TCIOceania16 Upgrading Australia’s Competitiveness: The Role of Cluster-based Economic Development

Upgrading Australia’s Competitiveness: The Role
of Cluster-based Economic Development
Christian H. M. Ketels
3rd TCI Oceania Cluster Conference, Adelaide, 1-3 June 2016
"Driving (Regional) Competitiveness through Innovative Clusters to Bolster National Prosperity"

Upgrading Australia’s Competitiveness:
The Role of Cluster-based Economic Development
Dr. Christian H. M. Ketels
Institute for Strategy and Competitiveness, Harvard Business School
President, The TCI Network
Adelaide, Australia
2 June 2016
rafmozart@terra.com.br

2 Copyright 2013 © Christian Ketels
The Lucky Country…
Australia outperforming its peers, fueled by..
• Past policy reforms
• China-driven natural resource-boom
• (Partial) isolation from US/European crises
Source: IMF, 2016

…Loosing Steam…
0
0.5
1
1.5
2
2.5
3
3.5
4
Labor
Mobilization
Labor
Productivity
GDP Population Prosperity
Prosperity Decomposition, Australia, 2000 - 2016
2000-07
2008-15
2016 (ex)
Source: The Conference Board, Total Economy Database, May 2016
Average Annual
Growth Rate, %

…and Even Falling Behind?
0
0.5
1
1.5
2
1996-2015 2016-2020 (IMF proj.)
GDP per Capita Growth
Australia G7
Average Annual
Growth Rate, %
Source: IMF, 2016

Drivers
External
• China’s growth and natural resource demand is slowing, probably
structurally
• Advanced economies are (slowly) working their way towards recovery
Internal
• Australia has few obvious new growth sectors
• A combination of Dutch Disease and the effects of distance and
modest absolute market size have decimated traditional
manufacturing
• Australia has solid but stagnant competitiveness fundamentals

Australia’s Competitiveness Fundamentals over Time
Openness of
Product Markets
Cost of
Doing Business
Overall
Competitiveness
• 2008: Rank 13
• 2013: Rank 8
• 2010: 81%
• 2016: 80%
• 2010: Rank 15
• 2015: Rank 22

A Closer Look at Australia’s Competitiveness
Macro (16)
Political Institutions
(31)
Human Development
(26)
Rule of Law
(20)
Demand Conditions
(30)
Related and Supporting
Industries (29)
Context for Strategy and
Rivalry (23)
Factor Input Conditions
(20)
Micro (22)
Capital
(12)
Admin.
(19)
Logistics
(31)
ICT
(20)
Innovation
(19)
GDP pc (10)
Index (19)
Social Infra-
structure and Pol.
Institutions (21)
Macroeconomic
Policy (25)
Business
Environment Quality
(22)
Company
Sophistication
(23)
Source:WorldEconomicForumGlobalExecutiveOpinionSurvey2014,ISCanalysis,144countries
Strategy
(25)
Internationalization
(21)
Organization
(15)
Skills
(25)
Significant
advantage
Moderate
advantage
Neutral
Moderate
disadvantage
Significant
disadvantage

…And How it Translates into Economic Composition
Economic Complexity Index, 2013
AUSTRALIA
Source: Atlas of Economic Complexity, 2016
HIGH LOW

Australia’s Competitiveness Challenge 2016
• What will be Australia’s positioning in the Asian/Oceanic and global
economy in the future?
• In what sectors and markets will companies from Australia be able to
successfully compete?
• What policies can help Australia build sustainable competitive
advantages in specific areas?
• What role can cluster-based economic development approaches
play in addressing these questions?

Clusters: An Established Concept….

…with a Stable Set of Core Building Blocks …
Collaboration
& Rivalry
Related Variety
Critical
Mass
Proximity

… in a Changing Economic Environment
Rising
Knowledge-Intensity
Lower Trade Barriers
Globalization of production sites
Falling Transportation/
Communication Costs
Accelerated
Technological Change
Clusters are a critical facet
of modern economies
Clusters are a key aspect of
urbanization
Clusters are becoming more
specialized
Clusters are becoming more
connected
Agglomeration Dispersion
Globalization of markets

Types of Industries and the Nature of Competition
EMPLOYMENT
INCOME
PATENTS
36% 64%
51% 49%
91% 9%
Local Industries
• Present everywhere at
similar levels
• Serve exclusively the local
market
• Little exposure to cross-
regional competition
• Important for jobs, but
lower wages; growth
potential limited by size of
the local market
Traded Industries
• ‘Spiky’ across space; 2/3s of all
traded industry employment is in
strong clusters
• Serve national and global markets
• Exposed to competition from other
regions and nations
• Critical for prosperity through
higher wages, productivity, and
innovation; growth potential set by
the global market
Traded vs. Local Share of the U.S. Economy

15
Employees 50,000 =
Traded Cluster Composition of the Massachusetts Economy
Note: Clusters with less than 1,000 employees not shown.
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Overall change in the
Massachusetts Share of US
Traded Employment: -0.13%
Massachusetts Overall
Share of US Traded
Employment: 2.65%
Added Jobs
Lost Jobs
Employment
2003-2013
Massachusetts National
Employment Share, 2013
Change in Massachusetts Share of National Employment 2003-2013
Business
Services
Education and
Knowledge Creation
(-.66%, 6.9%)
Marketing, Design,
and Publishing
Performing Arts
Electric Power
Generation
and Transmission
Video Production
and Distribution
Distribution
and Electronic
Commerce
Financial
Services
Information Technology
and Analytical Instruments
(-.037%, 6.4%)
Hospitality and Tourism
Insurance
Services
Transportation and Logistics
Plastics
Food Processing
and Manufacturing
Production Technology
and Heavy Machinery
Aerospace Vehicles
and Defense
Metalworking
Technology
Communications
Equipment
and Services
Printing Services
Medical Devices
Lighting and
Electrical Equipment
Biopharmaceuticals
Paper and Packaging
Downstream
Metal
Products
Construction
Products
and Services
Upstream Metal
Manufacturing
Textile
Manufacturing
Downstream
Chemical Products
Furniture
Vulcanized and Fired
Materials
Automotive
Apparel
Wood Products
Livestock Processing
Fishing and Fishing Products
(-1.7%, 5.6%)
Environmental Services
Upstream
Chemical
Products
Jewelry and Precious Metals
(-2.7%, 5.0%)
Water Transportation
Nonmetal Mining
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%

16
Cluster Linkages: Massachusetts
Metal-
working
Food
Processin
g
Lighting
IT &
Analytical
Instruments
Comm-
unications
Equip. &
Services
Down-
stream
Chemicals
Biopharma
Leather
Apparel
Printing
Services
Financial
Services
Insurance
Environ-
mental
Services
Business
Services
Education &
Knowledge
Creation
Marketing
Services
Music &
Sound
Recording
Performin
g
Arts
Video
Productio
n
Hospitality
& Tourism
Metal
Mining
Coal
Mining
Upstream
Metals
Wood
Products
Furniture
Tobacco
Aerospace
Upstream
Chemicals
Trailers &
Appliances
Textiles
Footwear
Forestry
Agricultur
e
PlasticsPlastics
Distribution
& eComm.
Livestock
Processing
Fishing &
Fishing
Products
Water
Transport
Transport
&Logistics
Vulcanize
d
Materials
Construction
Nonmetal
Mining
Oil & Gas
Electricity
Down-
stream
Metals
Production
Metal-
working Automotive
Paper &
Packaging
Recreation
& Electric
Goods
Jewelry &
Precious
Metals
Strong clusters above
90th percentile specialization
Other specialized
clusters
Strong clusters above 75th
percentiles specialization
Cluster Specialization
Medical
Devices

Clusters Linkages and Regional Diversification
U.S.
Military
Communications
Equipment
Sporting and
Leather Goods
Analytical Instruments
Power Generation
Aerospace Vehicles
and Defense
Transportation
and Logistics
Information Technology
1910 1930 1950 19901970
Bioscience
Research
Centers
Climate
and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education and
Knowledge Creation
• Existing cluster
portfolios have a
significant impact on the
evolutionary path of
regional economies
(Neffke et al, 2009;
Boschma et al. 2011)
• Clusters provide a
powerful analytical tool
to understand
diversification and the
emergence of new
economic activities
The San Diego Economy
Source: Porter, Monitor Company, Council on Competitiveness (2003)

Clusters and Economic Performance
Prosperity Entrepreneurship Structural Change
• Wages
• Productivity
• Job growth
• Resilience
• Patenting
• New business
formation
• Survival of new firms
• Job growth in new
firms
• Path of structural
change(emergence
of new clusters)
Presence of Strong Clusters

Putting Clusters into Context
(Creative)
Skills
Complexity
Social Capital
Innovation
Systems
Entrepreneurial
Ecosystems
Framework
Conditions
Clusters
Urbanization

Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Public Institutions
Sound Monetary
and Fiscal Policies
A Comprehensive View at Competitiveness
Source:: Delgado, Ketels, Porter, Stern (2012)

Microeconomic Drivers of Competitiveness
Business
Environment
• Skills, knowledge
• Infrastructure
• Efficient public
services
• Access to capital
• Competitive
markets
• Rules and
regulations
• Demand conditions
Cluster
Presence
• Critical mass in
specific groups of
related and
supporting
industries
• Strengths of
linkages and
cluster dynamics
Company
Sophistication
• Quality of companies’
operational practices
• Nature of companies’
competitive
advantages

Upgrading Competitiveness: Principles
• There is no silver bullet
• Many things matter
• What matters most depends on what you already have
• Every location is different, but all adhere to the same economic
principles and dynamics
• You can’t change everything at once, even if all has to change
eventually
• Change requires action by many

Economic Development: Prevailing Approaches
Entrepr.
Eco-
systems
Clusters
Mixed
Economic
Gardening
Big Game
Hunting
The Next Big
Thing
Picking
Winners
Firm/Sector
Focused
New
Existing
Framework
Conditions
Build it and
They Will
Come
Place
Making
Open for
Business
Business Environment
Focused
Narrow
Broad

Economic Development: Prevailing Approaches
Framework
Conditions
Economic
Gardening
Big Game
Hunting
Build it and
They Will
Come
The Next Big
Thing
Picking
Winners
Place
Making
Open for
Business
Firm/Sector
Focused
Business Environment
Focused
Entrepr.
Eco-
systems
Clusters
Mixed
New
Existing
Narrow
Broad
High Risk
Lack of
competitive advantages
Interest group capture
Limited potential
Limited potential
Often not creating specific
competitive advantages
High Risk
How to
get it right?

Two Opposing Approaches to Cluster Policy
MORE (Agglomeration)
BETTER (Competitiveness)
FINISH
• High risk
• Traditional
‘industrial policy’
• Long-term impact
• New model of public-
private collaboration

20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels26
Types of Government Interventions in Clusters
• Direct intervention at the
firm level
– Attraction of firms
– Subsidies, directed credit
High short-term impact/High distortion/low productivity impact Long-term impact/Low distortion/high productivity impact
• Intervention into the
market
– Provision of monopoly
rights; Entry/trade barriers
– Demand subsidies
• Investments in the cluster-
specific business environment
– Specific to the cluster
– Benefiting the cluster but part of a
general upgrading strategy
• Enable collaboration with
and within the cluster
– Support for cluster initiatives
– Active engagement with the
cluster in setting and
implementing policies

Target Public Policy at Clusters
Clusters
Specialized Physical
Infrastructure
Environmental Stewardship
Setting standards
Science and Technology
Infrastructure
(e.g., centers, university
departments, technology
transfer)
Education and Workforce TrainingBusiness Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of public
policy and public investments towards economic development
EntrepreneurshipMarket Information
and Disclosure

Cluster-Based Entrepreneurship Policy
• A growing number of regions support entrepreneurship through
incubators, risk capital, and other mechanisms
• Start-ups share many needs that such efforts can help address
• Linking them to clusters and cluster organizations can significantly
enhance their economic impact
• Entrepreneurship is much more likely to spurn the emergence of high-
growth companies if it occurs in clusters
• Clusters reflect location-specific advantages that enhance new firms’
likelihood of entry, survival, and growth in related fields
• Cluster organization can enable easier access to the many types of
industry-specific partners and assets that new companies need
Source::Stern/Guzman (2016), Delgado et al. (2014)

What are Cluster Initiatives?
• Upgrading of
company operations
and strategies across
a group of
companies
• Strengthening of
networks to enhance
spill-overs and other
economic benefits of
clusters
• Upgrading of cluster-
specific business
environment
conditions
Cluster initiatives are collaborative activities by a group of companies, public sector
entities, and other related institutions with the objective to improve the competitiveness of a
group of interlinked economic activities in a specific geographic region

Clusters, Cluster Initiatives, and Performance
CLUSTER
PRESENCE
CLUSTER
EFFORT
ECONOMIC
PERFORMANCE
+ =
+ =
+ =
20150409 – MOC 2015 – Session 19

Supporting Emerging Clusters:
Identification
Context for
Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Factor
(Input)
Conditions
Demand
Conditions
• Sophisticated and demanding
local customers and needs
– e.g., Strict quality, safety, and
environmental standards
– Consumerprotection laws
• Local rules and incentives that
encourage investment and
productivity
– e.g. incentives for capital investments, IP
protection, corporate governance
standards
• Open and vigorous local
competition
− Openness to foreign competition
− Strict competition laws
• Access to high quality business
inputs
– Human resources
– Capital availability
– Physical infrastructure
– Administrative
infrastructure (e.g., business
registration, permitting,
transparency)
– Scientific and technological
infrastructure
• Availability and depth of suppliers and
supporting industries
• Presence of Institutions for
Collaboration (IFCs) that support
productive coordination and
collaboration among actors
Business Environment Strengths Existing Cluster Portfolio
• External intelligence (technology, market needs) is critical
• Choice under uncertainty
Assessment criteria
• Existing bridgeheads, market opportunity, leadership
Metal-
working
Food
Proces
sing
Lighting
IT &
Analytical
Instrumen
ts
Comm-
unication
s
Equip. &
Services
Down-
stream
Chemical
sBiopharm
a
Leather
Appare
l
Printin
g
Service
s
Financi
al
Service
s
Insura
nce
Enviro
n-
mental
Service
s
Busine
ss
Service
s
Educatio
n &
Knowledg
e
Creation
Marketi
ng
Service
s
Music
&
Sound
Record
ing
Perfor
ming
Arts
Video
Produc
tion
Hospit
ality
&
Touris
m
Metal
Mining
Coal
Mining
Upstream
Metals
Wood
Produc
ts
Furnitu
re
Tobacc
o
Aerosp
ace
Upstream
Chemical
s
Trailers &
Appliance
s
Textile
s
Footwe
ar
Forestr
y
Agricul
ture
PlasticsPlastics
Distributi
on
&
eComm.
Livestock
Processin
g
Fishing &
Fishing
Products
Water
Transport
Transport
&Logistic
s
Vulcani
zed
Materia
ls
Construct
ion
Nonmetal
Mining
Oil & Gas
Electricity
Down-
stream
Metals
Productio
n
Metal-
working
Automoti
ve
Paper
&
Packag
ing
Recreatio
n
& Electric
Goods
Jewelry &
Precious
Metals
90th percentile specialization
Other specialized
clusters
75th percentiles
specialization
Cluster Specialization
Medica
l
Device
s

Current Status of Cluster Policies and Programs
• Many countries and regions, especially within the OECD, have cluster-related
policy programs
• Spending on cluster-related programs is meaningful, but only a modest
percentage of total spending per policy area
• Funding is tilted towards existing strengths, but many efforts exist without
established critical mass
• Cluster programs are often run by a range of ministries or agencies; there is
limited coordination between programs
• Funding for strengthening collaboration is always a part; other elements
differ significantly
• Design principles differ widely across many dimensions

20150204 – MOC 2015 – Session 2 Copyright 2015 © Christian Ketels33
Modes of Cluster Policy
Fund operation of
cluster initiatives/
sectoral plans
Create/task backbone
organizations to
mobilize clusters
Deploy policy funds
through cluster
initiatives/networks
Use cluster
initiatives/networks as
organizational infrastructure
for policy action
Policy for Clusters Cluster-based Policy
Basque
Germany
France
Sweden
US
Catalonia
Korea
Austria
Mexico
Colombia
Sporadic:
Create
stronger linkages
Tactical:
Deliver programs
more effectively
Strategic:
Choose & design
better policies

Resources &
Capabilities
• Quality of staff
• Budget and tools
• Governance
Narrow model
• Focus on networking
• Limited resources
• Limited impact
Systemic model
• Cluster initiatives as
key channel for
delivering policy action
• Moderate operational
resources, strong
influence on other
investment streams
• High impact possible
What Drives the Success of Cluster Initiatives?
Context
Activities
• Cluster strength
• Business
environment
conditions
• Firm sophistication
• Collaboration
culture, trust
IMPACT
• Activities aligned with the needs of firms
• Activities aligned with actions of partners
• Effectiveness of implementation

The Role of Government at Different Levels
National
Regional
Local Making it happen
Orchestrating a strategy
Setting the stage
• Success is the result of effective collaboration across different levels
of government, building on their respective roles and capabilities

Towards an Economic Strategy for a Location
Business
Environment
Cluster
Portfolio
Positioning
• The specific value the location provides as a place to do
business in the national and global economy
• Activities focused on existing and
emerging clusters that draw most
benefits from and emphasize the
location’s value proposition
• Activities to upgrade cross-cutting
business environment conditions
that are most critical for the
location’s value proposition
Outcome Ambitions
Implementation Architecture
• Responsibilities, resources, capabilities, and coordination

Developing a Cluster-Based Economic Strategy
Diagnostics Choice Action Plan
• What is the profile of
our performance?
• What business
environment
conditions do we
offer?
• What clusters do we
have? How are they
positioned?
• What business
environment
conditions do we
want to offer?
• Which type of
companies and
skills do we aim to
attract with these
qualities?
• What are the
priorities for action?
• Who is going to do
what?
• How do we deploy
our resources?
• What channels and
platforms can we
use?

Making it Happen:
The Need for New Partnerships
Old Model
• Government drives economic
development through policy
decisions and incentives
New Model
• Economic development is a
collaborative process involving
government at multiple levels,
companies, teaching and
research institutions, and private
sector organizations
• Cluster organizations are
effective tools to organize
public-private dialogue

Implications for Australia
• Australia has a strong economy, rooted in robust underlying
competitiveness
• The combination of strong demand for Australian natural resources and
a policy focus on cross-cutting framework conditions, especially the
openness of markets, has left the country with few competitive
advantages and clusters outside a narrow range of areas
• The country would benefit from shifting towards the exploration and
systematic development of positions in a broader range of fields
• A cluster-based approach is a powerful way for Australia to identify
and implement such a strategy, based on a new model of public-private
collaboration

TCIOceania16 Upgrading Australia’s Competitiveness: The Role of Cluster-based Economic Development

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