By Christian Ketels, presented during the 8th TCI Latin American Cluster Conference, Medellin, Colombia, 16-19 June 2015

1. 1 Copyright 2013 © Christian Ketels
New Industrial Policy and Economic
Development:
What Role Can Cluster Efforts Play?
Dr Christian H. M. Ketels
President, TCI Network
Institute for Strategy and Competitiveness
Harvard Business School
18 June 2015

2. 2 Copyright 2013 © Christian Ketels
The Evolution of Industrial Policy
• Subsidies for
firms/industries
• Creating new
winners?
• Backing losers!
Old
Industrial Policy
• Sector-specific
upgrading
• Structural
change into
related fields
New
Industrial Policy
FAILURE
• Generic, cross-
sectoral policies
• Helping all?
• Helping few
enough!
Framework
Conditions
PARTIAL
SUCCESS
?

3. 3 Copyright 2013 © Christian Ketels
The Evolution of Industrial Policy
Two Competing Motivations
Upgrading
productivity
Moving into
more attractive
sectors
Sectors/Industries
as the objective
Sectors/Industries
as a tool/channel
What you doHow well you do it

4. 4 Copyright 2013 © Christian Ketels
The Evolution of Industrial Policy
Issues for Emerging Economies
• The industrial composition differs systematically between more and
less advanced economies
• Structural transformation is a critical part of the economic
development process
Achieving structural transformation
• Strategic approach
– Import-substitution policies
– Export-led strategies, global value chains
• Strategic intent
– Creating scale: Big push, strategic industrial policies
– Creating capabilities: Linkages, economic complexity/product space

5. 5 Copyright 2013 © Christian Ketels
Source: Observatory of Economic Complexity
Product Space Analysis
Colombia, 2012
• Where are you currently strong?
• What related areas are opportunities?
• How do you get to the most central parts of the product space?

6. 6 Copyright 2013 © Christian Ketels
“Where you compete”:
Understanding the Nature of Structural Change
• Sectorial composition is related to the stage of economic development
BUT
is sectorial composition
a driver, a symptom, or an outcome?
• Emerging evidence suggests that sectorial composition is largely endogenous
to business environment quality
• Use data on sectorial composition as a diagnostic tool
• Upgrade business environments to enable structural change
• But be careful about adopting sectorial composition as a policy target

7. 7 Copyright 2013 © Christian Ketels
Using Cluster Data as A Diagnostic Tool
• Overall share of employment in traded clusters
• Share of employment in strong clusters
• Share of employment in strong clusters gaining share
• Job creation/change of market position in strong vs.
weak clusters
• Market position and profile of strong clusters
• Linkages among strong clusters
Strength of
Core Clusters
Strength of
Cluster Portfolio
Dynamics of
Cluster Portfolio

8. 820150510–Jerusalem Competitiveness Presentation Copyright 2015 © Professor Michael E. Porter
Traded versus Local Clusters
Example: The City of Jerusalem
59.47%
52.78% 52.67%
45.03%
Tel Aviv Haifa Israel Jerusalem
Employment share of Traded Clusters
Source:CentralBureauofStatistics

9. Copyright 2015 © Christian Ketels9
Performance of Strong Clusters
Example: The Great Lakes-St. Lawrence Region
• Strong clusters are those that reach critical
mass in employment (top 25% in LQ)
• Strong clusters have in the Great Lakes-St.
Lawrence Region suffered
disproportionate employment losses,
unlike the experience in other regions
• This has been true across many cluster
categories, but especially in those that
have been hit the hardest in overall
employment
• These outcomes suggest fundamental
challenges in the market positioning of
many of the Region’s traditional clusters
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
Strong Clusters Elsewhere
2003
2013
- 9.8%
- 2.0%
Employment in…

10. 10 Copyright 2013 © Christian Ketels
Cluster-Based Economic Development
Upgrade
existing
clusters
Mobilize
related
clusters
Improve
general
business
environment
conditions

11. 11 Copyright 2013 © Christian Ketels
Cluster-Based Economic Development
Principles
• Scope defined by groups of related industries
• Geography-conscious, concentrating activities in specific locations
with critical mass and capabilities
• Based on public-private collaboration, with clear division of roles
• Focused on competitiveness upgrading through improvements in
company sophistication, cluster linkages, and business environment
conditions

12. 12 Copyright 2013 © Christian Ketels
The Role of Cluster Initiatives
• Channel to deliver government programs
• Workforce skill development
• Internationalization
• Access to finance
• SME Management support
• Technology transfer/extension
• Platform to discuss policy priorities
• Inform government about market realities and company needs
• Inform companies about budget realities and government tools
• Requires robust organizational platform with capabilities, funding,
independence, and integrity

13. 13 Copyright 2013 © Christian Ketels
Core Partners for Cluster Initiatives
• Multinational companies
• Leading local companies
• Business groups (chambers of commerce, industry associations)
• Academic institutions
• National economic development agencies
• Regional economic development agencies
• Political leaders

14. 14 Copyright 2013 © Christian Ketels
Clusters, Cluster Initiatives, and Performance
CLUSTER
PRESENCE
CLUSTER
EFFORT
ECONOMIC
PERFORMANCE
+ =
+ =
+ =

15. 15 Copyright 2013 © Christian Ketels
Cluster-Based Economic Development
Policy Tools
Existing Clusters Potential Clusters White Space
Needs
Tools
• Strengthen
collaboration
• Address specific
business environment
weaknesses
• Integrate policies
• Explore market
opportunities
• Connect potential
parts of the cluster
• Address specific
barriers for growth
• Enable entrepreneurs
to test ideas
• Create an environment
where new ideas can
emerge
• Present economic
base
• Opportunities given
context
• Unknown
• Cluster efforts
• Cluster-oriented
strategies with
dedicated funding
• Creation of networks
• Removal of barriers
• Limited funding tied
to performance
• General
entrepreneurship
environment
Specific Characteristics of
Policies for Potential Clusters
• Accept and manage risk
• Create clear exit mechanisms
• Encourage exploration of market
opportunities
• Make knowledge generated widely
available
• Support projects, not institutions
• Be flexible on geographic and
industry boundaries

16. 16 Copyright 2013 © Christian Ketels
• Pull; react to market signals
• Support all clusters with critical mass,
willingness to act, and a plausible strategy
• Push; amplify weak market signals
(and react to new signals)
• Apply strong market discipline to
avoid rent capture
• Pull; react to market signals
• Support and help coordinate regional efforts
Cluster Policy Across Different Levels of Government
Established Clusters
with national importance,
often with presence in
multiple regions
Established Clusters
with regional importance
Potential Industries
with limited current
presence and no clear
regional concentration
• Pull; react to policy signals
• Compete by providing best bus.
environment for potential industries
National Government
Regional Governments

17. 17 Copyright 2013 © Christian Ketels
Challenges – The Three C’s
• Capacity in government
• Capacity in the private sector
• Political economy
• Incentive effects of policy tools
• Global market context
Capacity
Capture
Context

18. 18 Copyright 2013 © Christian Ketels
Strategy
Implementation
SUCCESS