The Economic Benefits of Clusters and Regional Support Initiatives within the East of England

Cluster Development

The Economic Benefits of Clusters and
Regional Support Initiatives within the
East of England

by Peter Louis

September 2003

© 2003 Peter Louis. All Rights Reserved

1. Introduction

Inspired by the writings of Porter (1990, 1998) and Krugman (1991), there has been
an increasing appreciation of the role that geography plays in the location of industry,
and the benefits and economies that location provides to firms, regions and nations.

In the 1998 White Paper Our Competitive Future – Building the Knowledge Driven
Economy, the British government outlined its strategy “to reverse a century of relative
economic decline by raising the sustainable rate of growth” (Department of Trade
and Industry 1998, p. 6). The government recognised that the global economy had
changed the fundamentals of competition: capital mobility allowed firms to produce in
low-cost countries; technology transfers increasingly occurred between the
developed and developing parts of the world; and goods made in developing
countries were being increasingly shipped to developed ones.

Further, the government acknowledged that in the global economy, the best ways in
which the UK could achieve competitive advantage were through developing UK
competencies1 (Prahalad and Hamel 1990) in knowledge, skills and creativity that
were key to Building the Knowledge Driven Economy.

1.1 Cluster Economic Development

In The Competitive Advantage of Nations, Porter (1990, p. 71) indicated that four
broad attributes “shape the environment in which local firms compete that promote or
impeded the creation of competitive advantage” (Porter 1990):

1. Factor conditions – the quantity and quality of productive factors required
during production, such as skilled labour, technology or infrastructure
2. Demand conditions – the nature of demand in the domestic market for the
product or service

1
Firms realise their core competences in core products that form the basis of finished items.
(Prahalad and Hamel 1990)


3. Related or supporting industries – the presence or absence of internationally
competitive supplier or related industries in the domestic economy
4. Firm strategy, structure and rivalry – the domestic conditions that dictate how
companies are created, organised and managed, and the competitive forces
that determine industry competition

These attributes form a nation’s diamond and Porter has contended that nations are
most likely to succeed in industries or industry segments where the diamond is the
most favourable. To complete the framework, Porter added the role of chance (such
as acts of pure invention and war), how it creates discontinuities and shifts the
competitive position, and the role of government (for example, national, regional and
local), how it influences and is influenced by the various attributes of the diamond
(see figure 1).

Source: Porter, M. E. (1990). The Competitive Advantage of
Nations. London: Macmillan Press Ltd., pp. 72 & 127

Figure 1. Diamond of national advantage

Porter (1990, p. 148) stated that the “systemic nature of the ‘diamond’ promotes the
clustering of a nation’s competitive industries,” and Porter identified two types of
clusters:

• Vertical clusters – where firms are linked through buyer-supplier relationships


• Horizontal clusters – in which firms have, for example, common customers,
technology or channels

1.2 Nurturing Cluster Development

Our Competitive Future (Department of Trade and Industry 1998, p. 40) commented
that, “Sectorial partnerships, including supply chain initiatives, networking and
clusters play a critical role [emphasis mine] in sharing knowledge and upgrading
skills among complementary businesses.” The government tasked the Regional
Development Agencies (RDAs) with taking forward many of the proposals outlined in
the White Paper: “raising regional skills, encouraging links between business and
higher and further education, working with Business Links to develop regional
centres of expertise, encouraging business collaboration and facilitating the
development of clusters” (Department of Trade and Industry 1998, p. 42) Initially, the
government identified clusters of critical importance around Cambridge, Oxford and
Dundee in which the UK had European leadership in biotechnology and genome
research. Figure 2 illustrates the clusters (in stars) of firms, organisations and
individuals that form communities in Bedfordshire and along the Oxford-Cambridge
Arc.


Source: Oxford-Cambridge Arc (www.oxford2cambridge.net)

Figure 2. Clusters in Bedfordshire and along the Oxford-Cambridge Arc

In Planning for Clusters (Office of the Deputy Prime Minister 2000), the government
analysed six clusters. They identified that location and spatial factors were critical to
early cluster development whilst economic and vertical factors (for example, the
operation of a supply chain) were critical to cluster consolidation. However, “social
and cultural factors (labour mobility, sharing of information etc [sic])” were said to
“form the glue which makes the cluster operational” (Office of the Deputy Prime
Minister 2000, p. 31).

Lorenzen (1999) pointed out, for a region to achieve knowledge, there needed to be
localised learning systems, such as systems of firms within high-tech industries, with
multiple extra-regional linkages to sources of codified (explicit) knowledge. However,
other systems, notably small and medium sized firms (SMEs), could learn by
leveraging linkages to obtain local (tacit) knowledge. Lorenzen considers the
following elements important in promoting the endogenous creation of knowledge:


• Education and training - the flexibility of the labour force but more importantly
how it increases the stock of local knowledge (human capital) and improves
regional core competencies
• Promoting experimentation and innovation within single firms – firms are risk
averse, consequently, grants can encourage the use of experimental
technology or access to finance can encourage spinouts. Similarly, incubator
services can stimulate spinout and start-up activity.

2. Characteristics of a Cluster

In the view of Doeringer and Terkla (1995, p. 225), clusters are “geographical
concentrations of industries that gain performance advantages through co-location.”
Porter (1998, p. 88) agreed that co-location “creates the potential for economic
value”; however, Porter (1998, p. 88) qualified his assertion by adding that, “it [co-
location] does not necessarily ensure its realization.” Moreover, Porter referred to
clusters as geographical concentrations of “interconnected companies and
institutions in a particular field.” Porter elaborated that:

Clusters encompass an array of linked industries and other entities important
to competition. They include, for instance, suppliers of specialized inputs
such as components, machinery, and services, and providers of specialized
infrastructure. Clusters also often extend downstream to channels and
customers and laterally to manufacturers of complementary products and to
companies in industries related by skills, technologies, or common inputs.
Finally, many clusters include governmental and other institutions-such as
universities, standards-setting agencies, think tanks, vocational training
providers, and trade associations – that provide specialized training,
education, information, research, and technical support. (Porter 1998, p. 78)

Jacobs and De Man (1996, p. 425) noted, “There is not one correct definition of the
cluster concept.” Rather, they concluded that there were a set of dimensions to
which tailor-made policies could be developed. The dimensions identified were:

• Geographical – spatial clustering of economic activity


• Horizontal – relationships between industry sectors at similar stages in the
production process
• Vertical – relationships between industry sectors at different stages along the
production process
• Lateral – relationships where different sectors share certain capabilities that
lead to performance gains in the form of economies of scope2
• Technological – around a basic technology
• Focal – a cluster of firms around a central actor (such as a firm, a research
centre or an educational institution)
• Quality of the network – the way in which firms cooperate and the relative
benefits that they receive will determine whether the network will be
sustainable and stimulating

Rosenfeld (1997, p. [4]) contended that the term cluster needed to be clearly defined
if it was to become a “useful subject of analysis and policy.” Rosenfeld (1997, p. [4])
described a cluster as “a geographically bounded concentration of interdependent
businesses with active channels for business transactions, dialogue, and
communications, and that collectively shares common opportunities and threats."

Among these various definitions or dimensions of a cluster are clear set of
characteristics that help to distinguish a cluster from other forms of economic activity.
Firstly, spatial proximity is seen as an important dimension of a cluster (Doeringer
and Terkla 1995; Jacobs and De Man 1996; Porter 1990, 1998; Rosenfeld 1997).
There is, nevertheless, no general agreement as to what qualifies as being within the
spatial proximity of a cluster. Nonetheless, I will accept the position that, “Often a
regional cluster covers a local labour market area or travel-to-work area (European
Commission 2002, p. 13).”

Secondly, clusters are characterised by the active relationships that illustrate the
interdependencies among firms. These relationships can occur within a sector,
across sectors or across industries and they suggest the productive output of the
cluster (Jacobs and De Man 1996; Porter 1990, 1998; Rosenfeld 1997).

2
Long-run reduction in average costs as the range of activities increases.


Lastly, Jacobs and De Man (1996), Porter (1990, 1998), and Rosenfeld (1997) have
described how flows of information, knowledge, capital, skills, new technology and
innovations are an essential feature of a cluster, where these flows occur both within
the cluster, and to and from it.

3. The Economic Benefits of Clusters

3.1 Regions of Competitiveness

Porter (1998) has indicated that firms within a cluster are immersed within a
competitive business environment that provides three advantages. Firstly, firms
“operate more productively” (Porter 1998, p. 81). Firms can readily obtain access to
inputs such as suppliers, information, technology and higher education institutions.
Costs related to searching for and hiring talented employees are reduced, as talent is
made available within the cluster. Often, firms can source products and services
from inside the cluster and thus forgo the (greater) cost of having to develop or
produce the product or service. Being within a cluster provides members with
preferred access to “extensive market, technical, and competitive information” (Porter
1998, p. 81) that accumulates inside a cluster. Cluster members also benefit from
being associated with the cluster through efforts such as joint marketing, trade fairs,
bulk purchasing and brand recognition (Porter 1998).

Secondly, clusters are incubators of innovation. For example, through having a close
relationship with sophisticated buyers within a cluster, suppliers are more tuned to
their specific needs and market trends and are able to bring products to the market
more rapidly than isolated competitors. Clusters often provide the ability and the
agility for members to implement innovations more rapidly. The sheer competitive
pressures between peers that are exerted reinforce these advantages for innovation
(Porter 1998).

Thirdly, clusters encourage new business formation. Firms develop to take
advantage of the concentrated customer base. Gaps in the market lead to spinouts
where product and service innovations can be developed. These products and
services can be developed at considerably reduced cost and risk through the
leveraging of established relationships (Porter 1998).


3.2 Regions of Co-operation

As mentioned, Porter (1998) has asserted that competition is the dominant behaviour
among firms within a cluster and that, through this competitive behaviour, a nation
gains competitive advantage in the industries in which its clusters compete.
Doeringer and Terkla (1995), and Rosenfeld (1997) have identified collaboration as
key means of strengthening and developing a cluster. Rosenfeld observed that firms
within a cluster form networks that have common business goals. These networks
are based on co-operation, which allows them to benefit from specialised services at
lower cost and engage in complex activities they would not otherwise perform.

Doeringer and Terkla have pointed out that efficiencies may be achieved through
horizontal competition. However, “Facilitating cooperative relationships and
promoting vertical collaborations that lead to production channel clustering among
suppliers and customers appear to be more constructive directions for development
policy” (Doeringer and Terkla p. 235).

Saxenian (1994, p[1]) noted that Silicon Valley had “dense social networks the
organizational boundaries within companies are porous, as are the boundaries
berween [sic] companies themselves and between companies and local institutions
such as trade associations and universities.” Moreover, in a pilot survey of 17 small
high technology firms in Oxfordshire and Berkshire, it was found that, “The more
strongly firms interact with research laboratories and universities, the more likely they
are to have come up with at least one major recent product innovation” (Romijn and
Albu 2002).

3.3 Regions of Learning

Florida (1995, p. 528) observed, “Regions are becoming more important modes of
economic and technological organization in this new age of global, knowledge-
intensive capitalism.” These regions take on the characteristic of learning regions
that act as collectors and repositories of knowledge and ideas and provide the
underlying infrastructure, which “facilitates the flow of knowledge, ideas and learning”
(Florida 1995, p. 532). Thus, competitive advantage lies within the region in its ability
to generate and harness knowledge and ideas.


Lawson’s (2000) view is that regions obtain competitive advantage, just like firms,
through their system of core competences. Core competences represent the total
collective learning of firms, their ability to integrate multiple streams of technology
and coordinate diverse production skills.

In this move towards knowledge-intensive capitalism, the key economic unit of
production, and ultimately wealth creation, shifts from the firm to the region. “It
involves the development of new inputs and a broader infrastructure at the regional
level on which individual firms and production complexes of firms can draw” (Florida
1995, p. 531).

Just as features such as continuous improvement, knowledge creation, new ideas
and organisation learning describe and characterise the knowledge-intensive firm the
same features describe and characterise the learning region:

Learning regions provide the crucial inputs required for knowledge and
intensive economic organisation to flourish: a manufacturing infrastructure of
interconnected vendors and suppliers; a human infrastructure that can
produce knowledge workers, facilitates the development of a team
orientation, and which is organised around life-long learning; a physical and
communication infrastructure which facilitates and supports constant sharing
of information, electronic exchange of data and information, just-in-time
delivery of goods and services, and integration into the global economy; and
capital allocation and industrial governance systems attuned to the needs of
knowledge-intensive organizations. (Florida 1995, p. 534)

4. Turning Clusters into Learning Regions

TSER European research network conducted research within ten regional clusters of
technology intensive firms, namely Cambridge, Oxford, Sophia-Antipolis, Munich, the
Dutch Randstad, Pisa, Piacenza and NE Milano, Goteborg, Helsinki, and Barcelona.
Considering the heterogeneity of these regions, the research clearly identified in the
successful high-technology regional clusters active local inter-firm and inter-
organisational processes that promoted learning, knowledge development, and
“exceptional levels of technological and product innovation” (Keeble 2000, p. 220).


These key regional collective learning processes were the creation of new
businesses through spinouts and entrepreneurship, a dynamic knowledge-based
labour market, “active and relatively intense local networking” (Keeble 2000, p. 214),
and collaboration linkages between local firms complemented by linkages to global
innovation networks. These processes operated mainly between individual firms
irrespective of size. However, regional institutional support mechanisms also had
identifiable influences on these processes (Keeble 2000).

4.1 Institutions

Institutions, such as major universities and research institutes, played an important
role in encouraging collective learning in their regional high-technology cluster. In
relation to the key regional collective learning processes, the roles played by
institutions were as follows (Keeble 2000):

• Generating local technology-based spinouts – for example, in Oxford, 18% of
high technology SMEs were spunout from Oxford University whilst in
Cambridge, Cambridge University accounted for 17%. In general, “Britain's
universities have spun out [sic] more than 4,000 companies, exploiting
research from their academics and securing external finance from investors”
(Jones 2002, p[3])
• Training of knowledge practitioners such as scientists, engineers,
researchers, managers and other graduates – for example, in Grenoble, “‘The
development of skilled manpower in computing (software and hardware)
has powerfully influenced firm location in more profound ways than just as a
result of traditional labour market considerations’” (de Bernardy, 1999, pp.
349, 351)
• Collaborating with regional firms in research and technology development
activities – for instance, 54% of SMEs report close links with Oxford
University or a local public research institute; however, the research suggests
the need to obtain specialised technological expertise is more national and
global than regional


4.2 Regional Support Initiatives

Keeble (2000) noted that during the 1990s, in several regional high technology
clusters, regional initiatives were aimed specifically at encouraging regional collective
learning. Keeble suggested that this trend involved a coalition of diverse
organisations such as large firms, universities, SMEs, local and regional
governments, trades unions, public research institutions and business and training
agencies. The principal aim was to reduce or remove barriers that affected regional
business growth, such as access to venture capital and financing, developing
collaborative relationships between local firms and universities and using tools, such
as the Internet, to market and brand the region. Specific examples of regional
support initiatives include:

• Cambridge Network – a high-technology business-led initiative aimed at
raising the global profile of and increasing the degree of local networking
between Cambridge IT companies (Keeble 2000). Support now extends to
other high-tech areas, such as biotechnology, and the Cambridge Network
provides an online service where members and non-members, for example,
can obtain news and up-to-date information on events for networking
opportunities, post job opportunities and CVs, or access a local directory of
companies and individuals (see figure 3) – (www.cambridgenetwork.co.uk).
Moreover, visitors to the Cambridge Network can use the bFORA link on the
Website (see figure 3) to navigate to other partnered networks, such as OxIT
and the Munich Network.


Figure 3. Cambridge Network events diary

• bFORA – this is a forum for information exchange and exploration of other
business networks. bFORA categorises content such as jobs and news by
network, and events by areas such as Hi-Tech, Conference and Technology
Transfer (see figure 4). Access to content is through a link that transfers
users to the network that provided the content. Currently, there are seven
bFORA lines or high-level categories. Apart from those mentioned, they
include Business Cluster, Science Park, East of England and West Midlands
(www.bFORA.net).


Figure 4. bFORA event calendar

• New Science Parks and Incubators – apart from the original Cambridge
Science Park established in 1970, other parks that have been established
include St John’s Innovation Park, Melbourn Science Park, Granta Park,
Cambridge Research Park, a biotechnology incubator at Hinxton Hall, and a
technology park at the Babraham Institute (Keeble 2000).
• East of England Development Agency (EEDA) – EEDA was established on 1
April 1999 by the UK government as one of nine RDAs. The RDAs were
tasked with developing regional economic development strategies. Since
January 2003, their remit has included both developing and implementing
regional cluster policies (Department of Trade and Industry n.d.). EEDA has
outlined its strategy for the East of England as identifying, developing and
supporting local initiatives; sourcing extra-regional finance and directing that
finance to cluster initiatives, accordingly; building on local network
foundations; contributing expert and specialist resources and sharing of
accumulated knowledge and experience. EEDA seeks to assist firms and
organisations that operate in the following clusters: environmental, motor


sports, medical devices auto (advanced engineering) and energy (EEDA n.d.,
Wathen 2003).
• Regional Infrastructure for Innovation (RII) – this is a regional collaboration of
ten Higher Education Institutions (HEIs) in the East of England. Participating
HEIs include (www.rii.org.uk):

o Anglia Polytechnic University
o University of Cambridge
o Norwich School of Art and Design
o Cranfield University
o University of Luton
o University of Essex
o University of Hertfordshire
o University of East Anglia
o The Open University
o Writtle College

The RII is developing ways for businesses and organisations in the East of
England to “gain access to and support for the innovation services they
require to enhance their growth and development” (www.rii.org.uk). Access
to the combined capabilities of regional universities will allow businesses and
organisations to capitalise on opportunities for knowledge sharing and
collaboration, which is particularly useful to SMEs that are looking to gain
access to both intellectual and physical resources and support innovation in
their quest for growth and greater profitability (www.rii.org.uk).

One way that the RII seeks to support business and organisations is by
providing information on events run by member HEIs through their event
calendar (see figure 5).


Figure 5. Events calendar for Regional Infrastructure for Innovation

In November 2003, RII will be re-launched as Innovation 10 (I10) (Website:
www.I10.org.uk). I10 has been funded by EEDA with the aim of providing
businesses with a central repository of the core knowledge, expertise and
facilities of regional HEIs so that businesses within the clusters targeted by
EEDA’s cluster policy can more readily identify knowledge transfer institutions
(Kitson 2003b).

Like RII, I10 will also promote the events of member HEIs, and special I10
events. Events will be distributed through both traditional channels, such as
the post, and non-traditional ones – for example, email and an event calendar
similar to RII (Kitson 2003b).

• Oxford-Cambridge Arc (O2C) – is an initiative of regional HEIs, sub-regional
economic partnerships (such as the Milton Keynes Economic Partnership and
the Northamptonshire Sub-regional Strategic Partnership), the private sector
and three regional RDAs. Its principal objective is to make the region


between and around Oxford and Cambridge “the largest and most successful
knowledge-based economy in Europe with realistic ambitions to become the
world leader” (Oxford-Cambridge Arc 2003). As part of this policy, O2C is
looking to encourage and facilitate “exceptional levels of interaction” between
the various regional stakeholders through three main activities (Oxford-
Cambridge Arc 2003):

o Networking and Brokering – developing a network of champions,
formal and informal contact facilitation, lobbying organisations,
managing and communicating the existence of events to foster
networking and knowledge transfer, issuing a regular e-newsletter on
events and activities within the arc
o Initiating and Managing Projects – assessment of community needs,
infrastructure improvements, creating a database of organisations
within the arc, creating an O2C Arc website to communicate important
information and to facilitate community communication, developing
event planning capabilities to enable networking and brokering
o Promoting of the Arc – champion the region nationally and
internationally to attract inward investment, secure funding for
infrastructure improvement, promote sector-specific growth
(biotechnology, aeronautics, automotive, ICT and
telecommunications), infrastructure funding

O2C is still in its formative stages and its strategy to implement its mission is still
evolving.


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