Clusters in ICT Development Policy

CLUSTERS
In ICT Industry Development Policy
Tarek Salah Kamel
Capability Development Unit Manager
tsalah@itida.gov.eg
V2.0, 21st of Jan 2014

What is a Cluster?
A geographically proximate group of interconnected companies and
associated institutions in a particular field, linked by commonalities and
complementarities – Michael Porter1
1Michael Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, Nov-Dec 1998.

What is a Cluster?
Features
 Manifests an end product industry
 Includes suppliers of specialized inputs. (Components, machinery, and providers of
specialized infrastructure)
 Extends downstream to channels and customers
 Extends laterally to manufacturers of complementary products. (Those having shared
activities, labor, technologies, channels or common customers)
 Encompasses supporting institutions. (Financial, vocational training, trade
associations, research universities, standard-setting agencies)

What is a Cluster?
General Business
Environment
Microeconomic
Business Environment
Cluster
Firm
Position Within the Economic Business Environment

Selected Industrial Clusters of Emilia-Romagna, Italy
2001, Invest in Emilia-Romagna

Leading Industrial Clusters of Emilia-Romagna, Italy
Automotive Mechanics Agro-Food Fashion Boating
Hyperlink

Tourism Cluster in Cairns, Australia

European Cluster Observatory
www.clusterobservatory.eu

European Cluster Observatory
Outcome
GDP per capita
Growth of GDP per capita (ppp)
GDP per capita (€)
Growth of GDP per capita (€)
Disposable income per capita
Long term unemployment rate
Population at risk of poverty
Life satisfaction rate
Happy Life Years
Land use with heavy environmental impact
Intermediate performance
Employment rate
Employment rate (female)
Employment rate (male)
Enterprises
Patents per million habitants
Apparent labor productivity
Competitiveness drivers: Specialization
High and med. high-tech. manufacturing employment
Knowledge intensive services employment
Observatory star rating
Observatory star rating in technology and knowledge-intensive
clusters
Employment in industries with high energy purchases
Competitiveness drivers: Firms behavior
Business R&D share of GDP
Business R&D personnel
Business investment
Employees per enterprise
New foreign firms
Patent collaborations
Patents with foreign collaboration
Competitiveness drivers: Business environment
Students in pre-vocational and vocational programs
Students in tertiary programs with academic orientation
Lifelong learning
Average wage
Public (government) R&D expenditure
Public (government) R&D personnel
Public (higher education) R&D expenditure
Public (higher education) R&D personnel
Total R&D expenditure
Total R&D personnel
Household broadband access
Internet trade
Part-time employment
Public sector, education and health employment
Human resources in science and technology
Population with upper-secondary or tertiary education
Skilled migrants
Multimodal potential accessibility
Population aged 15-34
Usual weekly hours worked
Trust in people
Trust in legal system
Fundamentals
Area
Population
Population density
Degree of urbanisation
Other
Regional Innovation Scoreboard
Hyperlink

Clusters and Competitiveness
 Within the same national or regional context we have a scale of clusters ranging
from highly dynamic and competitive ones to more static and uncompetitive ones.

What is Competiveness?
COMPETITIVENESS
“The Degree to which a nation can, under free and fair market conditions, produce
goods and services that will meet the test of international markets, while
simultaneously maintaining or expanding the real income of its citizens”
(US Council on Competitiveness Definition)

Productivity as a Determinant for Competiveness

Productivity and High-Tech Competition
 The term High-Tech has created the misconception that only a handful of
businesses compete in a sophisticated way, which distorted the thinking about
competition
 There is only low-tech companies … Those failing to use world-class
technologies to enhance productivity and innovation.
 Modern competition depends on Productivity
 And Productivity is strongly influenced by the quality of local business
environment
 Clusters constitute the most important microeconomic foundations for
competition in advanced economies.

How Clusters affect Competiveness?
1. Clusters Increase Productivity
 Efficient access to specialized inputs, services, employees, information, institutions,
training programs, and other “public goods”(local outsourcing)
 Ease of coordination and transactions across firms
 Rapid diffusion of best practices
 Ongoing, visible performance comparisons and strong incentives to improve vs. local
rivals
 Proximity of rivals encourages strategic differentiation
 Agglomeration Economies Effects:
 Specialized Workers
 Specialized Suppliers
 Important Customer Base.
 Knowledge Spillover
 Competitive Pressure

2. Clusters Stimulate and Enable Innovations
 Greater likelihood of perceiving innovation opportunities (e.g., unmet needs,
sophisticated customers, combinations of services or technologies)
 Presence of multiple suppliers and institutions to assist in knowledge creation
 Ease of experimentation given locally available resources

3. Clusters Facilitate Commercialization and New Business Formation
 Opportunities for new companies and new lines of established business are more
apparent
 Spinoffs and startups are encouraged by the presence of other companies , commercial
relationships, and concentrated demand.
 Commercializing new products and starting new companies is easier because of available
skills, suppliers, etc.

Clusters as Economies of Agglomeration

Clusters as Economies of Agglomeration
 Congestion costs
 Rising input costs
 Increased localized competition
 High administrative costs

Birth, Evolution, and Decline
1. Cluster Birth Factors:
Clusters Roots can be traced historically to:
 Research done in a nearby university (MIT and Harvard area of clusters)
 Location comparative advantage. (Dutch Transportation Cluster)
 Sophisticated local demand. (Israeli Irrigation Equipment Cluster)
 Pollution problems. (Finland Environmental Cluster)
 Prior existence of supplier industries
 Existence of innovating companies that stimulate the growth of many others.
(Minneapolis Medical Device Clusters due to Medtronic)
 Just a chance event (Telemarketing Cluster in Omah

2. Cluster Evolution:
 Once a cluster begins to form, a self-reinforcing cycle promotes its growth, especially
when local institutions are supportive and local competition is vigorous
 As the cluster expands, so does its influence with government and with public and
private institutions
 A growing cluster signals opportunity and its success stories attract the best talents
 Entrepreneurs take notice and migrate in from other locations
 Specialized suppliers emerge; information accumulates; local institutions develop
specialized training, research, and infrastructure.
 Eventually the cluster broadens to encompass related industries
 This requires a decade to develop depth and real competitive advantage

2. Cluster Evolution:
 The evolution of clusters thus
emanates from both deterministic
forces (legacy, culture, history)
and voluntaristic forces (as played
on the firms level).
 There is also the constructive
forces, which will impact the
development and competitiveness
of the cluster, of which one type
emanates from policy
implementing conscious efforts to
improve the microeconomic
business environment of a region.

3. Cluster Decline Factors:
Both external and internal factors
 External Threats:
o Technological discontinuities as an external threat
o A shift in buyers needs, creating divergence between local needs and needs
elsewhere.
 Internal Threats:
o Over-consolidation, mutual understanding and cartels undermine local rivalry.
o Regulatory inflexibility
o Low quality of supporting institutions. (Schools and Universities)
o Groupthink among cluster participants (Too inward looking generates
collective inertia to perceive radical innovation)
o Government suspends or intervenes in competition
o Increase in the cost of doing business

Life Cycle
Growth of a Cluster

Life Cycle
Demise of a Cluster

Clusters and Economic Development
 Poor Countries lack well-developed clusters
 Economic activities are centered around capital cities suffering diseconomies of
agglomeration
 Policy makers in developing economies must focus on foundations:
o Improving education and skills levels
o Building technology capacity
o Opening access to capital markets
o Improving quality of institutions
o Expand internal trade among cities and neighboring countries
 Government policies may work against cluster formation. Government subsidies distort
competition. Restrictions on industrial locations and subsidies to invest in distressed
areas can disperse companies
 Specialization and dispersion of economic geography are much more productive than
huge diversified cities

Implications on the Strategic Agenda of Companies
1. Choosing Locations
 Globalization may entail productivity penalties
 Locational decisions must be based on total systems costs and innovation potential, not
on input costs alone
 Every product line needs a home base, and the most vibrant cluster will offer the best
location for it
 It’s better to move groups of linked activities to the same location rather than to spread
them across numerous ones.
2. Engaging Locally
 Agglomeration benefits must be reaped by the company itself
 The company must actively establish a local presence within a cluster
 Foster collaborative relationships with governmental bodies and supporting institutions

Implications on the Strategic Agenda of Companies
3. Upgrading the Cluster and Working Collectively and Collaboratively
 Initiatives to improve local human resources. (scholarships and internships to local youth)
 Forming local trade associations to be a platform for open innovation and knowledge
generation
 Clusters offer a constructive way to change the dialog between public and private investors

Role of Private sector in Economic Development

Implications on the Industrial Policy
 The economic performance of a region is not only explained by the degree of
specialization, but also involves other aspects of the broader microeconomic business
environment, such as labor quality, research and education, and access to venture
capital and advanced infrastructure.
 Governments should strive to create the microeconomic foundations that improve
productivity and Competition. Productivity and Innovation will ultimately determine the
competition performance and relative competitiveness.
 Cluster formation should focus on the competitive advantage and specialization, not just
imitation.
 To follow a context-aware model of industrial policy development … Who does what in
each region and how can be enhanced evenly not selectively.

Shifting Roles and Responsibilities in Economic Development

Engines for Economic Development

Ecosystem Enablers for Clusters
Six ecosystem enablers facilitate access to local, regional and global markets

Ecosystem Enablers for Clusters
Economic clusters excel in differentiating enablers

Economic Cluster Development Cycle
Pre-requisite for building a value chain in a manufacturing cluster

Principles for Cluster Policy
 Neutral across clusters
 Enhancing productivity of multiple firms/institutions
 Facilitating/capturing linkages and externalities
 Facilitating the flow of information/knowledge across actors
 Engaging the private sector, not just government
 Preserving and enhancing market competition, not retarding it

The Cluster Initiative Performance Model (CIPM)
The CIPM is based on three drivers
affecting the performance:
 The social, political and economic
setting within the nation
 The objectives of the cluster
initiative
 The process by which the cluster
initiative develops

Objectives
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide. (51 IT Clusters)

Microeconomic Policy Intervention

Who takes the lead
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.

Financing
Source: The Cluster Initiative Greenbook. GSIC 2003 survey on 500+ cluster initiatives worldwide.

References
1. Michael Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, Nov-Dec 1998.
2. Michael Porter, “The Competitive Advatnage of Nations”, Harvard Business Review, March-April 1990.
3. “The European Cluster Observatory, EU Cluster Mapping and Strengthening Clusters in Europe”, European Commission,
Industry and Enterprise, Europe INNOVA, 2009
4. http://www.clusterobservatory.eu/index.html
5. ÖRJAN SÖLVELL, “Clusters: Balancing Evolutionary and Constructive Forces”, 2009
6. Tarek Salah, “Towards an Innovation-Driven Economy in Egypt, Industry Policy Development Recommendations from
The Italian National Innovation Support System”, Research Project Report in the higher education course on SME
Governance and Development, Italy, 2012
7. Cristina Boari, “Economics of Industrial Districts”, SME Governance and Development course materials, Bologna
University 2012.
8. Tarek Salah &Tarek Khalil, “Competitiveness of the Arab States in Science, Technology , and Innovation“, IAMOT 2009
conference, Orlando, USA.
9. Michael Porter. “The Competitive Advantage of Nations, States and Regions”. Advanced Management Program April 15,
2009.
10.Michael Porter, “Clusters, Innovation, and Competitiveness: New Findings and Implications for Policy”, Stockholm,
Sweden 22 January 2008
11. Povl A. Hansen and Göran Serin, ”The European ICT clusters: an overview of selected ICT clusters in Europe”, Roskilde
University, 2010
12.G. Lindqvist, Ö. Sölvell., C. Ketels, ”The Cluster Initiative GreenBook”, stockholm, August 2003
13.”Next Generation Economic Clusters”, ATKearny, 2011
14. Christian H. M. Ketels, “Clusters and the New Growth Agenda: Implications for Iceland”, Institute for Strategy and
Competitiveness , Harvard Business School, 2010
15. P. Martin, T. Mayer, F. Mayneris, ”Natural clusters: Why policies promoting agglomeration are unnecessary”, 4 July
2008. http://www.voxeu.org/article/natural-clusters-policies-promoting-agglomeration-are-unnecessary

Thank You
Capacity Building
Department
Information Technology Industry
Development Agency (ITIDA)

Microeconomic Business Environment
From the Competitive Advantage of Nations (Porter Diamond Model)

Microeconomic Business Environment

Determinants of Competitiveness

A Cluster Policy: Two Opposing Approaches
Agglomeration is the central policy lever.
 As agglomeration rises, competitiveness will
naturally follow as cluster effects set in
 Policy debate is around attracting new
companies through incentives – tax rebate
and free infrastructure.
 Needs early intervention to improve the
clusters upon which the economic
development is centered.
Competitiveness is the central policy lever.
 As Competitiveness rises, Agglomeration will
naturally increase as the cluster becomes more
attractive for new entrants
 Clusters are tools to implement policies and
not ultimate objectives.
 Policy debate is within innovation policy,
regional policy, and SME development policies.
 Policy intervention is on enabling collaboration
and channeling resources in optimum ways.

A Cluster Policy: Debates
 Government cluster policy interventions using subsidies and large funds may be harmful
to the cluster and generates a distortion to the free market competition
 Government cluster policy interventions to change location of enterprises could lead
them away from forming the optimum cluster
 Cluster policy uses industry-specific policy instruments and activities. As such, it can
become a politically convenient cover for what then in reality is nothing else but
traditional distortive industrial policy
 Many governments are under intense political pressure to ”do more” rather than
upgrading the general business environment
 While there is no systematic evidence that a government role per se is negative for
Cluster Initiatives, government cannot create clusters and can easily impose conditions
that hurt competitiveness
 An effective cluster policy mobilizes all clusters, not just the one that’s supposed to drive
future economic development.

Sundial Model for Context-Aware industrial Policy Development

Cluster Topologies
Each has its own competitive advantage

Clusters in ICT Development Policy

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