multinationals should treat emerging countries’ special economic zones as an integral part of their global business systems.
The French government demonstrated its belief that industry clusters are engineered when it embarked on a nationwide programme of cluster initiatives in 2003. Philippe Yvergniaux, London director for Invest in France, says the general priority of the cluster initiatives of the past few years was to adapt the French economy by developing and creating momentum for new services and technologies. France’s 71 official industry clusters are extremely diverse and push the boundaries of the definition of clusters. There are the usual sectors including IT, renewable energy and automotive sectors, but the government initiative also notes a horse racing and breeding cluster, a food cluster and children’s clothing cluster. The definition of a business cluster for Mr Yvergniaux is when several companies and research centres are located together to generate momentum for attracting other companies, new activities and wealth for the region. According to Mr Yvergniaux, the French government’s proactive approach to creating clustering “has worked remarkably well and exceeded expectations”.
As well as tax breaks, companies can reduce costs through joint research programmes, saving up to 50% by partnering as well as receiving grants from the public purse. “Our experience when we talk to companies is that the main criteria for manufacturers being in a cluster is access to market and for more R&D activities, clusters are critical in providing access to talent,” says Mr Yvergniaux. The idea of a critical mass of companies in the same location where local players can work together with the public and private sector working together to come up with new technology and innovation is becoming more and more common. Even remote working will not, in Mr Yvergniaux’s view, prevent innovate clusters from developing and being around in 20 or 30 years. “I think the idea of clusters still has a good future,” he says.
Prestige and status
In some cases it is crucial to have a presence within a globally recognised cluster for a company’s reputation. There are certain clusters in which a company simply cannot afford not to locate in.
California’s Silicon Valley is the classic case study for industry clustering. The high-tech Mecca which developed in the mid to late-1990s spawned some of the world’s most successful technology companies and developed a reputation as the premier global innovation hub. Venture capital firms flocked to the area as did entrepreneurs looking for networking and funding opportunities.
France Telecom launched its first global R&D lab in Silicon Valley 11 years ago to pursue the internet opportunity, says Georges Nahon, CEO of Orange’s San Francisco lab. “We needed to go into catch-up mode,” he says. Today the lab is part of the Orange mobile worldwide network of R&D labs.
France Telecom was the only European company with such a significant presence at that time in Silicon Valley, which Mr Nahon says was a very courageous move which has paid off. The company participates in a lot of outreach events including sponsoring mini conferences, including initiatives for women in technology and training workshops, which has helped to establish its global reputation.
“We are called upon to speak at conferences and are often asked to collaborate with universities and companies,” says Mr Nahon. Now established as a Silicon Valley insider with a reputation for innovation, the company is also called upon by venture capital firms to vet prospective investments. The company’s participation as an established member of the Silicon Valley community drives its global reputation for innovation and excellence alongside its reputation as a European telecoms carrier elsewhere. Part of the company’s success has been its consideration of the investment growing as part of the local ecosystem, says Mr Nahon, because essentially that is what a successful business cluster is.