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Industry Clusters: Importance of Place still Relevant to Business Success

Although industry clustering may not be the economic development "Holy Grail", an effective clustering strategy is still a proven recipe for success

November 2011
It may seem hard to believe in this age of the Internet and virtual reality, but anything can't be anywhere. Despite the emergence of a global economy, regional and statewide economic initiatives based on industry clustering have taken hold, proving the importance of place as a trigger for bolstering economic development and business success.

Two Schools of Thought
In his 1990 study of the competitive advantage of national economies, Harvard Business School Professor Michael E. Porter found that location characteristics play an important role in the success of a region's industries. Porter wrote that implementing a targeted approach of industry clusters could help firms achieve a competitive advantage by promoting their common interests. And while the strategy has produced mixed results, it remains a well-established model for economic development and business attraction.

Given the economic challenges presented by the past few years, though, two distinct schools of thought have emerged with regard to industry clustering: those who embrace Porter's thesis, and those who decry clustering as an ineffective model that limits a region's economic potential.

An op-ed in The Washington Post this summer challenged the effectiveness of industry clustering - "Industry Clusters: The Modern-Day Snake Oil" (July 14, 2011) - as an economic development strategy. The author, Vivek Wadhwa, an executive in residence and adjunct professor for the Pratt School of Engineering at Duke University, cited a Norwegian study that suggested clusters like Raleigh's Research Triangle Park are "irrelevant for innovation," arguing that what's missing is people who have the motivation and ability to start ventures. Basic infrastructure is always needed for regional economic development success, Wadhwa noted, but fancy science parks and big industry are just nice to have.

As early as the time of Plato's writing of The Republic in 360 B.C., there were signs of increased productivity through specialization and economic growth through collaboration. More recently, Porter laid down the gauntlet challenging economic development professionals to analyze what is driving their local economies and identify the resources giving them a competitive advantage. The old adage "success breeds success" is at the heart of any region's cluster strategy.

Proximity Matters
Sixty percent of the respondents to Area Development's 2010 Corporate Survey said the presence of activities similar to theirs was a consideration when selecting a site. More recently, a 2011 Brookings Institution report showed that "strong clusters foster innovation through dense knowledge flows and spillovers; strengthen entrepreneurship by boosting new enterprise formation and start-up survival; enhance productivity, income levels, and employment growth in industries; and positively influence regional economic performance."

Of course, "If you build it, they will come" really only works in the movies. It's not enough for economic development organizations to simply create fancy industrial parks and state-of-the-art buildings and expect new companies to line up at the doorstep. That's why, in recent years, more and more states and regions have been tailoring training, education, and incentive programs that build on existing clusters or foster the development of new ones in order to thrive in the "next economy."

For instance, in Brevard County, Fla., one of Central Florida's fastest-growing communities, the days of space shuttle launches are over. But economic development officials on the Space Coast believe industry clusters will help launch a new economy there. The region has targeted clean energy, defense, life sciences, information technology, and aerospace as industry sectors that can produce job growth in each sector ranging from fewer than 1,000 to nearly 14,000 new jobs through 2015, with hourly wages between $21 and $30.

In Sacramento, Calif., key stakeholders in that capital region of 2.1 million people are taking an in-depth look at their economy, by industry and by cluster, to identify what they do well, what they do better than others, what their best areas of specialization are, and what presents the region's greatest opportunities for job and cluster growth.

"The plan will focus on new job creation and capital investment activities," says Martha Clark Lofgren, interim president and CEO of the Sacramento Chamber. "The urgency of the current economy compels the region to focus on immediate actions that can be taken to help bring about economic prosperity across the capital region as quickly as possible."

In South Carolina, a research project was conducted in 2005 to identify clusters as an opportunity to boost prosperity by bringing a critical mass of businesses, service providers, customers, suppliers, training institutions, and others into close proximity. It challenged the state to reshape its approach to economic development. The analysis, for which Porter served as a senior advisor, asserted clusters must be grown and nurtured through increased productivity and efficiency, more innovation, and greater entrepreneurship.

A S.C. Example
South Carolina's fast-growing automotive cluster is made up of 125 manufacturers, suppliers, related companies, and their thousands of employees in the Upstate region - which straddles the I-85 corridor between Atlanta and Charlotte in the northwest corner of the state. The South Carolina Automotive Council in partnership with the regional economic development organization, the Upstate SC Alliance, is helping spearhead this automotive cluster that generates $29 billion in annual sales, while helping bring world-class companies and young talent to the region.

But for a cluster to sustain its competitive advantage, pure manufacturing prowess isn't enough. Research, innovation, and technological advancement are necessary to sustain a long-term advantage, according to a study published in January 2011 by the Moore School of Business at the University of South Carolina. It suggested that initiatives like Clemson University's International Center for Automotive Research (CU-ICAR) are critical to attracting more investment from companies such as Proterra Inc., which assembles drive and energy storage systems for heavy-duty, clean-energy vehicles. Proterra is projected to pump $68 million and 1,300 new jobs into the regional economy over the next seven years, part of the nearly $2 billion in economic investment the Upstate region saw in 2010 among its target industries.

Additionally, New Carolina - South Carolina's public-private partnership - is working to increase the state's economic competitiveness through a cluster development strategy. The partnership has established 15 cluster committees and counts more than 1,000 state leaders from the business, nonprofit, and government sectors as volunteers. Porter recently cited the organization's successes thus far in recruiting companies and suppliers to the state, along with three federal grants from the Small Business Administration and the Economic Development Administration to continue those efforts.

The White House Challenge
Industry cluster strategies have caught the eye of the White House, too. Last month the U.S. Department of Labor reported the Obama administration awarded $37 million to 20 high-growth regional industry clusters in the Jobs and Innovation Accelerator Challenge, a multi-agency competition launched to support the advancement of regional industry clusters. It will help promote development in areas such as advanced manufacturing, information technology, aerospace, and clean technology in rural and urban regions spanning 21 states, including projects like Minnesota's mining cluster, the renewable energy cluster in New York's Hudson Valley, and Atlanta's health information technology cluster.

The Washington Post op-ed authored by Wadhwa mocked industry clusters as the "holy grail," but the results are not as elusive as he suggests. In an age where global competition for jobs and economic investment is unprecedented, there is plenty of evidence to suggest that implementing an effective cluster strategy - investing in work force training, education, and technology that allows companies to grow and then, in turn, invest back into the community that helps make them so successful - is a proven recipe for success.

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