Cluster Theory and Industry Policy in Australia Essay Example

legitimate rationales for government involvement in cluster development, all of which are in some way related to competition, innovation, and the presence of externalities. These need to be balanced against the potential risks of inadequate industry diversification, lock-in commitments, and the use of inappropriate policy instruments (OECD 2007). The government has potentially four roles in the business environment: as a macroeconomic manager; as an institution builder; as a catalyst for competitive advantage; and as a facilitator of networking (Roelandt et al 1999).

The geographical scope of clusters can guide the analysis and help identify appropriate policies. Cluster analysis typically involves a combination of statistical techniques and qualitative case studies. There are a number of operational problems that stem from conventional industry classifications; data quality, and the limitations of qualitative assessments.

For policy implementation, Martinez (1998) proposes five practical generic strategies for cluster development, focused on fostering innovation and enhancing competitiveness.

Despite the at times disappointing experiences of the past and practical issues that make policy implementation complicated, there is a role for government policy in supporting cluster development in Australia as part of a wider national economic strategy. Cluster Theory and Industry Policy: An Overview Stanislav Bucifal Introduction

The goal of this paper is to discuss the potential of cluster theory to inform industry policy. The essay surveys recent literature published in Australia and in other OECD countries 1 and draws out some of the key issues relevant to policy decisions. The discussion is organized into five sections.

The first three sections lay the intellectual foundations by outlining the nature of the theory, identifying some of the strengths and weaknesses of the cluster approach, and highlighting the main

contributions of the theory.

Section four analyses the policy dimension of cluster theory, which is the main theme of the discussion, and in section five the focus turns to some of the practical issues that might affect policy development and implementation. 1. The nature of cluster theory Traditional theory of economic geography seeks to explain industry agglomerations as a result of increasing returns to scale, reduced transportation costs, and linkages between firms and their suppliers and customers (Schmutzler 1999).

A defining characteristic of industry agglomerations is the presence of positive externalities arising from knowledge spillovers between firms, specialized inputs from suppliers, and large pools of labor with specialized skills (Peneder 1999).

High concentrations of business activity are said to create job opportunities and attract mobile factors of production and investment capital. The emergence and subsequent development of an industry agglomeration can be triggered by a small event, suggesting path-dependence (Schmutzler 1999). Once an agglomeration reaches a critical mass its growth becomes self-reinforcing.

These ideas were first pioneered by Alfred Marshall in 1920. Among the most influential contemporary proponents of modern variants of the theory is Porter (1990).

Modern industry agglomerations—or clusters—can be loosely defined as production networks of strongly interdependent firms linked to each other in a value-adding production chain (Roelandt et al 1999). Clusters emerge naturally as firms and organizations choose their location to take advantage of natural resources, existing business networks, assets, infrastructure, and market opportunities.

Linkages extend downstream to customers, upstream to suppliers, and laterally to other organizations related by skills, technologies, complementary products, and common resources (Porter 2000). An important feature of clusters is the influence of location on the nature of competition.

Clusters

play a critical role in enhancing business rivalry and driving ‘sophisticated competition’, which is characterized by a focus on innovation as a source of competitive advantage, rather than on imitation (Porter 2000).

But the cluster concept extends beyond the geographical co-location of firms in related industries. It is a system of complex relationships, interactions, and interdependent actors that operate in the business environment as part of a value chain production network. The competitive structures of a value chain production network, captured by Porter’s Diamond model, 1 Member nations of the Organisation for Economic Co-operation and Development (OECD)

Cluster Theory and Industry Policy: An Overview Stanislav Bucifal provides a useful framework for understanding the competitive pressures firms face and the influences of random events and government policy on the business environment. Porter’s Diamond Model of the business environment Chance Firm Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries Government Source: Porter (1990) High concentrations of business activity bring many benefits to the local economy.

Cluster participants develop relationships with their local customers, specialized suppliers, competitors and institutions.

Face-to-face contact and physical proximity enhance communication and help reduce transaction costs associated with negotiating and monitoring contracts, as reputation effects serve to mitigate the risk of opportunistic behavior (Enright and Roberts 2001). Cluster firms are likely to be more flexible and able to anticipate and respond quickly to customer needs. They have superior access to quality factor inputs, capable suppliers, business services, public infrastructure, and timely information (Porter 2000).

They often benefit from mutually complementary products and services, and the sharing of marketing and training costs. Other drivers of regional clustering Porter’s emphasis on competition

has been criticized for understating the importance of collaboration.

For example, Doeringer and Terkla (1995) argue that the presence of intense rivalry can, in some cases, be counterproductive, and conclude that collaboration is more important to cluster development than intense rivalry. Waits and Howard (1996) identify six collaborative behaviors commonly exhibited by cluster firms.

Specifically, collaboration is demonstrated in:

•  the sharing of information;
• development of educational and training programs;
• coordination of joint marketing activities;

Cluster Theory and Industry Policy:

• An Overview Stanislav Bucifal collective purchasing of equipment;
• collective production or R&D 2 activities; and
• member contribution to the strengthening of institutional and economic foundations of the cluster (Waits and Howard, 1996). Another possible driver of the regional concentration of highly innovative industries is strategic access to large pools of specialized skills.