Cluster Theory: Opportunities and Problems

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Cluster TheoryOpportunities and Problems

• ESRC Conference
• Regions in Context
• Durham, 17 November 2004

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• Peter Swann

Nottingham University Business School
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Part 1Birth and Growth of ClustersVitality and
the Opportunities from Clustering
Two parts to my talk
Part 2Maturity of ClustersCongestion and the
Problems with Clustering
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Part 1 Birth and Growth of Clusters

• Clusters A Variety of Interpretations
• Benefits of Clustering
• Clusters, Growth and Entry
• Clusters, Innovation and Patenting
• Clusters, Productivity and Performance
• Lessons from Networks
• Critical Mass

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(No Transcript)
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(Early) Positive Feedback in the Growth of
Clusters
Industry Strength
New Entry
Growth of Incumbents
Fixed Effects
Science Base
Source Swann(1998)
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Advantages and Disadvantages of Clusteringfrom
the Perspective of the Clustered Firm
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Statistical /econometric evidence suggests that

• Companies located in strong clusters often grow
  faster than average
• This association is strongest when co-located
  with companies from similar industries
• Strong clusters attract disproportionate amounts
  of new firm entry
• Strong clusters generate disproportionate amounts
  of innovation/patenting
• Effects of cluster strength on productivity and
  financial performance is weak

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In summary

• Clustering seems more important for those
  activities that are important in the introductory
  and growth stages of the product life cycle
• Entry, growth, invention, innovation
• Clustering seems less important for those
  activities that are important in the maturity and
  decline stages of the product life cycle
• Productivity, cost-cutting

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Lessons from Networks

• Sarnoffs Law (broadcast networks) aggregate
  value of a network is proportional to number of
  members (n)
• Metcalfes Law (communication networks)
  aggregate value of a network is proportional to
  the square of number of members (n2)
• Reeds Law (group forming networks) aggregate
  value of network is an exponential function of
  number of members (2n)

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Critical Mass Take Off and Peak Entry to
Clusters
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E 0
Contribution to Entry ()
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E 0
E 0
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Approaching Peak Entry
Approaching Maturity
Taking Off
Fledgling
0
1,000
10 K
100 K
1 M
10 M
100
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All Computing Employment in Cluster
Source Swann (1998)
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European Computer Clusters Relative to USA1
Take Off 10 Maximum Entry
Source Swann (1999)
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Trends Business Research for DTI

• Business Clusters in the UK A First Assessment
  (2001)
• Trends Business Research found 154 clusters in
  the UK
• Range in Size from 3,000 employees to 465,000
  employees
• How many of these really achieve critical mass?
• As a rough indication we use the critical mass
  measures from the US computing study

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How many of the 154 Business Trends Research/DTI
clusters achieve critical mass?
Take Off 10K
Peak Entry 100K
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86
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Part 2 Maturity of Clusters

• Disadvantages of clustering
• Entry and returns to entrants, incumbents and
  others
• Congestion within clusters
• Real estate prices
• Internationalisation, specialisation and
  clustering
• Congestion in transportation networks between
  clusters
• Do wider roads cut congestion?
• Some dilemmas for policy

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Returns to Entrants, Incumbents and Third Parties

• Within any cluster there are diverse
  stakeholders
• Entrants often gain more than they contribute
• Incentives to enter persist even when entrants
  are imposing negative externalities on cluster
  incumbents and third parties
• Table describes effect of entry on stakeholders
  as the cluster evolves ....

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Effect of New Entry on Cluster Stakeholders
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Unlimited entry?

• When the final entrant has joined, the
  cluster has grown too big for many/most
  stakeholders
• Increasing congestion is natures way of
  erecting barriers to limit size of cluster
• Sometimes entry is deliberately restricted ...

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Barker Review of Housing Supply

• Lack of supply is the reason for rapid house
  price inflation
• Increase supply of new housing, especially in SE
• Growth areas
• Milton Keynes/South Midlands
• London-Stansted-Cambridge M11 Corridor
• Thames Gateway
• Ashford
• Speed up the planning process
• Limit scope to refuse planning applications
• There is a national need for housing to take
  precedent over parochial concerns... (House
  Builders Federation)

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Personal Computer (PC) Manufacture

• In PC manufacture, it is almost meaningless to
  ask in what country a PC is manufactured
• Open up a personal computer and inspect the
  electronic chips they read like the United
  Nations (Scott and Hayen, 1991)
• The various components are manufactured in many
  different countries, assembly may be done in more
  than one country, and the final "badge" may be
  added somewhere else again .

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Origin of Components for Typical Personal
Computer (2002)

• Brand USA
• Main Box Ireland
• Chips on Cards USA, Korea, Taiwan, Philippines
• Battery Philippines
• CD ROM Drive China (Japanese Parts)
• CD-R (consumables) Germany
• Hard Disk Drive Singapore
• 3.5" Floppy Disk Drive Philippines
• Modem Card Netherlands
• Graphics Card China
• Specialist Video Card USA
• Monitor UK

• Keyboard Mexico
• Mouse Mexico
• Child's Mouse Taiwan
• Loudspeakers Malaysia
• Microphone Mexico
• Inkjet Printer Spain
• Zip Drive Malaysia
• Scanner Taiwan
• Webcam China
• Power Supplies Taiwan, China, Malaysia, Mexico
• Manuals Scotland, Ireland, Wales, Germany
• Environmental Certification Sweden

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Congestion in Transportation Networks

• If congestion halts the growth of a dominant
  cluster, and there are multiple clusters ....
• then continuing process of division of labour,
  specialisation, clustering and intra-industry
  trade leads to a steady growth in derived demand
  for transportation
• Congestion shifts to transportation networks
• A simple model ....

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Simple Model ...

• N industries
• Groups of n clusters are group-sufficient
  meaning that they cover all N industries between
  them
• If each cluster is not specialised, n is small
• If each cluster is specialised, then n is large
• n measures the degree of specialisation

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The Lattice/Grid Transportation Network
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Orbital Transportation Network
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Relationship between Degree of Specialisation in
Clusters (n) and Total Transportation (T)
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Congestion in Transportation Networks, cont ...

• Optimist hopes for lower right hand corner ...
• Transportation demand depends on ton miles
• Relationship is a square-root law
• Pessimist fears top left hand corner
• Transportation demand depends on consignment
  miles
• Relationship is a square law
• Pragmatic view is somewhere in the middle

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Congestion in Transportation Networks, cont ...

• How does transportation volume translate into
  network congestion?
• Systems theory Throughput-Delay Curves
• Delay proportional to unused capacity
• When system is near saturation, delays can become
  very long

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Throughput/Delay Curve
Delay
Load
Cap0
Cap1
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Widen Motorways to Cut Congestion (?)

• Problem
• Transport problems have become a major issue for
  business (British Chambers of Commerce)
• Jams Ahead, Economy Behind (Freight Transport
  Association)
• Solution
• Road improvements are essential, to prevent
  congestion crippling commerce (RAC Foundation)
• Widen Motorways to Cut Congestion (Financial
  Times, May 18, 2004)
• Relief from congestion is just 12 feet away
  (Freight Transport Association)
• I believe this proposed solution is based on a
  misunderstanding

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Do wider motorways reduce congestion?
Road1
Road0
Congestion
Delay0
Delay1
Demand Structure1
Demand Structure0
Traffic
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Some Dilemmas for Policy

• Policy to foster cluster development?
• Formative stages?
• Into maturity?
• Policy towards congestion?
• A compliant supply side policy?
• Congestion is natures way of slowing down growth
  of the cluster
• Demand side or supply side as a focus for policy?