The IPL newsletter: Volume 9, Issue 170

INTRODUCTION

This newsletter is published by The Innovation Policy Lab at the Munk School of Global Affairs, University of Toronto, and sponsored by the Ministry of Research and Innovation. The views and ideas expressed in this newsletter do not necessarily reflect the views and policies of the Ontario Government.

Boosting Productivity, Innovation and Growth Through a National Innovation Foundation

Robert Atkinson and Howard Wial, Information Technology and Innovation Foundation (ITIF)
There is disturbing evidence that America’s innovation lead is shrinking. For example, the United States’ share of worldwide total domestic R&D spending fell from 46 percent in 1986 to 37 percent in 2003. Moreover, expanded support for basic research and science education, while important, will not be enough to respond to this challenge. Without a more robust, targeted, and explicit federal innovation policy, U.S. competitiveness will continue to slip and economic growth will lag. This new report argues that a critical step in that direction is the establishment of a National Innovation Foundation – a nimble, lean and collaborative entity devoted to supporting firms and other organizations in their innovative activities.  NIF would work to catalyze industry-university research partnerships, expand regional innovation-promotion by state governments, and encourage technology adoption. By realigning and augmenting the nation’s current diffuse efforts, the new National Innovation Foundation would help create better jobs in America, not just for highly educated “knowledge workers,” but for all workers, including high school graduates in manufacturing and “low-tech services.”

Cluster Policies and Cluster Strategies: Lessons from the ISRN National Study

David A Wolfe, Program on Globalization and Regional Innovation Systems, University of Toronto
The goal of cluster development remains an elusive target for many local economic development agencies. The fascination with industrial clusters arises out of the perceived relation between clustering and enhanced competitiveness and innovation performance. A key challenge for policy-makers is how to generate cluster-based development. The cluster literature has been preoccupied to a large extent with identifying the key factors that contribute to the origins and growth of clusters. Although the presence of such critical factors is sometimes taken as a causal explanation for the development of the clusters, as well as a guide for policy makers, it does neither very effectively. An adequate account of the factors that contribute to cluster development must differentiate between those policies that create the underlying conditions that are conducive to the emergence and growth of clusters, in contrast to those that sustain and promote the development of clusters once they have emerged.

This report draws upon the results of a comprehensive national study of industrial clusters in Canada by members of the Innovation Systems Research Network to analyze both categories of policies. The ISRN cluster study involved an extensive examination of twenty-six case studies across the country. The goal of the research project was to determine the prevalence and success of local industrial clusters in Canada’s diverse regional economies, and to analyze how the formation and growth of these clusters contributes to local economic growth and innovative capacity.

While it is virtually a commonplace to state that governments cannot create clusters by fiat or direct policy intervention, our account of the evolutionary character of cluster development suggests that government policies play a critical role at many different stages of cluster formation and growth.

Key Findings

Path Dependence – Cluster Origins
Central to the question of cluster policy is the role of path dependencies created by small, initial – often chance – events, as opposed to that played by deliberate actions of both private actors and public sector agencies.The key lesson here is that the path dependencies for cluster creation are highly variable, and that the chance events that provide the trigger for cluster formation can come from many sources. There is a certain element of serendipity in many of the cases that comprise the ISRN study but in virtually all of them ‘chance had its locational antecedents’. Once a cluster emerges through a combination of local antecedents, chance events and entrepreneurial initiative, the effects of increasing returns and positive feedback reinforce its existing advantages. This suggests the following critical lesson for policy analysis – public policies should be designed with an appropriate balance between those that help establish the local antecedents for clusters in specific regions and those that support the continued growth and development of the clusters once they have emerged.

Clusters as Sectoral Phenomenon
Another key finding that emerges from the ISRN case studies is the extent to which the cluster/sector distinction that is often made in the literature has masked one of the most significant dimensions of the cluster. The ISRN study highlighted the extent to which the character of individual clusters is strong influenced by the nature of the particular sectors in which they are based. This finding has critical implications for the formulation of cluster policies, as policies which may be appropriate or valuable for clusters with one set of sectoral dynamics, may be inappropriate for clusters in a another sector.

Differentiated Knowledge Bases of Clusters
Clusters can also be differentiated in terms of the critical source of knowledge they draw upon. It is useful to have a clearer understanding of how these forms of knowledge vary between industries. Recent analyses of the geography of knowledge flows — within and between local clusters — identify distinctive patterns by sector. These analyses distinguish between ‘analytical’ and ‘synthetic’ knowledge bases. Synthetic knowledge bases are characteristic of such industries as advanced industrial engineering where innovation takes place mainly through the application or novel combinations of existing knowledge. Analytical knowledge bases are found in science-based industries where knowledge creation is normally based on formal models, codified science and rational processes. The ISRN study developed a matrix of clusters differentiated by the nature of their knowledge base and the relative importance of the global/local dimensions of knowledge flows within those cases.

The Role of Talent in Cluster Development
One of the most consistent findings from the research is the centrality of skilled labour as the single most important local asset. If there is one type of input that is overwhelmingly local, it is highly skilled labour. The depth and breadth of the local labour market is the key ingredient defining a cluster’s ability to support knowledge-intensive production. This factor endowment is created and maintained by the attraction and retention of highly educated, potentially mobile workers who are drawn to thick and deep opportunity-rich local labour markets. It is also the factor that is most amenable to public policy influence. Post–secondary educational institutions play a central role in the development of a local talent pool.

Research Infrastructure and Talent Creation

In much of the cluster literature, the presence of research intensive institutions is depicted as a critical factor in seeding the growth and development of the cluster; the generation of a strong pool of highly skilled talent and the presence of a ‘thick’ labour market are portrayed as a positive, but secondary consequence of the investment in building dynamic research capabilities. The results of the ISRN case studies suggest that the line of causality may point in the other direction. In relatively few of the cases, outside of those which rely most strong on a synthetic knowledge base, such as the biotechnology clusters, does the cluster owe its emergence and
present strength to direct spin offs of new firms or the licensing of technology from research intensive institutions.

The ISRN findings underline the fact that direct seeding of the cluster by postsecondary institutions is the exception, rather than the rule. The case studies suggest that the presence of universities and research institutes act primarily as attractors of inward investments by lead anchor firms interested in tapping into the knowledge base of the local community, or its local buzz, and as providers of the talent pool that firms in the cluster draw upon, rather than as direct initiators of cluster development. In this respect, universities also act as part of the network linking actors in the local cluster to the global pipelines that are essential for the knowledge flows in the cluster. Successful research universities also attract leading scientists, further reinforcing their linkages to external knowledge flows through the extensive network of contacts they bring to their new location.

This means that the role of public policy in stimulating economic development through direct support for research-intensive universities is critical, if not always in terms of the popularly conceived linear relationship. The public interventions that have the most enduring effect in sustaining the process of local economic development are those that strengthen the research infrastructure of region or locality and contribute to the expansion of its talent base of skilled knowledge workers.

Policy Directions

A critical insight from the ISRN studies is that different cluster policies are appropriate at different stages of the cluster life cycle — there may be one set of environmental conditions that support the creation of a cluster, while a different set of conditions may be required for the ongoing development of a cluster and the competitive advantages the cluster confers upon its constituent enterprises. The project adopted a life cycle model of cluster development and transformation that includes the following stages:

• Latent – the presence of a strong research infrastructure or the growth of a thick labour market endowed with specific skill sets creates the preconditions for cluster formation. The region has a number of firms and other actors that begin to cooperate around a core activity and realize common opportunities through their linkages.
• Developing – an outbreak of entrepreneurial activity often as spin-offs from the lead or anchor firm or from public research institutes, stimulates the development of the cluster. As new actors in the same or related activities emerge or are attracted to the region, stronger linkages develop among the key players in the cluster. Formal or informal institutes for collaboration may appear, as may a label and common promotional activities for the region.
• Established – a certain critical mass of firms and supporting institutions is established. Relations both within and outside of the cluster are strengthened. There is a self sustaining dynamic of new firm creation through start-ups, joint ventures, and spin-offs.
• Transformational – clusters change with their markets, technologies, and processes. In order to survive, the cluster must avoid stagnation and decay. Transformation may be through changes in the products and methods, or into new clusters focused on other activities

Policy interventions are important at every stage of the cluster life cycle, even the later ones, and may be especially critical at the transformational stage when the cluster is facing novel and unprecedented challenges. This paper divides the appropriate policies into two broad categories. The first category consists of general policies designed to foster the initial conditions that create the conditions for latent clusters to develop and ensure an adequate supply of the factor endowments critical for cluster emergence. The second category of policies includes those targeted at providing supports for the continued growth of clusters once they have
emerged. Public sector agencies with cluster mandates must clearly refine their role in individual clusters to accommodate the specific developmental stage of each one.

Initial Conditions
Public policies that create a strong knowledge base in the regional economy and contribute to the creation of a well educated workforce establish the local antecedents that can support the emergence of clusters. While clusters are overwhelmingly a local and regional phenomenon, in most industrial countries the policies that contribute most directly to seeding the condition in which they can emerge lie within the jurisdiction of federal or provincial governments. A broad cross-section of the cases included in the ISRN national study underline the important roles played by different scales of political jurisdiction in the genesis of clusters.

Cluster Development and Policy Coordination
Many of the public policies that are most effective at seeding the growth of clusters are frequently designed with some other goal or objective in mind. Public policies that build a strong knowledge base in the regional economy, and contribute to the creation of a well educated workforce, rank among the most effective in establishing the local antecedents that can support the emergence of clusters.Cluster policies can serve as an effective means of focusing the impact of a wide range of other policy instruments deployed by senior levels of government to ensure they achieve maximum impact and benefit in promoting the development of networks of local firms. A key challenge for economic development policy is to ensure a better degree of integration and coordination of available policy instruments across all levels of government. A cluster focus provides an effective mechanism for achieving this at the level of the local and regional economy. It also requires a greater degree of coordination between all three levels of government and their respective economic development agencies.

The Role of Civic Organizations

The formation of local civic associations constitutes an important stage in the evolution of the cluster, signifying that it has reached a self–sustaining level of development. However, their emergence cannot be taken for granted, nor should it be assumed that they do not encounter numerous obstacles once they have emerged. Many cluster strategies make the formation of cluster support organizations a centre piece of their strategy, and in situations where they have formed independently, government policies also target support for the association as a crucial piece of the overall strategy. The ISRN case studies suggest that the most successful clusters have profited from the development of strong social networks at the community level and the emergence of dedicated, community–based organizations.

The Role of Strategic Foresight in Cluster Development Strategy

Local high technology associations can also play a central role in formulating innovation–based economic strategies. One set of techniques developed and applied at the local and regional level in Europe and North America involves a process of strategic planning or regional foresight exercises. Approaches that stress participative methods and strategic futures analysis have been labeled ‘innovation–based strategic planning’ or ‘local social knowledge management’ exercises. This approach is based on the insight that regions can enhance their potential for cluster growth, and economic development more broadly, through a strategic assessment of their existing assets and current weaknesses.

Entrepreneurship and Management Skills

Numerous cluster studies, including those conducted as part of the current ISRN project, affirm the centrality of entrepreneurship for cluster success. A key challenge involves the need to help dynamic entrepreneurs make the transition into effective managers. As cluster firms grow and expand, the set of managerial skills required to maintain their momentum changes significantly. A key barrier that they often encounter is an adequate supply of the critical management skills needed. The ISRN study identified several different types of management knowledge, in addition to purely technical knowledge, that cluster firms require to succeed. Expanding firms confront a critical range of issues that include the need for more sophisticated human resource management skills, improved information about existing and potential competitors, expanded sales capabilities, more effective inventory and supply chain management and more sophisticated use of information technology resources. This is one of the least well documented, but critical elements, for cluster firms.

Conclusions

There are no quick and easy solutions to the numerous challenges faced by individual clusters, nor should the adoption of cluster strategies and policies be mistaken as a panacea for solving all of the challenges of local economic development. Both academic researchers and policy analysts must guard against the danger of being seduced by the the ‘cluster brand’ at the expense of serious analysis of whether the role of clusters actually contributes to sustained economic development in local and regional economies. The most dynamic clusters view their strategies as part of an iterative process that must constantly be revisited and adapted to changing circumstances and competitive positions. Government can play a supporting role for the cluster, but cluster initiatives that rely excessively on government for leadership have difficulty sustaining their momentum. Successful initiatives build the need for
renewal and refocusing into their agenda from the outset. Cluster strategies that take too long to produce results can fail by attrition, as key participants lose their energy and commitment and fall by the wayside. It is essential to target small, achievable steps from the outset to provide concrete and measurable indicators of success for cluster participants. Finally, policy alignment can be highly effective for cluster strategies; strategies that require the implementation of major new programs by senior levels of government or require substantial budgetary commitments are likely to founder on the complexities of the public sector budgetary process. Often cluster initiatives can succeed by tapping into existing government programs and budgetary envelopes to access needed resources, or by co-opting new federal, provincial, or even, private sector initiatives and aligning their objectives to meet the goals of the cluster strategy.