Advantages of the Industry Cluster Approach to Economic Development

1
Advantages of the Industry Cluster Approach to
Economic Development

• Mary Jo Waits
• Morrison Institute for Public Policy
• Arizona State University

2
Why New Approach to Economic Development

• Key messages
• Be more strategic / be a more intelligent player
• Old ways of analyzing the economy are not enough
  anymore
• Location still mattersbut for different reasons

3
Traditional economic development programs are
increasingly criticized for...

• not focusing on key goals (increasing the
  competitiveness of business),
• targeting individual firms,
• not thinking strategically,
• not reaching enough firms to make a difference,
• presenting a fragmented and confusing maze of
  programs and services,
• not being industry driven, and
• not being accountable to private sector clients
  or public sectors funders.

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Place Still Matters But for Different Reasons

• The enduring competitive advantages in a global
  economy lie increasingly in local
  thingsknowledge, relationships, motivationthat
  distant rivals cannot match.
• This role of location has been long
  overlooked, despite striking evidence that
  innovation and competitive success in so many
  fields are geographically concentrated.
• Michael Porter
• -

5
Arizonas experience using industry clusters as...

• an analytical tool (e.g., to better understand
  the economy and deploy resources strategically)
• an organizational tool (e.g., to engage industry
  leaders in a regional strategy and foster
  communication networking and improvement among
  companies) and
• a service delivery tool (e.g., to provide
  high-value specialized services)

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Industry Clusters asan Analytical Tool
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Assessing Strengths
Model 1 Creating Wealth
Global Economy
New
Exports
Products/Services
Linkage Industries
e.g. business services transportation metals dis
tribution
Products/Services
Population-Driven Industries
e.g. Retail hotels real estate construction
Population Growth
Tourists
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Identifying Industry Clusters

• Business Interdependence
• Arizona chose clusters where businesses relate
  to each other through the buyer-supplier food
  chain, as competitors, or as partners.
• Export Oriented
• Many of the companies in the cluster sell
  products or services to companies outside the
  region.
• Concentration
• Employment in the cluster is more concentrated
  in the region than the national average, and the
  cluster is an existing or emerging area of
  specialization.
• Significant Size or Rapid Growth
• The cluster is of a significant size or, if new,
  has an above average growth rate compared to that
  of the U.S. as a whole.

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Arizona Clusters

• High Technology (aerospace and information)
• Food, Fiber, Natural Products
• Minerals and mining
• Tourism
• Transportation
• Business Services
• Bioindustry
• Software
• Environmental Technology
• Optics
• Senior Industries
• Plastics Advanced Materials

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Key Arizona industry clusters by employment size,
concentration and growth, 1989-1999
Source Collaborative Economics, Inc.
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Industry Clusters asan Organizational Tool
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Charge to Each Cluster

• Catalogue the key components of the cluster
• Articulate an achievable vision of what the
  cluster can become over the next 10-20 years
• Identify opportunities for growing the cluster in
  the desired direction by expanding existing
  companies and attracting outside companies
• Identify opportunities for more synergy within
  the cluster
• Identify needs for specific economic foundations
  and proposed strategies

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Arizonas Emerging Software Cluster
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Software Cluster Diversity
Employment concentration in Arizona relative to
the nation (national concentration - 1.0)
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Arizona Cluster Activities

• Co-inform
• Co-learn
• Co-market
• Co-purchase
• Co-produce
• Co-build economic foundations

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Power of Collaboration Optics Cluster Example

• Identify critical mass
• optical components optical design software
  lasers for medical, industrial and graphics
  application optical telescopes digital
  electronic camera
• formed association
• state and local recognition seat at the table
• national recognitionBusiness Week Optics
  Valley
• 4-year program to build exports
• joint ventures among optics firms
• joint ventures with other clusters
• workforce development community colleges,
  school-to-work grant

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Power of CollaborationHigh-Tech Clusters Example

• Formed 2 regional associations
• Major cities compete for critical mass
  identity
• Joint venture with Tempe to create Tech Oasis
  image
• Tech Tuesday- 500 to 700 young professionals
• ADOC, Greater Phoenix and Greater Tucson Councils
  assign staff by clusters
• Joint ventures to start Venture Capital
  Conference and Arizona Tech Incubator
• Joint ventures to change university patent
  policy
• Workforce development community colleges,
  school-to-work grant
• Successful legislative agenda
• Push for Governors Partnership for the New
  Economy
• Sales tax increase earmarked for university
  research

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History of Tech Transfer

• Pre-1990 few inventors, limited activity
• 1980s industry view ASU/UA tech transfer too
  difficult
• 1996 New tech transfer staff and policies at
  ASU, UA
• 1996-1999 Industry/University team designs new
  ABOR Intellectual Property policy, among most
  liberal in USA
• 2000 APNE pushes tech transfer/economic
  development
• 2001 Prop 301 expands tech transfer/econ.
  development

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Industry Clusters asa Service Delivery Tool
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Shortcomings in the current trade development
system

• One Shotwith the top goals often being quantity
  over quality, program staff generally have only 1
  or 2 interactions with a given company
• One Typemost services are limited to relatively
  early-stage and generic assistance
• One-On-Onestaff deal with individual companies
  and assume that brochures and seminars are a way
  to achieve scale and
• One Sidedprograms often sustain only superficial
  relationships with business leaders, private
  organizations or other actors in the business
  development system.
• Source Carol Conway, Corporation for Enterprise
  development, May 1995

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Clusters offer special opportunities to better
provide assistance by

• offering a critical mass of customers for
  consultants and government
• formally incorporating businesses and trade
  associations in program design
• providing services tailored to industry
• facilitating firms collaborating to compete
  globally

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AZs Industry Clusters and ASU Research
Transportation Distribution
Environmental Technology
Software Information Industry
Optics
High Technology
Bioindustry
Environmental Sciences
Planetary Sciences
Materials
Biosciences Bioengineering
Biosciences Biotechnology
Information Science Information Technology
Manufacturing
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What are Proposition 301 funds used for?

• Funds for workforce development, tech transfer,
  research
• UA, ASU, NAU all have IT and Biomed/Biotech
  research
• UA also supports research on optics and water
• ASU also has materials and manufacturing research
  
• NAU also has environmental science and technology
• Research topics relate to GSPED clusters

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Priority Cluster Growth Targets
Greater Phoenix can join the top-tier in the
identified clusters by striving toward the
following targets
12,300 net new jobs 12,900 netnew jobs 27,700
netnew jobs 20,500 netnew jobs 32,500 netnew
jobs
Maintain current employment concentration
of 260 of national concentration. Grow to the
current US level of concentration.
Maintain concentration of 140 of the current
US concentration in high wage segments. Return
to 1990 concentration of 220 of the US level
(increasing concentration in higher-wage sectors
of the cluster) Build concentration to
120 of the current US concentration.
Aerospace Bio-industry Advanced Financial
Business Services High-technology Software
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Benefits of Cluster Approach to Economic
Development

• First time to mix entrepreneurs and traditional
  business (banks, utilities) CEOs in process to
  develop an economic development strategy
• Cluster-based approach provided a more in-depth
  understanding of the state economy
• Produced an industry-driven strategy
• Recognized that industry does not speak with a
  single voice
• Created a broader constituency for economic
  development
• Changed the way we define the customer

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Staying with It

• 1990-91 ASPED process
• 1992- GSPED Clusters Incorporate
• 1992-93 regional ED, universities follow
  framework
• 1994 Senate asks for senior industry cluster
• ASU initiates USDOC USAEP grants (5)
• Governors race (1994)
• ADOC targets staff and programs to clusters (
  167 M workforce 500,000 CECD)

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Staying with It

• GPEC targets staff programs to clusters
• Several clusters hire ex. directors
• 5 high-tech clusters hire lobbyists
• ADOC updates cluster studies
• New Economy A Guide for Arizona (1999)
• Phoenix Tucson Chambers adopt clusters
• Governors new economy task force
• Proposition 301 sales tax increase for K-12
  education university research (2000)
• Legislature funds new economy initiatives

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Staying with It

• Five Shoes Waiting to Drop on Arizonas Future
• Greater Phoenix Economic Summit (2001-02)
• GPEC and ADOC emerge stronger on clusters (new
  studies)
• Legislature keeps cluster funds NE initiatives
  in 200203 budget ( - 800 M)
• 2 universities, state, 2 cities, 5 clusters, ED
  groups form Arizona Biotech Biomedical Institute
  (ABBI)
• Feasibility study for ABBI research
  infrastructure (target 100 M)

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Why Clusters are Important to Regions

• Clusters generate wealth, exports, jobs, sources
  of information
• Firms are attracted to clusters because of
• economies of scale
• productivity advantages
• marketing and other competitive advantages
• Globally, clusters are driving regional growth

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Clusters offer special opportunities to better
provide assistance by

• reaching and educating all competitive companies
  in a sector
• accelerating the learning curve and confidence
  with opportunities for firms to learn from firms
• offering a format for delivering well-coordinated
  services

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Knowledge Employment
Knowledge Industry Employment Concentrations
Source Index of the Massachusetts Innovation
Economy, 1998.
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High-TechnologyLocation Factors
Existing High-Tech Presence

• Traditional
• Business Costs
• Tax Structure
• Compensation Costs
• Space Costs
• Capital Costs
• Business Climate

• Specific to High-Tech
• Proximity to Excellent Research Institutions
• Access to Venture Capital
• Educated Workforce
• Network of Suppliers
• Technology Spillovers
• Climate and Quality of Life

Source Milken Institute, Americas High-Tech
Economy, 1999
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8 Distinguishing Characteristics

• Technology is a given
• Globalism is here to stay
• Knowledge builds wealth
• People are the most important raw material
• Theres no such thing as a smooth ride
• Competition is relentless
• Alliances are the way to get things done
• Place still mattersbut for different reasons

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Firms Cluster in One Place for Bottom Line Reasons

• Reduce transaction costs
• Specialize
• Exploit one anothers specialties
• Increase rates of innovation
• Pursue joint solutions to common problems
• Build a common labor pool, technology,
  infrastructure
• Learn collectively what it takes to be
  competitive

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Comparison of High Technology Centers

• Places specialize
• Knowledge differs from place to place
• History matters
• High tech is not a monolith

Cortright and Mayer, Regional Connections A
Comparison of High Technology Centers, December
1999
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Place Still Matters But for Different Reasons

• The enduring competitive advantages in a global
  economy are often heavily local, arising from
  concentrations of highly specialized skills and
  knowledge, institutions, rivals, related
  businesses, and sophisticated customers.
• - Michael Porter
• Harvard Business School
• Anything that is available to rivals
• elsewhere is essentially nullified as a
• source of competitive advantage.