This document discusses the wrong approach of selecting specific clusters as the focus of economic development efforts. It argues that picking clusters is close to an flawed view that does not address the underlying needs of nations and regions. Selecting a few clusters can politically alienate other industries, bias policy towards limiting competition, and lead down a path of improper industrial policy intervention. The document proposes that the right questions are what priorities will increase productivity and how to act on them. This focuses economic development on improving the overall business environment and microeconomic foundations to benefit all industries, with clusters playing an important role in identifying issues and new government and industry roles, rather than being the sole target.

1. What Clusters Should We Pick:
Getting right answers for the wrong question
Christian H. M. Ketels, PhD
Institute for Strategy and Competitiveness
Harvard Business School
TCI Conference
Ottawa, Canada
29 September 2004
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free
Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2003, (World Economic
Forum, 2003), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press,
1998), and the “Cluster Initiative Greenbook” by C Ketels, O Solvell, and G Lindqvist. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the
permission of the author.
Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu

2. 2 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
What clusters should we pick
as the key drivers of our future economic growth?
• This is a typical and legitimate question at the outset of many regional
or national competitiveness efforts
• However, the question is dangerously close to a deeply flawed view of
the role clusters have in competitiveness
• Why is this the wrong question?
• What question should we ask to address nations’ and regions’
underlying needs?

3. 3 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Different Approaches to Economic Development
Industrial PolicyIndustrial Policy
• Targets areas of perceived market
demand
• Intervenes in free competition
(subsidies, protection, etc.)
• Requires sustained financial
commitment by the public sector
• Has a high failure rate; short term
impact with low sustainability
• Targets areas of perceived market
demand
• Intervenes in free competition
(subsidies, protection, etc.)
• Requires sustained financial
commitment by the public sector
• Has a high failure rate; short term
impact with low sustainability
Cluster PolicyCluster Policy
• Leverages existing assets,
history, and geographic location
• Enables competition to be more
sophisticated
• Requires sustained participation
by all actors
• Has increasing impact over time;
quick returns are possible
• Leverages existing assets,
history, and geographic location
• Enables competition to be more
sophisticated
• Requires sustained participation
by all actors
• Has increasing impact over time;
quick returns are possible
• There are economic, political, and economic policy reasons why cluster
selection can hurt even well intended cluster efforts

4. 4 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Downside of Picking Clusters
The Economic Argument
• The economic impact of focusing all efforts on a few selected clusters
are likely to be small
• Knowing the exact sources of future growth is impossible; future
growth will come from both current and new fields a-priori unknown
• The benefits will almost always take time to materialize; cluster
development is no quick fix
• Even the best cluster effort is destined to disappoint when the
expectation is to quickly grow an entire regional economy based on a
few selected clusters alone

5. 5 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Downside of Picking Clusters
The Political Argument
• Selecting a few clusters will politically alienate the 90%+ of the
economy (and employees) not among the chosen few
• The selection process will tend to focus the attention on government
as the only institution with the legitimacy to choose among clusters
• For cluster efforts to be sustainable over time, especially in terms of
government involvement, political support needs to go beyond the
members of the cluster

6. 6 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Downside of Picking Clusters
The Economic Policy Argument
• Favoring a few clusters can bias the choice of policy tools towards
limiting rather than enhancing competition even for a given cluster
• Focusing on selection as the first visible stage of a cluster effort easily
mobilizes support from the wrong groups while alienating natural allies
• The more diligently you work to find clusters with the highest economic
potential, the shorter the road to industrial policy intervention
• Picking clusters can lead on a slippery slope towards the wrong
economic policy, even when no “picking the winners” is intended

7. 7 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
WhatWhatHowHow
Economic Development Strategy
Key Elements
• Set the right goal for economic
development
• Be explicit about the enabling
conditions for productivity
growth
• Integrate individual policies in an
overall strategy consistent with
your goals and economic
realities
• Set the right goal for economic
development
• Be explicit about the enabling
conditions for productivity
growth
• Integrate individual policies in an
overall strategy consistent with
your goals and economic
realities
• Productivity improvements
throughout the economy to
enable sustained prosperity
growth, not clusters per se
• Quality of the microeconomic
foundations, including intense
local rivalry, not strategic
intervention
• Improvements in the most
binding constraints to
productivity growth present in
the microeconomic context
• Productivity improvements
throughout the economy to
enable sustained prosperity
growth, not clusters per se
• Quality of the microeconomic
foundations, including intense
local rivalry, not strategic
intervention
• Improvements in the most
binding constraints to
productivity growth present in
the microeconomic context

8. 8 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Upgrading the Microeconomic Foundations
A Two-Pronged Approach
• Enables targeted
upgrading of the
business environment
and roots reforms in
the private sector
• Spreads the
benefits of clusters
and increases their
effectiveness
General Business
Environment
Upgrading
Cluster
Mobilization

9. 9 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Role of Clusters in Economic Development
• Clusters are a forum to identify fundamental challenges in the
national or regional business environment
• Clusters provide new roles for government, companies, and other
institutions in economic development
• Clusters are critical engines in the economic structure of national
and regional economies
• Clusters need to be a core element of any competitiveness effort
but they should not stand alone

10. 10 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Cluster Selection: From the Pivotal to the Pragmatic
• The selection of clusters is a practical necessity, not a matter of
principal
– Limitations in terms of resources and leadership capacity
• Clusters should be selected based on criteria that reflect their roles in
economic development
– Identify cross-cutting challenges: Size, heterogeneity
– Enable new roles: Willingness to act
– Economic potential: Critical mass, business environment conditions
• The selection process should be a recurring activity, not a one-off
decision
– Successful cluster initiatives get a “life of their own”
– Government can start new waves of cluster initiatives

11. 11 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
Prioritizing Cluster Efforts
Existing Clusters
Nascent Clusters
Entirely New Clusters
•Assess the extent of existing economic activity
•Assess the cluster’s willingness to act
•Evaluate the economic potential of the effort
•Assess current positions of related clusters
•Assess the quality of the cluster-specific
business environment
•Identify potential private sector anchors
•Not part of traditional cluster efforts; odds of
developing driven by
- General business environment quality
- Consistency with a location’s overall
positioning

12. 12 Copyright 2004 © Professor Michael E. Porter, Christian H. M. KetelsTCI conference Ottawa 09-30-04 CK
What are the priorities to enable higher productivity
and how do we act upon them?
• The question is rooted in the prosperity goal of economic policy and
consistent with fundamental economic concepts
• The question is a vivid reminder that competitiveness is achieved by
knowing not only what to do but how to do it
• Clusters and cluster development have a well defined role in
addressing both the what and the how
• Selecting the appropriate clusters goes a long way to improving their
effectiveness as a policy tool