economic benefits of clusters and cluster development within the east of england

8/14/2019 Economic Benefits of Clusters and Cluster Development Within the East of England

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2003 Peter Louis. All Rights Reserved

Cluster Development

The Economic Benefits of Clusters and

Regional Support Initiatives within the

East of England

by Peter Louis

September 2003


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1. Introduction

Inspired by the writings of Porter (1990, 1998) and Krugman (1991), there has been

an increasing appreciation of the role that geography plays in the location of industry,

and the benefits and economies that location provides to firms, regions and nations.

In the 1998 White Paper Our Competitive Future Building the Knowledge Driven

Economy, the British government outlined its strategy to reverse a century of relative

economic decline by raising the sustainable rate of growth (Department of Trade

and Industry 1998, p. 6). The government recognised that the global economy had

changed the fundamentals of competition: capital mobility allowed firms to produce in

low-cost countries; technology transfers increasingly occurred between the

developed and developing parts of the world; and goods made in developing

countries were being increasingly shipped to developed ones.

Further, the government acknowledged that in the global economy, the best ways in

which the UK could achieve competitive advantage were through developing UK

competencies1 (Prahalad and Hamel 1990) in knowledge, skills and creativity that

were key to Building the Knowledge Driven Economy.

1.1 Cluster Economic Development

In The Competitive Advantage of Nations, Porter (1990, p. 71) indicated that four

broad attributes shape the environment in which local f irms compete that promote or

impeded the creation of competitive advantage (Porter 1990):

1. Factor conditions the quantity and quality of productive factors required

during production, such as skilled labour, technology or infrastructure

2. Demand conditions the nature of demand in the domestic market for the

product or service

1Firms realise their core competences in core products that form the basis of finished items.

(Prahalad and Hamel 1990)


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3. Related or supporting industries the presence or absence of internationally

competitive supplier or related industries in the domestic economy

4. Firm strategy, structure and rivalry the domestic conditions that dictate how

companies are created, organised and managed, and the competitive forces

that determine industry competition

These attributes form a nations diamondand Porter has contended that nations are

most likely to succeed in industries or industry segments where the diamond is the

most favourable. To complete the framework, Porter added the role of chance (such

as acts of pure invention and war), how it creates discontinuities and shifts the

competitive position, and the role of government (for example, national, regional and

local), how it influences and is influenced by the various attributes of the diamond

(see figure 1).

Figure 1. Diamond of national advantage

Porter (1990, p. 148) stated that the systemic nature of the diamond promotes the

clustering of a nations competitive industries, and Porter identified two types of

clusters:

Vertical clusters where firms are linked through buyer-supplier relationships

Source: Porter, M. E. (1990). The Competitive Advantage ofNations. London: Macmillan Press Ltd., . 72 & 127


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Horizontal clusters in which firms have, for example, common customers,

technology or channels

1.2 Nurturing Cluster Development

Our Competitive Future (Department of Trade and Industry 1998, p. 40) commented

that, Sectorial partnerships, including supply chain initiatives, networking and

clusters play a critical role [emphasis mine] in sharing knowledge and upgrading

skills among complementary businesses. The government tasked the Regional

Development Agencies (RDAs) with taking forward many of the proposals outlined in

the White Paper: raising regional skills, encouraging links between business and

higher and further education, working with Business Links to develop regional

centres of expertise, encouraging business collaboration and facilitating the

development of clusters (Department of Trade and Industry 1998, p. 42) Initially, the

government identified clusters of critical importance around Cambridge, Oxford and

Dundee in which the UK had European leadership in biotechnology and genome

research. Figure 2 illustrates the clusters (in stars) of firms, organisations and

individuals that form communities in Bedfordshire and along the Oxford-Cambridge

Arc.


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Figure 2. Clusters in Bedfordshire and along the Oxford-Cambridge Arc

In Planning for Clusters (Office of the Deputy Prime Minister 2000), the government

analysed six clusters. They identified that location and spatial factors were critical to

early cluster development whilst economic and vertical factors (for example, the

operation of a supply chain) were critical to cluster consolidation. However, social

and cultural factors (labour mobility, sharing of information etc [sic]) were said to

form the glue which makes the cluster operational (Office of the Deputy Prime

Minister 2000, p. 31).

Lorenzen (1999) pointed out, for a region to achieve knowledge, there needed to be

localised learning systems, such as systems of firms within high-tech industries, with

multiple extra-regional linkages to sources of codified (explicit) knowledge. However,

other systems, notably small and medium sized firms (SMEs), could learn by

leveraging linkages to obtain local (tacit) knowledge. Lorenzen considers the

following elements important in promoting the endogenous creation of knowledge:

Source: Oxford-Cambridge Arc (www.oxford2cambridge.net)


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Education and training - the flexibility of the labour force but more importantly

how it increases the stock of local knowledge (human capital) and improves

regional core competencies

Promoting experimentation and innovation within single firms firms are risk

averse, consequently, grants can encourage the use of experimental

technology or access to finance can encourage spinouts. Similarly, incubator

services can stimulate spinout and start-up activity.

2. Characteristics of a Cluster

In the view of Doeringer and Terkla (1995, p. 225), clusters are geographical

concentrations of industries that gain performance advantages through co-location.

Porter (1998, p. 88) agreed that co-location creates the potential for economic

value; however, Porter (1998, p. 88) qualified his assertion by adding that, it [co-

location] does not necessarily ensure its realization. Moreover, Porter referred to

clusters as geographical concentrations of interconnected companies and

institutions in a particular field. Porter elaborated that:

Clusters encompass an array of linked industries and other entities importantto competition. They include, for instance, suppliers of specialized inputs

such as components, machinery, and services, and providers of specialized

infrastructure. Clusters also often extend downstream to channels and

customers and laterally to manufacturers of complementary products and to

companies in industries related by skills, technologies, or common inputs.

Finally, many clusters include governmental and other institutions-such as

universities, standards-setting agencies, think tanks, vocational training

providers, and trade associations that provide specialized training,education, information, research, and technical support. (Porter 1998, p. 78)

Jacobs and De Man (1996, p. 425) noted, There is not one correct definition of the

cluster concept. Rather, they concluded that there were a set of dimensions to

which tailor-made policies could be developed. The dimensions identified were:

Geographical spatial clustering of economic activity


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Horizontal relationships between industry sectors at similar stages in the

production process

Vertical relationships between industry sectors at different stages along the

production process

Lateral relationships where different sectors share certain capabilities that

lead to performance gains in the form of economies of scope2

Technological around a basic technology

Focal a cluster of firms around a central actor (such as a firm, a research

centre or an educational institution)

Quality of the network the way in which firms cooperate and the relative

benefits that they receive will determine whether the network will be

sustainable and stimulating

Rosenfeld (1997, p. [4]) contended that the term clusterneeded to be clearly defined

if it was to become a useful subject of analysis and policy. Rosenfeld (1997, p. [4])

described a cluster as a geographically bounded concentration of interdependent

businesses with active channels for business transactions, dialogue, and

communications, and that collectively shares common opportunities and threats."

Among these various definitions or dimensions of a cluster are clear set ofcharacteristics that help to distinguish a cluster from other forms of economic activity.

Firstly, spatial proximity is seen as an important dimension of a cluster (Doeringer

and Terkla 1995; Jacobs and De Man 1996; Porter 1990, 1998; Rosenfeld 1997).

There is, nevertheless, no general agreement as to what qualifies as being within the

spatial proximity of a cluster. Nonetheless, I will accept the position that, Often a

regional cluster covers a local labour market area or travel-to-work area (European

Commission 2002, p. 13).

Secondly, clusters are characterised by the active relationships that illustrate the

interdependencies among firms. These relationships can occur within a sector,

across sectors or across industries and they suggest the productive output of the

cluster (Jacobs and De Man 1996; Porter 1990, 1998; Rosenfeld 1997).

2 Long-run reduction in average costs as the range of activities increases.


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Lastly, Jacobs and De Man (1996), Porter (1990, 1998), and Rosenfeld (1997) have

described how flows of information, knowledge, capital, skills, new technology and

innovations are an essential feature of a cluster, where these flows occur both within

the cluster, and to and from it.

3. The Economic Benefits of Clusters

3.1 Regions of Competitiveness

Porter (1998) has indicated that firms within a cluster are immersed within a

competitive business environment that provides three advantages. Firstly, firms

operate more productively (Porter 1998, p. 81). Firms can readily obtain access to

inputs such as suppliers, information, technology and higher education institutions.

Costs related to searching for and hiring talented employees are reduced, as talent is

made available within the cluster. Often, firms can source products and services

from inside the cluster and thus forgo the (greater) cost of having to develop or

produce the product or service. Being within a cluster provides members with

preferred access to extensive market, technical, and competitive information (Porter

1998, p. 81) that accumulates inside a cluster. Cluster members also benefit from

being associated with the cluster through efforts such as joint marketing, trade fairs,

bulk purchasing and brand recognition (Porter 1998).

Secondly, clusters are incubators of innovation. For example, through having a close

relationship with sophisticated buyers within a cluster, suppliers are more tuned to

their specific needs and market trends and are able to bring products to the market

more rapidly than isolated competitors. Clusters often provide the ability and the

agility for members to implement innovations more rapidly. The sheer competitivepressures between peers that are exerted reinforce these advantages for innovation

(Porter 1998).

Thirdly, clusters encourage new business formation. Firms develop to take

advantage of the concentrated customer base. Gaps in the market lead to spinouts

where product and service innovations can be developed. These products and

services can be developed at considerably reduced cost and risk through the

leveraging of established relationships (Porter 1998).


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Lawsons (2000) view is that regions obtain competitive advantage, just like firms,

through their system of core competences. Core competences represent the total

collective learning of firms, their ability to integrate multiple streams of technology

and coordinate diverse production skills.

In this move towards knowledge-intensive capitalism, the key economic unit of

production, and ultimately wealth creation, shifts from the firm to the region. It

involves the development of new inputs and a broader infrastructure at the regional

level on which individual firms and production complexes of firms can draw (Florida

1995, p. 531).

Just as features such as continuous improvement, knowledge creation, new ideas

and organisation learning describe and characterise the knowledge-intensive firm the

same features describe and characterise the learning region:

Learning regions provide the crucial inputs required for knowledge and

intensive economic organisation to flourish: a manufacturing infrastructure of

interconnected vendors and suppliers; a human infrastructure that can

produce knowledge workers, facilitates the development of a team

orientation, and which is organised around life-long learning; a physical and

communication infrastructure which facilitates and supports constant sharing

of information, electronic exchange of data and information, just-in-time

delivery of goods and services, and integration into the global economy; and

capital allocation and industrial governance systems attuned to the needs of

knowledge-intensive organizations. (Florida 1995, p. 534)

4. Turning Clusters into Learning Regions

TSER European research network conducted research within ten regional clusters of

technology intensive firms, namely Cambridge, Oxford, Sophia-Antipolis, Munich, the

Dutch Randstad, Pisa, Piacenza and NE Milano, Goteborg, Helsinki, and Barcelona.

Considering the heterogeneity of these regions, the research clearly identified in the

successful high-technology regional clusters active local inter-firm and inter-

organisational processes that promoted learning, knowledge development, and

exceptional levels of technological and product innovation (Keeble 2000, p. 220).


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These key regional collective learning processes were the creation of new

businesses through spinouts and entrepreneurship, a dynamic knowledge-based

labour market, active and relatively intense local networking (Keeble 2000, p. 214),

and collaboration linkages between local firms complemented by linkages to global

innovation networks. These processes operated mainly between individual firms

irrespective of size. However, regional institutional support mechanisms also had

identifiable influences on these processes (Keeble 2000).

4.1 Institutions

Institutions, such as major universities and research institutes, played an important

role in encouraging collective learning in their regional high-technology cluster. In

relation to the key regional collective learning processes, the roles played by

institutions were as follows (Keeble 2000):

Generating local technology-based spinouts for example, in Oxford, 18% of

high technology SMEs were spunout from Oxford University whilst in

Cambridge, Cambridge University accounted for 17%. In general, Britain's

universities have spun out [sic] more than 4,000 companies, exploiting

research from their academics and securing external finance from investors

(Jones 2002, p[3])

Training of knowledge practitioners such as scientists, engineers,

researchers, managers and other graduates for example, in Grenoble, The

development of skilled manpower in computing (software and hardware)

has powerfully influenced firm location in more profound ways than just as a

result of traditional labour market considerations (de Bernardy, 1999, pp.

349, 351)

Collaborating with regional firms in research and technology developmentactivities for instance, 54% of SMEs report close links with Oxford

University or a local public research institute; however, the research suggests

the need to obtain specialised technological expertise is more national and

global than regional


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4.2 Regional Support Initiatives

Keeble (2000) noted that during the 1990s, in several regional high technology

clusters, regional initiatives were aimed specifically at encouraging regional collective

learning. Keeble suggested that this trend involved a coalition of diverse

organisations such as large firms, universities, SMEs, local and regional

governments, trades unions, public research institutions and business and training

agencies. The principal aim was to reduce or remove barriers that affected regional

business growth, such as access to venture capital and financing, developing

collaborative relationships between local firms and universities and using tools, such

as the Internet, to market and brand the region. Specific examples of regional

support initiatives include:

Cambridge Network a high-technology business-led initiative aimed at

raising the global profile of and increasing the degree of local networking

between Cambridge IT companies (Keeble 2000). Support now extends to

other high-tech areas, such as biotechnology, and the Cambridge Network

provides an online service where members and non-members, for example,

can obtain news and up-to-date information on events for networking

opportunities, post job opportunities and CVs, or access a local directory of

companies and individuals (see figure 3) (www.cambridgenetwork.co.uk).

Moreover, visitors to the Cambridge Network can use the bFORA link on the

Website (see figure 3) to navigate to other partnered networks, such as OxIT

and the Munich Network.


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Figure 3. Cambridge Network events diary

bFORA this is a forum for information exchange and exploration of other

business networks. bFORA categorises content such as jobs and news by

network, and events by areas such as Hi-Tech, Conference and Technology

Transfer (see figure 4). Access to content is through a link that transfers

users to the network that provided the content. Currently, there are seven

bFORA lines or high-level categories. Apart from those mentioned, they

include Business Cluster, Science Park, East of England and West Midlands

(www.bFORA.net).


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Figure 4. bFORA event calendar

New Science Parks and Incubators apart from the original Cambridge

Science Park established in 1970, other parks that have been established

include St Johns Innovation Park, Melbourn Science Park, Granta Park,

Cambridge Research Park, a biotechnology incubator at Hinxton Hall, and a

technology park at the Babraham Institute (Keeble 2000).

East of England Development Agency (EEDA) EEDA was established on 1

April 1999 by the UK government as one of nine RDAs. The RDAs were

tasked with developing regional economic development strategies. Since

January 2003, their remit has included both developing and implementing

regional cluster policies (Department of Trade and Industry n.d.). EEDA has

outlined its strategy for the East of England as identifying, developing and

supporting local initiatives; sourcing extra-regional finance and directing that

finance to cluster initiatives, accordingly; building on local network

foundations; contributing expert and specialist resources and sharing of

accumulated knowledge and experience. EEDA seeks to assist firms and

organisations that operate in the following clusters: environmental, motor


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sports, medical devices auto (advanced engineering) and energy (EEDA n.d.,

Wathen 2003).

Regional Infrastructure for Innovation (RII) this is a regional collaboration of

ten Higher Education Institutions (HEIs) in the East of England. Participating

HEIs include (www.rii.org.uk):

o Anglia Polytechnic University

o University of Cambridge

o Norwich School of Art and Design

o Cranfield University

o University of Luton

o University of Essex

o University of Hertfordshire

o University of East Anglia

o The Open University

o Writtle College

The RII is developing ways for businesses and organisations in the East of

England to gain access to and support for the innovation services they

require to enhance their growth and development (www.rii.org.uk). Access

to the combined capabilities of regional universities will allow businesses and

organisations to capitalise on opportunities for knowledge sharing and

collaboration, which is particularly useful to SMEs that are looking to gain

access to both intellectual and physical resources and support innovation in

their quest for growth and greater profitability (www.rii.org.uk).

One way that the RII seeks to support business and organisations is by

providing information on events run by member HEIs through their eventcalendar (see figure 5).


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Figure 5. Events calendar for Regional Infrastructure for Innovation

In November 2003, RII will be re-launched as Innovation 10 (I10) (Website:

www.I10.org.uk). I10 has been funded by EEDA with the aim of providing

businesses with a central repository of the core knowledge, expertise and

facilities of regional HEIs so that businesses within the clusters targeted by

EEDAs cluster policy can more readily identify knowledge transfer institutions

(Kitson 2003b).

Like RII, I10 will also promote the events of member HEIs, and special I10

events. Events will be distributed through both traditional channels, such as

the post, and non-traditional ones for example, email and an event calendar

similar to RII (Kitson 2003b).

Oxford-Cambridge Arc (O2C) is an initiative of regional HEIs, sub-regional

economic partnerships (such as the Milton Keynes Economic Partnership and

the Northamptonshire Sub-regional Strategic Partnership), the private sector

and three regional RDAs. Its principal objective is to make the region


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between and around Oxford and Cambridge the largest and most successful

knowledge-based economy in Europe with realistic ambitions to become the

world leader (Oxford-Cambridge Arc 2003). As part of this policy, O2C is

looking to encourage and facilitate exceptional levels of interaction between

the various regional stakeholders through three main activities (Oxford-

Cambridge Arc 2003):

o Networking and Brokering developing a network of champions,

formal and informal contact facilitation, lobbying organisations,

managing and communicating the existence of events to foster

networking and knowledge transfer, issuing a regular e-newsletter on

events and activities within the arc

o Initiating and Managing Projects assessment of community needs,

infrastructure improvements, creating a database of organisations

within the arc, creating an O2C Arc website to communicate important

information and to facilitate community communication, developing

event planning capabilities to enable networking and brokering

o Promoting of the Arc champion the region nationally and

internationally to attract inward investment, secure funding for

infrastructure improvement, promote sector-specific growth

(biotechnology, aeronautics, automotive, ICT and

telecommunications), infrastructure funding

O2C is still in its formative stages and its strategy to implement its mission is still

evolving.


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