Harvard Report on Chemical Industry Clusters

THE EUROPEAN PETROCHEMICAL ASSOCIATION

This document has been printed and made available by the courtesy of EPCA at the occasion of its 41st Annual Meeting

The Role of Clusters in the Chemical Industry

Dr. Christian Ketels, Harvard Business School


Page 2 of 55 (c) Christian Ketels, 2007

Photos cover :Top : Large platform, Antwerp, Katoen Natie, © Katoen NatieMiddle : Pipe rack connection, Marl Chemical Park, ChemSite, © ChemSiteBottom : Mid-Europoort cluster, Port of Rotterdam, © Port of Rotterdam

The financial support for this researchby EPCA, the European Petrochemical Association,

is gratefully acknowledged



Content

1. INTRODUCTION 5

2. THE ROLE OF CLUSTERS IN GLOBAL COMPETITION 7

2.1. Clusters and the microeconomic foundations of competitiveness 8

2.2. Globalization 11

2.3. Cluster initiatives 13

2.4. The emerging agenda for business leaders 16

3. CLUSTERS IN THE CHEMICAL INDUSTRY 19

3.1. The context for regional clusters in the chemical industry 20General factors 20Europe-specific factors 21

3.2. Mapping chemical clusters 22Cluster Mapping 22The chemical cluster category 24Employment 26Exports 37

3.3. Cluster initiatives 45The chemical industry as a basis for cluster initiatives 45Chemical cluster initiatives in Europe and Asia 47

4. CONCLUSIONS 53





1. Introduction

The European petrochemical industry is in transition. Traditionally, the industry has been one of the

hallmarks of European business, important for economic prosperity at home and successful in global

competition abroad. This position is now under threat. Many of the traditional strengths of the

European petrochemical industry remain in place – a stock of skills, knowledge and experience; well

integrated facilities with a rich set of specialized suppliers, services providers, and producers; highly

developed infrastructure; demanding consumers. But new locations with different sets of advantages

– preferential access to foodstocks; large and growing markets; new facilities able to better exploit

economies of scale; aggressive government support – are challenging these strengths. The

European petrochemical industry needs to develop new sources of competitive advantage, not

because the old ones have failed but because on their own they are no longer sufficient to succeed in

global competition.

There is a clear realization in the industry, that business-as-usual is not an option. The ever

increasing pressure from competing locations has been one factor. The bruising debates with

European policy makers about environmental regulations have been another. EPCA and others have

been platforms for the industry to discuss where the industry stands, what challenges it is facing, and

how it can react. This report aims to make a contribution to this debate.

First, it discusses the role of clusters in global competition more generally. The chemical industry has,

for reasons to be discussed, a tradition of strong cluster-like linkages between companies. As the

comparison with clusters in other parts of the economy shows, however, this legacy has not only

been a blessing; it has in ways also limited the way in which clusters and cluster initiatives are being

discussed in the chemical industry.

Second, it presents empirical facts on chemical clusters, focusing on Europe. The analysis draws on

proprietary data from the Institute for Strategy and Competitiveness at Harvard Business School, the

European Cluster Observatory, the Global Cluster Initiative Survey, and a number of other sources.

This data has its limitations – in particular, it covers mostly Europe and North America – but it

provides an important perspective on clusters and cluster initiatives in this industry; the first broad

quantitative study of this sort that we are aware of.

Based on this analysis, it offers a number of observations and conclusions that are based on the data,

on a review of the documents prepared by industry working groups in collaboration with EPCA, and

on the experience of working with cluster initiatives and cluster policies across a broad range of

countries and economic sectors.



Overall, this report suggests that there is a clear opportunity for the European petrochemical industry

to leverage clusters as a tool for making the transition to a new stage of successful development. The

following statements describe some of the key characteristics of this new phase. For some locations

and companies, they will read like a description of their current state or at least ambition. For others,

they can hopefully be an encouragement to review the direction they are taking:

� Competitiveness upgrading in the European petrochemical industry has moved from a model of

internal optimization within companies to a model of cluster-based optimization across networks

of co-located activities

� Cluster efforts in the European petrochemical industry have moved from a focus on supply-chain

improvements to a broad-based agenda of improving competitiveness at the level of companies,

the cluster, and the cluster-specific business environment

� Cooperation in the European petrochemical industry has moved from an industry-based model

to a new framework of cooperation that includes different levels of government, educational and

research institutions, as well as industrial partners



2. The Role of Clusters in GlobalCompetition

Successful companies in many industries are concentrated in a moderate number of locations, rather

than being distributed evenly across geography. This empirical observation has long been neglected

in the debate about the driver’s of company performance. Understanding the role of clusters and the

wider conceptual framework of microeconomic competitiveness provides the tools to better

understand the role of location in company success.

In the traditional analysis, company success is a function of industry structure and of the company’s

relative position within that industry. The way to superior performance relative to your peers within the

industry is through better strategies and higher operational effectiveness. Both of these are the result

of management choices within the company.

While intuitive, this approach makes it hard to understand why the core activities of most successful

companies in many industries tend to concentrate geographically. Why are so many of the key

management decisions in the pharmaceutical industry made in New Jersey/New York and a limited

number of other locations? Why in the automotive industry in Southern Germany and in a few places

in Japan? Why in the financial services industry in New York and London? The geographic

concentration of successful companies in a few places – different by industry – suggests that more

factors than internal management and other firm capabilities play a role.

In the cluster- or, more broadly, microeconomic competitiveness-based analysis, geographic

concentration of strong companies appears naturally. Location-specific factors including the presence

of a cluster shape the opportunities that a management team is facing and raise the likelihood as well

as the returns to making smart decisions on strategy and operations. Management choices within the

company are important but location-specific factors external to the company need to be understood

as well. Successful companies combine internal excellence with a presence in strong locations and

clusters that leverage their strengths.

What are the location-specific factors that matter? How does globalization change the relevance of

these factors? In what ways can cluster initiatives influence them? And what does this mean for the

agenda that business leaders face?



2.1. Clusters and the microeconomicfoundations of competitiveness

Clusters are defined by Porter (1998) as “geographic agglomerations of companies, suppliers, service

providers, and associated institutions in a particular field.” Their two key characteristics are thus the

proximity of individual activities in terms of (1) geography and (2) value creation.

In the Boston Life Sciences cluster (see figure below) most of the activities occur in Cambridge, a

relatively small geographic area within the Boston metropolitan region. Value creation is based in a

core of pharmaceutical and biotech companies that draw on the presence of world-class teaching and

specialized hospitals, specialized equipment and material suppliers, and providers of specialized

research and business services focused on this cluster. In addition, the cluster benefits from

educational institutions with many relevant research and training programs and strong cluster

organizations covering different segments of the cluster. Finally, the life science cluster can utilize the

assets and capabilities of the related cluster in analytical instruments, another area in which the

Boston region has particular strengths.

The Boston Life Sciences Cluster

Research OrganizationsResearch OrganizationsResearch Organizations

Biological

Products

Biological

Products

Specialized Risk CapitalVCFirms,AngelNetworks

Specialized Risk Capital

VCFirms,AngelNetworks

Biopharma -

ceutical

Products

Biopharma -

ceutical

Products

Specialized Business

ServicesBanking,Accounting,Legal

Specialized Business

ServicesBanking,Accounting,Legal

Specialized Research

Service Providers

Laboratory,ClinicalTesting

Specialized Research

Service ProvidersLaboratory,ClinicalTesting

Dental Instruments

and Suppliers

Dental Instruments

and Suppliers

Surgical Instruments

and Suppliers

Surgical Instruments

and Suppliers

DiagnosticSubstancesDiagnosticSubstances

ContainersContainersContainers

MedicalEquipmentMedicalEquipment

OphthalmicGoodsOphthalmicGoods

Health andBeauty

Products

Health andBeautyHealth andBeauty

ProductsProductsTeaching and Specialized HospitalsTeaching and Specialized Hospitals

Educational Institutions

HarvardUniversity,MIT,Tufts University,BostonUniversity, UMass

Educational InstitutionsHarvardUniversity,MIT,Tufts University,

BostonUniversity, UMass

Cluster Organizations

MassMedic , MassBio ,others

Cluster OrganizationsMassMedic , MassBio ,others

Analytical InstrumentsAnalytical InstrumentsAnalytical Instruments

Source:MichaelPorter,2006



Clusters are an empirical reality – employment in many industries is concentrated in a limited number

of regions. As a corollary, many regions are specialized in a limited number of industries. Importantly,

different industries have their regional concentrations in different locations and different regions

specialize in different industries. There is not one road to success, but many different models where

excellence depends on a set of characteristics that is truly specific by industry.

Clusters reflect the existence of spill-overs and linkages between companies. These externalities

create real economic value: Companies can achieve higher levels of productivity, because they have

close access to specialized suppliers and service providers and can rapidly learn from the best

practices of close competitors. Companies can be more innovative, because they can turn ideas

more efficiently into prototype products and services and get more quickly feedback on their market

potential. And companies in the start-up phase can find the many external services and assets that

they can not provide internally but need to tap into to launch their operations.

POLICY

Emergence of Clusters

Location

Natural Resources

Context for competition across regions

Existing Clusters

Entrepreneurs

Business Environment



Clusters emerge where the business environment provides opportunities for individual companies to

conduct profitable operations. The nucleus for a new cluster can come from a wide range of factors

related to the business environment, existing clusters, or individual entrepreneurship (see figure

above). But then it almost always requires a strong general business environment to move from

individual companies to a sustained agglomeration process in which more and more companies are

attracted. The combination of factor conditions, the context for strategy and rivalry, demand

conditions, and the presence of related and supporting industries are all dimensions that matter. The

successful growth of a cluster is far from an automatic process. The initial conditions might provide an

opportunity but then it depends on many individual decisions and the relationship between them

whether a location can succeed in the competition with others.

Developed clusters come in many different shapes and forms. Some are organized around large

anchor companies that have over time attracted a network of suppliers and service providers. Others

are groups of small- and medium-sized companies that have been able to overcome the

disadvantages of small individual size through active collaboration. Yet another category is

characterized by small start-up companies that have developed around a university or a research

institution. There is no one model that guarantees success. But success demands that the unique

profile and conditions within a particular cluster are understood.

Background publications on competitiveness, clusters, and cluster initiatives

Michael E. Porter with Christian Ketels and Mercedes Delgado, Building the MicroeconomicFoundations of Prosperity: Findings from the Business Competitiveness Index, in: The Global

Competitiveness Report 2006-2007. New York: Palgrave.

Michael E. Porter, Clusters and the New Economics of Competition, in: On Competition.Boston: Harvard Business School Press, 1998.

Örjan Sölvell, Göran Lindqvist, and Christian Ketels, The Cluster Initiative Greenbook.Stockholm: Ivory Tower, 2003



2.2. Globalization

Globalization was initially perceived as the death knell to clusters. The technological revolution in

communication and transport would make the advantages of physical proximity obsolete. And the

emerging economies would have such a huge labor cost advantage that the (falling) differences in

productivity due to proximity would be marginalized. The experience of the last few years has,

however, been very different. Globalization has increased the role of clusters, has spurred the

development of clusters in many new locations, and changed the demands that clusters need to meet

to succeed in global competition.

Globalization has increased the role of clusters in two ways. First, competitive advantages that reside

in the intensive local interaction within a cluster have become relatively more important as other

sources of competitive advantage related to unequal access to technology or other inputs have dried

out. While a competitor can use the same supplier independent of his location, he can not get access

to the full flow of linkages and externalities without being present in the cluster. Second, knowledge

has become a more important driver of value creation and this has strengthened the role of clusters,

a key factor in “open systems” of innovation that rely on ideas flowing between companies and

research institutions in often unplanned and unstructured ways. While technology has become more

widely available everywhere, the unstructured knowledge that provides superior value remains tied to

specific people and locations.

Globalization has enabled many new locations to attract and grow clusters. First, the upgrading of

business environment conditions in many emerging economies has made them attractive markets to

serve. While some of these sales could be captured by growing existing clusters, the larger market

also enabled many new clusters to emerge. And naturally these new clusters were located in or close

to the growing markets. Second, the same business environment reforms have also increased the

attractiveness of the emerging economies as export platforms. With a favorable combination of low

wages and improving productivity they were able to attract labor-intensive and technologically mature

activities from existing clusters. These “off-shored activities” turned out to follow the cluster logic in

the new locations as well, concentrating geographically in a few locations rather than spreading

widely throughout emerging economies.

Globalization has not only increased the relative role of location and clusters, it has raised the bar in

terms of the demands that successful clusters have to meet:

� First, the competition between clusters has clearly increased. More locations are vying for

business activity and the pressure to meet rivals’ best practices has increased.

� Second, higher levels of competition drive clusters to become more specialized and develop a

clear strategic position. While in the past the important clusters in a given field tended to have a



similar profile, there is now a much stronger differentiation by activity (R&D hub, production,

service, etc.) and market segment (geographic, needs-based, etc.).

� Third, the increasing level of specialization has increased the level of linkages between clusters

and made the presence of such linkages a key element of a cluster’s strength. While in the past

clusters were like different islands competing with each other, they are now part of global value

chains that often compete and cooperate simultaneously.

As a result of these changes in the global economy, many industries have developed global value

chains, where groups of specialized clusters develop complementary activities to serve markets in

many nations.

Clusters in Global Value Chains: Footwear

Vietnam/Indonesia

• OEM Production

• Focus on the low costsegment mainly for theEuropean market

China

• OEM Production

• Focus on low costsegment mainly for theUS market

Portugal

• Production

• Focus on short -production runs in themedium price range

Romania

• Production subsidiariesof Italian companies

• Focus on lower tomedium price range

United States

• Design and marketing

• Focus on specific marketsegments like sport andrecreational shoes andboots

• Manufacturing only inselected lines such ashand-sewn casual shoesand boots

Source:Research byHBSstudent teams in 2002 – Van ThiHuynh,Evan Lee,Kevin Newman,NilsOleOermann

Italy

• Design, marketing,and production ofpremium shoes

• Export widely to theworld market

Brazil

• Low to medium quality finishedshoes, inputs, leather tanning

• Shift toward higher qualityproducts in response to Chineseprice competition



2.3. Cluster initiatives

Many of the advantages associated with the presence in a cluster occur whether or not any type of

organized cooperation exists between the co-located activities and companies. But cooperation can

enhance these advantages and enable companies to increase the benefits they can derive from them.

And with the pressure for clusters increasing to develop their own strategic positioning rather than

following a generic blueprint that is the same for all locations in a given economic sector, the need for

joint decision making and coordination within a cluster has even increased.

Cluster initiatives are defined as organized efforts by coalitions of companies and/or public institutions

to improve the competitiveness of a cluster. Most of the activities that cluster initiatives pursue fall into

one of three categories:

� Upgrade company sophistication; especially if clusters consist of many small- and medium sized

companies, cooperation can help them to improve operational practices by sharing best

practices and making joint investments in market intelligence and other functions.

� Improve the business environment; the more co-located companies and institutions exchange

their views on the most pressing barriers for performance improvement in the business

environment, the easier it is to define and address the key bottlenecks a cluster is facing.

� Strengthen networks; the more co-located companies and institutions are aware of each other,

the higher the level of linkages between them will be and the more likely it is that companies

take decisions that are mutually reinforcing.

Cluster initiatives have been around long enough that a more systematic understanding of their key

success drivers is emerging. The Global Cluster Initiative Survey, a survey of more than 1400 cluster

initiatives has identified three different dimensions that appear to have the strongest impact on the

performance of cluster initiatives: The economic context in terms of the cluster, the business

environment, and the economic policy pursued which the cluster initiative operates, the activities that

a cluster initiative is engaged in, and the governance structure through which the cluster initiative is

organized.

Cluster initiatives are more likely to succeed, if they can leverage a strong cluster, a strong general

business environment, and a regional culture of strong trust between companies and towards the

public sector. While this observation might sound trivial, it does have important practical implications

that are often overlooked:

� Cluster initiatives can not compensate for a weak cluster or a disadvantageous business

environment at a location. Cluster initiatives can support better decisions on upgrading the

cluster and its environment. But without a basic set of strengths in place, such initiatives face an



uphill battle. Too many cluster initiatives are launched to pursue the dreams of the next Silicon

Valley while basic conditions within and around the future cluster are not in place.

� Cluster initiatives need to take a role in improving the overall competitiveness of a region, even

beyond the boundaries of their cluster. Cluster initiatives that follow a narrow agenda focused on

their cluster alone miss out on the positive repercussions that a strong overall regional economy

can provide. And they face the challenge of addressing weaknesses that are often rooted in the

overall nature of the region as the interests of a narrow group, not as the interests of the wider

regional economy.

Typical Activities of Cluster Initiatives

Value chain

• Joint purchasing

• Joint logistics

• Joint production

• Supply -chain development

Joint R&D

• Joint R&D projects

Process/HR

• Technical training

• Management training

• Technical standards

• Education system

• Production processes

Intelligence

• Market intelligence

• Technical trends

Bus. environment

• Regulations and policy

• Infrastructure investment

Firm formation

• Incubator services

• Spin -off promotion

• Business services

Joint marketing

• Joint product branding

• Joint region branding

• Joint foreign marketpromotion

Source:GlobalCluster InitiativeSurvey,2006

Cluster initiatives are more likely to succeed, if they pursue an action agenda that is targeted at the

specific needs of their cluster. In general, this will require mounting concerted efforts in a number of

interlinked areas. Clusters that perceive their activities narrowly as networking or another single role

fail to reach their potential. Again, these results have very practical implications.

� Custer initiatives need to ground their activity plans in a deep understanding of its cluster’s

current profile and strategic positioning. Cluster initiatives have in the last few years been very

concerned with the notion of best practices and established operational standards. While useful,



these efforts often fail to start with an understanding of where the cluster stands and which role it

can reasonably aspire to play in relation to its peers. Cluster initiatives are significantly more

effective, if their activities are based on a clear understanding of the cluster’s unique strategy.

� Cluster initiatives need to pursue parallel activities in an integrated set of areas. Cluster success

is the result of mutually reinforcing strengths in the cluster structure and the cluster-specific

business environment. Upgrading the cluster further is almost never the result of improving

performance in only one dimension – broad based, integrated efforts are more effective.

� Cluster initiatives can learn from the experience of peers but need to overcome the focus on

benchmarking and copying of activities. Benchmarking and networking across cluster initiatives

have over the last few years been popular activities. They can provide useful insights into how

other cluster initiatives are organized, how they set strategy, and how they approach specific

operational challenges. But they can also fuel a dangerous obsession of copying of activity plans

that worked elsewhere but have little connection to local needs and conditions.

Cluster initiatives are more likely to succeed, if they have sufficient resources that are committed over

the medium-term and a governance structure that engages the full breadth of cluster participants. In

the past, dedicated individuals with long years of experience in different parts of the respective

clusters were often the critical success factor for cluster initiatives. The research points towards key

factors to move towards a model where the dependence on finding the right cluster initiative manager

is decreased, and the initiative becomes institutionally more stable.

� Cluster initiatives need to be open to all companies or institutions that are part of the cluster or

have a strong influence on the cluster-specific business environment. Traditional industry

associations tend to be formed by a relatively homogenous group of companies with similar

structures and interests. Cluster initiatives need to instead bring together very different

participants that share a common interest in strengthening the cluster but otherwise have many

divergent and sometimes competing interests.

� Cluster initiatives need to create a governance structure in which companies drive decisions

about action priorities and work with government and others to implement them. Companies

have critical insights because they alone understand what creates and destroys value on the

market. The challenge for cluster initiatives is to find an organizational structure in which the

dispersed knowledge from many individual companies can come together to form the basis for

an effective action agenda targeted at the key barriers for higher performance.

Cluster initiatives are not a panacea. But they are a reflection of the increasing complexity of modern

business, where success depends on individual performance but also a myriad of decisions taken by

many independent business and government leaders. Cluster initiatives provide a unique platform to

coordinate actions in the face of these multiple interdependencies without limiting the strength of

competition.



2.4. The emerging agenda for businessleaders

Changes in the nature of global competition have made clusters an increasingly relevant item on the

agenda for business leaders. Companies not only compete with their rivals’ internal qualities, they

also compete with the full breadth of assets and capabilities that these rivals can access through the

clusters in which they are present.

Changes in the way companies are run have accelerated this process. The trend to outsource

activities that do not provide a competitive advantage within a company’s overall activity system has

increased the dependence on competent suppliers and service providers. While some of them may

be located far away (i.e., often in clusters like the Bangalore business services clusters that are

specializing in these type of services) many are more efficiently provided in close proximity to the

company. Clusters emerge naturally as companies’ spin-off activities into independent units or attract

suppliers to locate nearby.

Picking a location:Where do we locate which activity in sync

with our strategic position?

Picking a location:Where do we locate which activity in sync

with our strategic position?

Improving a location:How can improve the value of our location

in supporting our strategic position?

Improving a location:How can improve the value of our location

in supporting our strategic position?

Leveraging a location:How do we derive strategic benefits from

the characteristics of our location?

Leveraging a location:How do we derive strategic benefits from

the characteristics of our location?

LocationLocation StrategyStrategy

Location as Strategic Management

Traditional roles of locational analysis

New roles of locational analysis



For business leaders, these trends have propelled a company’s locational footprint from an

(important) issue of operational efficiency, i.e. where can this activity be conducted at the lowest costs,

to one of strategic positioning, i.e. where can this activity be conducted to become a source of

competitive advantage. Company executives face a number of opportunities to make their locations a

winning factor in competition:

� The first task is to leverage the clusters in which a company is currently present in order to

create sustainable competitive advantages. The location(s) a company is active in provide it with

a unique set of external conditions. The challenge is to choose a strategic position on the market

that leverages the advantages that the existing environment in these locations confers and

minimizes the weaknesses that they might impose.

� The second task is the choice of locations that provide the highest value to their business. But

while in the past this choice was a large but ultimately operational question, it now achieves a

truly strategic dimension: The set of locations that a company can tap into through the

geographic placement of its activities becomes an important source of competitive advantages,

not just a determinant of its cost level. Companies strategic opportunities are shaped by the

assets and capabilities they can leverage in these locations.

� The third task is to decide whether they can make investments in the business environment of

their locations to improve their value for the company. The microeconomic business environment

is the result of choices in which companies do play an important role. They can work with local

universities in shaping education programs that provide critical skills, work with other companies

to raise the profile of the region, or participate in activities of local investment attraction agencies

to attract companies that strengthen the local cluster. Such investments of time and money can

be as or more effective in improving the economic performance of the company than investment

in internal capabilities.





3.Clusters in the chemical industry

In this section, we apply the general framework of clusters to the chemical industry. Our aim is to

provide the basic empirical data to further the understanding of the geographical distribution of

economic activity in this large sector.

The section starts with a discussion of the specific conditions that affect geographic agglomeration in

the chemical industry, both generally and in Europe. It then turns to the empirical analysis. First, it

discusses the definition of chemical cluster that emerges from the analysis of actual co-location

patterns in the U.S. economy. Second, it applies this definition to the available employment and trade

data. The employment data covers sub-national regions in North America, Europe, and Russia. While

there is no comparable employment data available on other countries, we include a short discussion

of the findings of other research on clusters and the chemical industry in that part of the world. The

trade data covers exports from all countries. Third, the section presents a discussion of cluster

initiatives in the chemical industry, comparing their particular features to the profile of cluster

initiatives in other parts of the economy.



3.1. The context for regional clusters in thechemical industry

The shape that clusters take in a particular sector of the economy depends on a number of key

factors related to technology, government policies, and market conditions that characterize the sector

across all locations. In addition, there will be a number of additional factors related to the

development path that have shaped clusters in a specific geographic area that will have left a legacy

in their current profile relative to other regions.

General factors

The chemical industry is based on capital-intensive processes. Investment decisions represent a

significant and generally long-term financial commitment of a company to a specific location.

Companies will tend to have an interest in the long-term strengths and potential of a location, not just

in short-term factors like one-time financial subsidies. This creates an environment that is conducive

for cluster development and cooperation.

The chemical industry uses many input factors and produces many outputs that are bulky and costly

to transport. In addition, the geographical location of key feedstock inputs, predominantly oil and

natural gas, do not match with the location of key markets for chemical products. Transportation costs

are a significant part of overall costs along the value chain. This creates an environment where

companies across different stages of the respective production process naturally co-locate to

minimize on transportation costs throughout the industry value chain. It creates an environment,

where clusters emerge naturally at locations with good transportation infrastructure. And it creates an

environment where the presence of specialized logistical companies and proximity to related

transportation and logistics clusters provide clear benefits.

The chemical industry covers segments with different economics that have given rise to a

heterogeneous mix of companies. In basic chemicals, the commodity nature of products has led to

the emergence of large multinational companies that compete in a global market based on

economies of scale, learning economies, and the ability to manage highly optimized production

structures. In specialty chemicals, the existence of many individual markets has driven a structure of

companies of different sizes focused on serving particular customer needs or geographic areas with

some markets global and others more national or regional in nature.



Europe-specific factors

Europe continues to be a large market for chemical products. While other markets, particularly in Asia,

register strong growth, the absolute size of the European market continues to provide a strong basis

for European clusters serving customers in this region.

Europe’s main strength is the highly developed business environment that enables chemical

companies to reach levels of productivity that largely compensate for the high factor costs in Europe.

A first key strength is the availability of efficient transportation infrastructure and services, sometimes

building on long traditions of individual locations as logistical hubs. A second asset is the access to a

highly qualified labor force, often in regions where a long legacy of employment in the chemical

industry has fostered the emergence of specialized educational institutions. A third advantage is the

presence of many related and supporting industries, especially in the industrial heartlands of Europe,

that provide the Chemical industry with access to productive general inputs and services.

Europe also has developed an advanced regulatory environment in which the production and use of

chemical products have to meet high environmental and safety standards. Some of these regulations

constitute a significant cost burden for the European chemical industry, threatening to undermine the

viability of European clusters. But as far as these standards foreshadow global trends and enable

companies to come up with different solutions to meet them, they can also establish the role of

European clusters as the innovation leaders in the global industry.

Based on these business environment conditions, Europe has developed a cadre of strong chemical

companies, often with strong historical roots. Many of these companies have developed multinational

reach and play an important role in the activities of clusters elsewhere in the world. This global reach

is a key advantage for European clusters; it provides them with strong linkages to other markets. And

it exposes European clusters to constant competition; European companies always have to consider

which of the many regions they are present in provides the best location for a particular activity.

The European chemical industry is older than many of its peers in other parts of the world, especially

in Asia. And it remains to be shaped by a legacy of fragmented markets, while competitors in other

regions have (North America) or are (China) growing in an environment of larger, more integrated

markets. While its long history has allowed European clusters to develop deeper and more complex

structures, it also creates challenges. The capital stock in Europe is on average older, with production

facilities not reaching the same economies of scale that new investments in Asia can reach. For

European clusters, this creates challenges in terms of productivity levels. And markets in Europe are

less consolidated, with more companies of sub-optimal size operating in some market segments. For

European clusters, this creates challenges in terms of the coordination of activities across larger

groups of actors, some of whom have low levels of competitive potential.



3.2. Mapping chemical clusters

The analysis of clusters has for many years suffered from ad-hoc definitions of which industries and

activities should be considered when describing a specific cluster. Professor Michael Porter has at his

Institute for Strategy and Competitiveness, Harvard Business School developed an empirical

approach for cluster mapping to overcome these weaknesses and create a set of cluster definitions

driven by the statistical analysis of actual employment patterns.

Cluster Mapping

Cluster mapping starts from the notion that if linkages and spill-overs really do have an economically

meaningful impact on companies, they should reveal themselves in the locational decisions that

companies make. Other approaches that aim to measure linkages (for example input-output relations)

or spill-overs (for example patent citations) directly inevitably exclude other cluster effects and face

the challenge of measuring the absolute impact relative to other factors.

Cluster Mapping proceeds in two main steps:

� In the first step, industries are differentiated by their distribution of economic activity across

space: some industries will exhibit clear concentration of employment in a few locations, while

others will be present relatively equally everywhere. The first group of industries, called traded

sector, is characterized by competition and mobility across regional boundaries; access to

different clusters and business environments becomes a factor in competition. The second

group, called local sector, is serving only local markets and competes with local competitors; all

rivals operate within the same cluster and business environment context.

In most economies, the majority of employment is found in the local sector. The U.S. with its

high service share has gone furthest in this direction, while Russia with its legacy of heavy

industries has the largest traded sector. European economies are found somewhere between

these two extremes. The traded sector registers much higher productivity and innovation than

the local sector. Both sectors have to be productive for an economy to be prosperous.

Understanding the structural differences between them is an important step towards policies that

can achieve this goal.

� In the second step, industries in the traded sector are further analyzed in terms of the co-location

of industries. If employment in industry x and industry y tend to occur in the same locations,

linkages between them might influence locational decisions. The statistical correlation of

employment provides the initial indication that industries might belong to the same cluster. Other

factors, such as input-output linkages, are then taken into consideration as well. Based on this



analysis, industries in the traded sector of the economy are then organized into cluster and

subcluster categories, i.e. groups of industries that have revealed economic connections. The

figure below provides a list of the cluster categories identified and gives examples of individual

industries within these categories.

Source: ISC Cluster Mapping Project, 2007

The allocation of industries to individual clusters is a complex task. As one would expect, there are

many industries that have linkages to different clusters. While, for example, in most regions the

production of measuring and controlling devices (SIC 3829) is associated with other industries in the

cluster category “Analytical instruments”, in some regions it is associated with industries from the

cluster category “Chemical Products”. The cluster mapping explicitly allows for such overlaps and

registers for each industry both a primary and any secondary clusters that might be relevant. These

overlaps between clusters turn out to be important for the evolution of clusters and for the strength of

a regional cluster portfolio. New regional clusters often emerge out of existing positions in established

related clusters. Portfolios of related clusters generate higher economic results than groups of

isolated clusters.



The cluster mapping approach provides statistical categories that allow for the consistent comparison

of different regional clusters. It is, however, subject to the limitations of the statistical data that is

available, in particular the definition of regions and of industries. In reality, most cluster categories

include both manufacturing and service activities. In the statistical data, service employment is

captured only in very broad categories that do not allow the identification of, for example, venture

capital companies exclusively focused on biopharmaceuticals. Despite these weaknesses, the cluster

mapping data has provided to be an invaluable tool for cluster analysis and policy design in an

increasing number of countries around the world.

The chemical cluster category

The chemical cluster category consists of more than 20 industries in seven subclusters at its core. A

further 20 industries in seven subclusters from four other clusters (oil and gas, biopharmaceuticals,

plastics, and analytical instruments) also register significant relations to the chemical cluster even

though their primary association is with other clusters. One linkage that might become more

important in the future is agriculture: if the chemical industry starts to use more agricultural-based

feedstocks that might have an impact on locational patterns.

Chemical Cluster Category

Basic

Chemicals

Processing

Chemicals

Refractories

Leather

Tanning

Ammunition

Special

Packaging

Treated

Garments

Hydro-

carbons

Petro-

chemicals

Plastics

Other

Packaging

Pharma-

ceuticals

Diagnostics

and related

Instruments

Plastics

Analytical

Instruments

Biopharma -

ceuticals

Oil & Gas

Source: ISCClusterMapping Project,2007



Unfortunately, only the United States provides data that is detailed enough and covers indicators

beyond regional employment to provide a benchmark view on the relative importance of the

subclusters in the overall chemical cluster category. In Europe, comparable data across all countries

is available only for employment and covers broader industry categories that do not easily translate

into subclusters.

Among the 14 subclusters that are related to the chemicals cluster, basic chemicals (for example

alkalies and chlorine) account for close to 19% of all U.S. employment and wages that are 10%

above the average level of the cluster. Processing chemicals (for example soap and lubricants) follow

with 16% of employment but less than average wages. The subclusters belonging primarily to the oil

& gas cluster register the highest wages (20% of the cluster average) and 15% of employment. The

subclusters belonging primarily to the biopharmaceutical clusters register wages close to the cluster

average and account for 28% of employment. Among the other subclusters, only instruments

accounts with 3% accounts for more than 1% of total cluster employment; all register below cluster

average wages.

The chemical cluster category accounts for 5% of patents, 1.45% of wages paid, 1.3% of employment,

and 0.5% of establishments in the overall traded sector of the U.S. economy. The cluster category is

relatively innovation intensive, productive, large, and home to moderately large companies. The figure

below ranks the chemical cluster category relative to other cluster categories along the four

categories discussed.

The role of the chemical clusters in the U.S. economy




Employment

Employment is an important indicator to measure the pattern of economic activity across regions. It is

not the only indicator that matters; productivity, wages, patents, and other measures of performance

need to be taken into consideration as well. For the capital-intensive industries allocated to the

chemical cluster category the focus on jobs can be particularly problematic. Despite these challenges,

employment data is often the only comparable information available. And it does provide a number of

interesting insights, especially for comparisons within the cluster category that keep the distortions in

terms of different levels of capital-intensity at a lower level.

For Europe (defined as the EU-27 plus four associated countries: Turkey, Norway, Israel, and

Iceland) we only have employment data available. In the European cluster sector, the chemical

cluster category accounts for 1.36% of employment, only marginally more than in the United States.

In both regions chemical clusters rank 18th among all cluster categories in terms of total employment.

In terms of the related clusters, the U.S. registers relatively more employment in plastics and oil & gas,

while Europe registers relatively more employment in biopharmaceuticals.

Sources of cluster data based on the ISC Cluster Definitions

United States – Institute for Strategy and Competitiveness, www.isc.hbs.edu

Europe – European Cluster Observatory, www.clusterobservatory.eu

Canada – Institute for Prosperity and Competitiveness, www.competeprosper.ca

Geographic concentration of employment Among all cluster categories, the geographic

concentration of employment in chemical products is at an average level. Many clusters with small

overall size, for example footwear, register a much higher share of their total employment in the

largest clusters. But also some large cluster categories, like automotive and business services, are

more concentrated than chemical products. Among the clusters related to chemicals, oil & gas and

biopharmaceuticals – two cluster categories of moderate overall employment – are more

concentrated while plastic – with more employment than chemical products – is less concentrated.



Concentration of Cluster Employment across RegionsEU-27 plus 4

0%

10%

20%

30%

40%

50%

60%

Foot

Sprt

Jewl

Oil

Lthr

Tob

Aero

Fish

Text

Aprl

CMtr

Instr

Powr

Phar

Auto

Bus

Chem

Com

MediIT

Fin

Publ

Lght

Prod

Ent

Plast

Agri

HvyM

Metl

Distr

Edu

Furn

Build

HospTrpt

Cnst

Forst

Food

Share of largest ten clusters in total

European employment by cluster category

Strong

concentration

Weak

concentration

Tradedsector

Source: EuropeanClusterObservatory,2007

Interestingly, in only one cluster category – food products - is employment less concentrated than in

the aggregate traded sector. The food products cluster is significant in many regions, often in regions

that are relatively small in overall size.

Leading chemical clusters in Europe The strength of regional clusters can measured

along three dimensions that track different indicators of potential cluster effects. We define cut-off

values for each of the three dimensions and assign “stars” to regional clusters that reach these limits.

� The size of the regional cluster – measured by the total number of employees in the cluster -

gives an indication of the amount of inter-cluster linkages and spill-overs that the cluster could

be able to achieve. We give a star to the 25 largest chemical clusters in Europe; the leading

10%-tile among the 259 regions for which we have data.

� The relative level of specialization – measured by the location quotient, the share of the regional

cluster in the total employment in the cluster category across all regions divided by the share of

the region in the total employment across all regions and cluster categories – gives an indication

of the relative market share that a region has been able to gain in this cluster category. We give

a star to regional clusters that reach an LQ higher than 2, i.e. regions have twice as much

employment in this cluster category than the size of the region would suggest.



� The weight of a cluster in the regional economy – measured share of the cluster in the total

regional employment across all cluster categories gives an indication to whether interactions

within the cluster might be or more less likely given the “noise” from other economic transactions

in the region. We give a star to the leading 100 clusters in Europe across all cluster categories

on this dimension.

Map of leading chemical clusters in Europe

The leading European chemical cluster is located in Rheinhessen-Pfalz and meets all three of our

criteria. This region – home to BASF, the world’s largest chemical company - has more than 13 times

as many employees in the chemical cluster than an average region of its size. With close to 7% of all

employment in the traded sector of the economy, the chemical cluster is a critical element of the

region’s economy.



Ten European regions meet two of our criteria; for all of them these are the size and the

specialization cut-offs. Düsseldorf, the region covering the Ruhr area, registers the highest

employment, followed by the regions of Antwerp, Lyon, and Istanbul. Three more German, one

Turkish, one British, and one Swiss region complete the list.

Leading chemical clusters in Europe

Source: European Cluster Observatory, 2007

Looking at two of the dimensions - size and specialization - alone, adds a number of other regions to

the list of significant chemical clusters in Europe. Lombardia, Catalonia, and Southern Netherlands

are among the top ten locations for chemical employment in Europe but are also large economic

agglomerations overall. Among the three, Catalonia - which includes the region around Tarragona –

registers the highest level of specialization in chemicals with more than 80% more employees than an

average region of this size would have.

Top chemical cluster locations in Europe by size and specialization

Source: European Cluster Observatory, 2007

The list of the top ten European regions by specialization on chemical products adds four regions in

Eastern Germany and the new EU member countries to the list of significant European chemical



clusters. Dessau is part of the East German chemical triangle, an area with a long tradition in these

industries that stretches into two additional NUTS-2 regions. The three other regions are the leading

chemical industry locations in the Czech Republic, Hungary, and Poland.

The data also provides some perspectives on changes that have occurred over the last few years.

Unfortunately, however, sufficiently detailed data is only available for 139 of the 259 regions. The

sample covers 52% of total European employment in chemical products.

The data suggests that chemical production has suffered significant jobs losses since 1999, with

many of the leading chemical clusters taking the brunt of the deterioration. The regions reporting data

for both 1999 and 2006 register a total loss of 78,998 jobs in the chemical cluster category. This puts

chemical products into the bottom third of all cluster categories in terms of job creation. The 19

regions with significant chemical clusters in 2006 that are part of this group account for 66% of these

losses. The three regions with the highest losses alone account for 50% of the losses.

Changes in Chemical Products Employment

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

Münster,DE

Rhône-Alpes,FR

Halle,DE

Lüneburg,DE

Picardie,FR

Haute-Normandie,FR

VlaamsGewest

Koblenz,DE

Hamburg,DE

Karlsruhe,DE

Basel,CH

Hannover,DE

Chester,UK

ERiding/NLincs,UK

TeesValley,UK

Darmstadt,DE

Mainz,DE

Düsseldorf,DE

Köln,DE

Chemical cluster

Other

Change in Employment, 1999 - 2006

Source: EuropeanClusterObservatory,2007



Strong chemical clusters in Europe are located in regions that differ in their profile from the typical

European region. We select the 28 regions in Europe that have featured in the analysis as locations

of chemical clusters and compare them to the 231 remaining regions. The data shows, that European

chemical clusters tend to be located in large regions with a strong manufacturing base. In particular,

we find that the typical home region of a strong chemical clusters is

� About 17% larger in terms of overall employment than other regions

� Has a share of about 41% of regional employment in the traded sector, compared to 36% in

other regions

� Has a share of 25% of traded sector jobs in cluster with strong levels of specialization, compared

to 20% in other regions

While the potential for dynamics among the core industries within the chemical cluster category is

important, it is only one dimension driving performance. The linkages to related clusters can be

another critical influence. And the presence of strengths in such clusters in the same region can give

insights into the particular profile of the chemical cluster within a region.

For all European regions with at least 50% more employment in chemical products than expected

given their size, we track the position of these regions in the three cluster categories most related to

chemical products, i.e. oil and gas, biopharmaceuticals, and plastics. These regions are then grouped

by the combination of other clusters in which they have significant strengths, measured by the same

indicator of specialization. Interestingly, Izmir (Turkey) is the only region with a significant chemicals

cluster that has no specialization in any one of the three clusters related to chemicals.

The analysis reveals a clear differentiation of regional clusters.

� Eleven European regions, with Cheshire in the UK (home of ICI chemicals) and Düsseldorf

(covering the Ruhr-area) the most significant, have a significant position in chemicals and

plastics but not in biopharmaceuticals.

� Eight regions, including most of the leading European chemical clusters, combine positions in

chemicals with positions in plastics and in biopharmaceuticals.

� Four regions, all in Germany, combine positions in chemicals with positions in plastics and in oil

& gas.

� Three regions register strengths in chemicals and oil & gas but not in the other related clusters.

� One region, Haute Normandie in France with relatively small overall employment, has a

significant position in all three cluster categories related to chemical products.

� There are no regions with positions only in chemicals and biopharmaceuticals or in chemicals,

biopharmaceuticals, and oil & gas but none of the other two related clusters



Linkages of Chemical Clusters

Haute -Normandie, FR

Rheinhessen -Pfalz, DENordwestschweiz, CH

Darmstadt, DEVlaams Gewest, BERhône -Alpes, FRPicardie, FRIstanbul, TRCatalu ña, ES

Münster, DEKöln, DEHalle, DE

Lüneburg , DE

Cheshire, UKDüsseldorf, DE

Eszak -Magyarorszag, HUKujawsko -Pomorskie, PLDogu Marmara, TR

Tees Valley and Durham, UKE Riding and N Lincs , UK

Opolskie , PLKozep -Dunantul , HU

Koblenz, DEHannover, DE

Severozapad, CZGuneydogu Anadolu, TR

Hamburg, DE

To Plastics

Clusters

To Oil & Gas

Clusters

To Biopharmaceuticals

ClustersSource: EuropeanClusterObservatory,2007

The strongest chemical clusters tend to have positions in at least one, more often two related cluster

categories. There is evidence of super-cluster effects; linkages between related clusters that add to

their inherent benefits. Chemical clusters lower down the rankings are focusing on specific steps in

the value chain from feedstock inputs (oil & gas) to final outputs that require moderate (plastics) to

final outputs that require advanced (biopharmaceuticals) additional capabilities. Making the link

between inputs to the most advanced outputs directly or focusing on the most advanced outputs

alone seems to be too challenging; the required capabilities are different and might be attracted by

different set of regional characteristics.

Leading Chemical Clusters in the United States The U.S. chemical clusters register a

total of 457,500 jobs in 2004; roughly half of the employment registered by their European peers.

Following the same methodology as for Europe, the table below identifies the leading U.S. chemical

clusters by size, specialization, and weight. We add the additional condition that the cluster needs to

register at leas 2,500 employees. Houston (Texas) and Augusta (Georgia) are the two only clusters

that register three stars, i.e. meet the cut-off values on all three dimensions.



Leading chemical clusters in the United States


Looking at two of the dimensions - size and specialization - alone reveals a number of other regions

significant for the chemical cluster category in the U.S. Many of the large metropolitan regions come

close to Houston in terms of absolute employment levels in chemical products. But given the overall

size of these economies, the role of the chemical cluster in these regions tends to be small. Only

Cleveland has a significant level of specialization in chemicals, registering 60% more employees in

this clusters than would be expected for a region its size. Some very small regions like Lewiston (ID)

and Casper (WY) register high levels of specialization in the chemical cluster. With an absolute size

of less than 2,500 employees their potential for cluster effects nevertheless seems modest.

Top chemical cluster locations in the United States by size and specialization


Many of the leading chemical clusters in the United States are located in relatively small,

manufacturing intensive regions.

� The average total employment across all U.S. regions is 650,000; the average total employment

in the home regions of the leading U.S. chemical clusters only 450,000.



� Both types of regions have a similar share of total employment in the traded sector: 29% in

regions with strong chemical clusters versus 28% in regions without.

� But regions with chemical clusters have a significantly higher share of their traded sector

employment in strong clusters, i.e. clusters with at least twice as much employment as in an

average region of its size. In regions with strong chemical clusters, strong clusters account for

35% of traded sector employment versus a share of 28% in other regions.

Comparing chemical clusters in Europe and the United States While direct comparisons of

U.S. and European clusters are problematic – U.S. metropolitan regions are more heterogeneous in

size and capture more economic transactions while European NUTS-2 regions are more

homogeneous in size and follow administrative boundaries – that available data indicates that:

� Chemical products account for roughly twice as many jobs in Europe than in the United States.

While the share of the category within the traded sector of the economy is virtually identical, the

European economy has 60% more jobs overall and higher share of its employment in the traded

sector (36% versus 30%)

� Strong chemical clusters in Europe tend to be in relatively large regions while they tend to be in

relatively small regions in the United States. In both Europe and the U.S. chemical clusters tend

to locate in regions with relatively strong portfolios of manufacturing-driven clusters.

These differences have a visible impact on the overall economic geography of activities in the

chemical clusters category. As in many other cluster categories, the top locations in the United States

account for a significantly higher share of total cluster employment than in Europe. The 10% U.S.

regions with the highest absolute employment in chemical products account for 48% of total U.S.

chemical employment. The comparable figure for Europe is 34%. This lower level of geographic

concentration in Europe can translate into fewer possibilities to reap the benefits of strong regional

clusters

It turns out, that the differences in employment concentration between the U.S. and Europe in the

chemical cluster are driven entirely by differences in the size distribution of regions. U.S. regions are

much more unequal in size than European regions. The 10% U.S. regions with the highest total

employment in the traded sector account for 50% of total U.S. traded sector employment. The

comparable figure for Europe is 24%. Relative to the size distribution of regions, chemical cluster

employment in the U.S. is slightly less concentrated than traded sector employment overall, while in

Europe it is significantly more concentrated. The European chemical industries have to a significant

degree been able to overcome the challenge of a generally more dispersed economy.



Concentration of Chemical Employment Across RegionsEurope versus the United States

0%

20%

40%

60%

80%

100%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Europe

U.S.

Share of Regions

(sorted by decreasing Chemical Cluster Employment)

Share of total

Chemical Cluster Employment

Source: EuropeanClusterObservatory, ISCClusterMapping Projec t,2007

Chemical clusters in other countries In Canada, the Institute for Prosperity and

Competitiveness has applied the cluster definitions developed at Harvard University to create a

cluster mapping database for Canadian provinces, metropolitan areas, and Ontario census

metropolitan areas. Most comparable to the U.S. metropolitan areas are their Canadian counterparts.

Canada registers four regions that register either a significant absolute number of employees in

chemical products or a high level of specialization. None of these regions would make it into the ranks

of the leading U.S. chemical clusters.

Leading chemical clusters in Canada

Source: Institute for Prosperity and Competitiveness, 2007



In Russia and Kazakhstan, the cluster definitions were translated into the national industrial codes

and used in the context of research projects on behalf of government-affiliated institutions.

Russia registers a significant list of strong chemical clusters. While these clusters might not be

competitive with European or North American peers in their current form, the proximity to feedstocks

and the legacy of agglomeration and skills signal the opportunities that exists. Whether these

opportunities can be leveraged, however, will depend on the economic policies that the Russian

government will pursue in the future.

Kazakhstan has, despite the emergence of a strong oil and gas cluster, so far not developed any

significant positions in chemical products. The one existing chemical cluster would barely enter the

list of leading Russian chemical clusters.

Leading chemical clusters in Russia and Kazakhstan

Source: ISC analysis, 2007

In Asia, systematic analysis of cluster structures using the cluster definitions developed at Harvard

University have so far unfortunately not been conducted. In China the available analysis points out

different patterns of agglomeration depending on the degree of an industry’s openness to

international competition. The more open industries are, the more concentrated their locational

profiles become. Different parts of chemical industry fall into different categories; i.e. chemical fibers

are open to competition and increasingly concentrate in the coastal areas while pharmaceuticals are

protected and remain geographically dispersed.



Exports

Trade flows are another important indicator of cluster presence that is widely available. The cluster

definitions originally created on the basis of industrial classification codes have been translated into

definitions based on product categories used to capture international trade. The Institute for Strategy

and Competitiveness has used these definitions to create a dataset of trade flows by cluster

categories.

The trade data has a key advantage: it is available for almost every country in the world. But it also

suffers from a number of weaknesses that need to be understood when interpreting the data. The unit

of analysis for the data is the country, not the region. For large countries like the United States, the

export performance in chemical products will thus be driven by many regional clusters, not just one.

And since the product codes used to track international trade were used to set tariffs, they are far

more granular for goods than for services. This is not so critical for chemicals, but does affect many

other cluster categories in which the service component is rising.

Share of Cluster Categories in World Trade

0%

5%

10%

15%

1988 1990 1992 1994 1996 1998 2000 2002 2004

Oil andGas

Automotive

Information Technology

Metals, MManufacturing

Agricultural Products

ChemicalProducts

Production Technology

Communications Equip.

Plastics

Biopharmaceuticals

Share of total

world trade

Source:GlobalClusterCompetitivenessProject,2007



Since 1998, the global trade in chemical products has grown at a compound annual growth rate of

9.1%. While impressive on an absolute level, this rate has been below the 10.1% growth rate of total

world trade. While the rise of oil and gas exports, more a phenomena of price increases than of actual

volume growth, has been an important factor behind this development, other clusters have grown

world exports at a rapid pace as well. Among all 39 export cluster categories, chemical products rank

only 20th in terms of trade growth since 1988.

Despite the relatively modest level of growth, chemical products remain the 6th most important cluster

category for world trade. While its share of world trade dropped from 5.36% in 1988 to 4.34% in 2000,

it has since stabilized around a level of close to 4.6%. Among the clusters related to chemical

products, oil and gas has seen the most impressive growth at annual rate of 17.7% since 1988. Oil

and gas exports are since 2005 the most important cluster category in world trade, accounting for

11.6% of all exports. Biopharmaceutical trade has also grown at a brisk rate of 15.2% per annum and

is now almost as important as trade in plastics.

Within chemical products, trade occurs in eleven separate subclusters. Organic chemicals are the

most important one, accounting for more than 50% of total trade value.

Share of Subclusters in Total Chemical Products Trade

Organic Chemicals,

51.5%

Chemically Based

Ingredients, 13.0%

Inorganic Chemicals,

13.0%

Packaged Chemicals,

7.2%

Dyeing, Tanning and

Coloring Materials,

5.4%

Pesticide and Other

Agricultural Chemicals,

3.9%

Other, 6.0%




Leading countries Exports in chemical products are dominated by a few countries. The

top ten countries account for close to 70% of world chemical trade. The leading exporters are

Germany, the United States, Belgium, Ireland, Japan, and China.

In addition to total export volume, a country’s specialization on chemical products and the importance

of chemical products in its total exports are important indicators to evaluate the strength of export

clusters.

� Specialization in trade is measured by revealed comparative advantages (RCA), a concept

closely similar to the location quotient used in the analysis of employment patterns across

regions. RCA is defined as the world market share of a country in a specific product category –

here chemical products – divided by the country’s total world market share across all exports.

� The importance of chemical products in a country’s trade is measured by the share of chemical

products in its total exports.

Leading global exporters in the chemical clusters category

Source: ISC International Cluster Competitiveness Project, 2007

Fourteen countries register high values across the combination of the three performance indicators

applied and total chemical product exports of at least $100m. Belgium, Ireland, and Switzerland

register significant strengths in all three, while the other eleven countries are strong in two of the

dimensions.

The largest exports of chemical products, Germany and the United States, are, in fact, not particularly

specialized in this cluster category. Both countries are strong exporters generally and chemical

products are only around 30% higher than expected given their respective total export volume.



The ranking of top global exports by size and by specialization individually adds a number of other

countries to the list of significant exporters of chemical products.

� Among the largest exporters, a number of European (France, Italy, and Spain) and Asian (Japan,

China, and Korea) are among the top 15, even though their specialization level in chemical

product exports is relatively modest. In fact, China exports about 20% less chemical products

than would be expected given the country’s overall export volume

� Among the most specialized exporters, only Dominica, a small island nation in the Caribbean

with chemical exports of less than $100m, enters the list.

Top global exporters in the chemical clusters category by size and specialization


The analysis of export profiles by subcluster within chemical products reveals the significant

heterogeneity in terms of countries’ specialization within this cluster category.

� The leading exporters are focused on organic chemicals, the largest subcluster by trade value,

and chemically based ingredients. In all other subclusters, the leading exporters have a smaller

export market position than on average in chemical products.

� Among the leading exports, there are significant differences in terms of the breadth of positions

across subclusters. Six countries have relatively strong positions in five or more subclusters,

while eight countries have more narrow positions.



Share of Leading Chemical Exporters

in World Trade by Subcluster

0%

10%

20%

30%

40%

50%

60%

70%

OrganicChemicals

ChemicallyBasedIngredients

Dyeing, TanningandColoringMaterials

Refractories

PackagedChemicals

PesticideandOtherAgricultural Chemicals

Explosives

MiscellaneousMineralProducts

InorganicChemicals

SyntheticFibers

MiscellaneousCrudeMaterials

Market shareof leadingexporters,2005

Total Cluster Products


Among the leading chemical product exporters, Ireland is most clearly specialized on organic

chemicals with insignificant positions in all other subclusters with the exception of chemically based

ingredients. Belgium and Singapore exhibit similar patterns, but are both relatively more balanced

with activity in all subcluster categories.

Germany and the United Kingdom show an opposite profile, with strong positions in seven of the

eleven subcluster categories. The United States and India follow with relatively strong positions in

four subclusters.

The smaller exporters in this group are all relatively strong in exports of inorganic chemicals. Trinidad

and Tobago, a country with significant natural gas resources as feedstocks, has little presence in

other subcluster categories. Morocco also has a significant presence in miscellaneous crude

materials, Jordan in packaged chemicals and pesticides, and Namibia in miscellaneous crude

materials.



Market share by Chemical Products Subcluster, Leading global exporters


In most subclusters, the top positions in terms of market share are occupied by countries that are

leading chemical products exporters overall. Only in pesticides (France) and miscellaneous crude

materials (Canada) are other countries on top.

Further down the list of leading exporters by market shares are countries with significant positions in

two or more subclusters that are overall not very specialized in chemical exports:

� The Czech Republic in packaged chemicals, explosives, and refractories.

� Mexico in packaged chemicals, explosives, and synthetic fibers.

� Russia in inorganic chemicals, miscellaneous crude materials, and explosives

� Poland in packaged chemicals and miscellaneous mineral materials

� Brazil in pesticides and refractories



A number of further countries have a position in a single subcluster. Among them, Saudi Arabia is on

the list of top exporters in organic chemicals, the largest product group in chemical exports overall.

Leading Exporters by Chemical Products Subcluster


Market shares in the global chemical export market have shifted significantly over the last few years.

Germany has lost position, dropping from 20% to 12% of the world market between 1990 and 2005,

with most of the losses happening through the 1990s. The United States has dropped from 16% to



12% in the same period, with more of the losses happing recently. Other countries that have lost

significantly are France, Japan, and the United Kingdom.

China and Singapore have at the same time gained position. China’s gains have even accelerated

while Singapore has lost some ground since 2003. Belgium and the Netherlands, too, have been able

to significantly improve their export market shares. Rather than simply moving market shares among

world regions, the relocation of export ability has happened within them.

0%

5%

10%

15%

-3% -2% -1% 0% 1% 2% 3%

Market Share Changes in Chemical Products

Market share,2005

Change in Market Share,2005 - 1999

Germany

United States

Belgium

IrelandJapan

China

NetherlandsFrance

UK

Switzerland

Italy SingaporeEurope

Rest of the world

S Korea

=10bnUS -$exports in 2005




3.3. Cluster initiatives

The chemical industry as a basis for cluster initiatives

Cluster initiatives do not emerge automatically; it always takes a specific decision by a company, a

government agency, or some other institution like a trade association or university to launch them.

Especially if the initiative originally comes from companies, it is often an individual person that is

instrumental in starting the cooperation.

There is still little systematic evidence on the specific conditions that trigger the emergence of cluster

initiatives. The experience from individual cases suggests, however, that many cluster initiatives fall

into one out of two large groups:

� Growth ambitions; if a new set of industries emerges as the result of technological innovation or

if a region aims for higher growth, all too often upgrading the general business environment is

either not enough or in its full breadth infeasible given the available resources. Cluster initiatives

are then a way to develop a concrete growth path and to focus the existing resources on those

activities that have the highest impact for a given set of businesses.

In German biotech, the ambition to find an efficient way for the government to support faster

growth in this science-driven industry led to the launch of the BioRegio competition, a program to

finance the best cluster initiatives in the field. In many developing and emerging economies like

Thailand and Indonesia, governments have identified specific clusters as part of national

economic development plans.

� Crisis; if a group of industries or a regional economy faces a threat to its established position, be

it through a sudden shock or a long-term decline, policies that only soften the blow or aim to

isolate the cluster or region from market realities are ultimately insufficient. Cluster initiatives

enable an active response that leverage the existing assets and capabilities, either by

strengthening them enough to regain competitiveness or by migration them into a new market

where they can become the foundation of a new competitive cluster.

In the U.S. state of Connecticut it was the cut-down in military spending and the general

downturn in the early 1990s that led to the development of cluster efforts as part of an overall

regional competitiveness initiative. In the UK Midlands automotive cluster, the demise of Rover

initially led companies to flock together to look for government support but then became the

starting-point for a much broader effort to increase the cluster’s competitiveness on the basis of

collective action.



In the chemical cluster category, the available data suggests that the propensity for cluster initiatives

has been lower than in parts of the traded sector. Only six chemical cluster initiatives were among the

1400 cluster initiatives that participated in the Global Cluster Initiative Survey. Emerging economies

report a more substantial share of their overall cluster initiatives in capital-intensive manufacturing, a

broad category that also includes chemicals.

Note that the level of cluster initiatives does not imply that there was no active government policy

directed at the chemical cluster. Where such industrial policies existed, however, they tended to lack

a specific regional focus or where purely government policies and programs without the active

involvement of other parts of the cluster in their design and execution.

Dominant Focus of Cluster Initiatives

0%

20%

40%

60%

80%

100%

Argriculture,

food, basic

manuf.

Capital

intensive

manuf.

"High tech",

advanced

services

Tourism

Shareofrespondents

Developing Economies

Emerging Economies

Advanced Economies

Automotive ; Chemicals; Forest products/paper; Metalmanufacturing; Oil & petrochemicals; Plastics; Power equipment

Source:GlobalCluster InitiativeSurvey,2006

Growth opportunities in chemicals can and have been present in economies at all stages of

development. In advanced economies, chemicals are a relatively mature group of industries where

growth is the result of individual companies that gain market share or moderately expand the market

through new products and services. Such growth can and often needs to be pursued individually.



In emerging economies, however, chemicals can be a critical element in the move from the factor-

driven to the capital-intensive stage of development. Chemical clusters can emerge if there is a

concerted effort, often led by the government, to upgrade the business environment and reduce the

risks of such a substantial financial commitment.

Crises have affected the established chemical clusters in the leading advanced economies. But these

crises have traditionally been dealt with at the level of individual companies, not the cluster. Crises

were also evident in the emerging economies, especially during the Asian crisis of 1997. But the

chemical industries in these countries were generally less well developed and the crisis so deep that

the chemical cluster was no specific priority.

In advanced economies, in particular the leading chemical clusters in Europe, this perspective is now

changing. There is a clear sense that the strong traditional position of these clusters can not be taken

for granted. A combination of rising competition from Asia and increasing regulatory pressure in

Europe has led many companies to the conclusion that joint action is now necessary.

Chemical cluster initiatives in Europe and Asia

In the remainder of this section, we will compare the cluster initiatives emerging in the European

chemical sector with efforts in Asia. This comparison gives a wider perspective on the context in

which European initiatives operate, the organizational structures that they use, and the operational

choices they face. The data to make this comparison is drawn from individual research and the

documents generated by some of the cluster initiatives; a more systematic analysis is unfortunately

not possible given the existing data.

Context The most important factors that shape the context for cluster initiatives – and

ultimately their chances of success – are the nature of government institutions and policies, the

general business environment conditions, and the strength and profile of the underlying cluster that

the initiative aims to mobilize.

The European chemical industry faces a context that is overall quite favorable to strong cluster

initiatives. But there are specific challenges that cluster initiatives need to react to, either through

appropriate organizational choices or through launching targeted activities.

� Regional governments tend to be well developed, widely engaged in economic

development activities, and in most cases open to collaboration with companies. National



governments and European institutions share the overall interest in economic development

but in the past there has also often been, especially at the EU level, a tension between

cluster mobilization and other policy goals

o Environmental regulations have been a strong focus of EU policies. The regulation of

chemical substances through REACH has been a major effort with significant impact

on chemical companies operating in Europe. The dialogue between industry and

government agencies has been problematic, undermining the mutual trust necessary

for cluster initiatives to work.

o Competition law is another key pillar of EU policies. Limitations to state aid and the

risks of joint activities between companies being found in violations of competition law

have been perceived as a barrier for launching cluster initiatives.

� The general business environment tends to be strong in most European regions, especially

in the locations of the leading chemical clusters. However, these traditional strengths are

under pressure.

o The physical infrastructure is well developed but economic growth puts increasing

strains on existing assets, especially the transport infrastructure. The leading chemical

clusters in Europe are located in major economic centers affected strongly from the

overall growth in transportation.

o The skill base is strong but the demographic development and the mismatch between

the supply and demand of skills have created increasing concerns about skill

shortages.

� The leading chemical clusters in Europe have strong market positions and a rich set of

supporting and related industries.

o While the maturity of the European clusters provides clear advantages, it can make

the launch of a cluster initiative more complex. The legacy of relations can turn out to

be a barrier for effective collaboration. The presence of many competing companies

can make it less likely for any individual company to take the initiative and contribute

to a common goal. Clusters with a dominating anchor firm, like BASF in Ludwigshafen,

seem to work well but might also have less potential for cluster effects.

o The lower rate of market growth in Europe has a dampening effect on investment,

leaving European clusters with an aging capital stock. Only 16% of all investment

projects in the chemical industry occur in Europe, compared to 35% in South East

Asia and 27% in the Middle East.



The chemical industry in Singapore faces a context that is also strong, notwithstanding the clear

structural differences between Singapore and Europe. The context for the chemical industry in China

is not quite as strong but improving.

� Governments play a strong active role in economic development in Singapore as well as in

China. In China both the national and the regional governments are important partners for

cluster initiatives.

o The Singaporean government has developed a global reputation for extreme

efficiency and professionalism. The country views economic development in

partnership between government and companies as a national priority.

o Government agencies in China can suffer from low efficiency and corruption, despite

their clear focus on economic growth. There can also be inconsistencies between the

decisions of different government agencies.

� The general business environment is very strong in Singapore while the situation in China

is more mixed.

o Singapore benefits from a very efficient infrastructure, high openness to foreign

companies, availability if skilled local and expatriate labor, and the presence of many

world-class companies in supporting and related industries.

o China has invested tremendously in physical infrastructure, boasts large numbers of

graduates in many technical disciplines, and has been interested to attract foreign

companies. Many industrial parks have been created, some - like Changzhou Park in

the Ningbo Chemical Industry Zone south of Shanghai - with a particular focus on

chemical products. But many weaknesses persist and China still ranks low on

aggregate measures of competitiveness such as the Global Competitiveness Report.

� Singapore has developed a strong chemical cluster as the result of a determined strategy

that has persisted over many years. China has attracted a number of major investments but

many clusters are still in an early stage.

o The Singaporean chemical cluster continues to receive major investment

commitments from foreign companies. Supporting logistical and financial services are

widely available, and the growing investments into biopharmaceuticals could present

an interesting future opportunity.

o The Chinese chemical clusters are emerging around the sites of major new

investments, like the joint venture between SINOPEC and BASF in Nanjing. Many

clusters in China are focused on a relatively narrow set of activities, even if they reach

large scale in those areas.



Participants Cluster initiatives develop very different dynamics depending on who initiates

them and who decides about which activities to pursue. Cluster initiatives that fail to mobilize all

relevant participants from the private and public sector are often less effective, because they miss out

on important information or lack the ability to address all aspects of the business environment.

� In Europe, in the chemical industry the private sector tends to play a larger role in initiating

and running significant cluster initiatives than in other industries. Government is involved in

some of them, mainly as a partner in addressing challenges in the physical infrastructure.

o A few private-sector led cluster initiatives, like the Cluster Initiative Mitteldeutschland,

have added activities to develop a broader strategy for the overall region on top of

cluster-specific efforts

Cluster Initiative Mitteldeutschland

Context

• Heart of the East German chemical triangle

• Significant foreign investments after 1990

• Presence of strong chemical parks

Motivation

• Concerns about the low attractiveness of the region as a threat to the long -termcompetitiveness of the chemical cluster

• Concerns about the inability of the public sector to mount effec tivecompetitiveness initiatives across three German states

Action

• Initiative taken by Bart Groot, head of Dow Chemicals operations in the region

• Initial focus on regional marketing

• Increasing focus on clusters –including chemicals – as enginesand ambassadors of the regionaleconomy

Source:HBSCasestudyMitteldeutschland,2006

o Government agencies have also launched a number of initiatives in which they play a

more central role

� Broader national and regional competitiveness efforts like the French Poles

de Competitivite, the Regional Development Agencies in the UK, and the

Bavarian Cluster Offensive have included chemical clusters as part of their

overall activities, increasing the role of government engagement



� The European Commission is supporting the collaboration among regions

and clusters; in that context, a network of European Chemical Regions

(ECRN) has been created under INTERREG in 2003, largely to facilitate

policy learning and information exchange

� In Singapore and China, government plays a much more central and directive role.

Companies are engaged but tend to note take the initiative or set the strategic direction

o In Singapore, the government has identified key clusters to be developed. Their efforts

are then very market-oriented, targeted at the attraction of companies by providing

attractive business conditions

o In China, the government has a more broad-based focus on overall development.

Designated zones or regions are developed to attract foreign investors. Publicly-

owned companies play a significant role as well

Activities Cluster initiatives are effective, if they identify the specific bottlenecks that affect

companies in their cluster and launch targeted activities to remove them. Generic action plans or the

misunderstanding that cluster initiatives are synonymous with a particular type of activity are

problematic.

� In Europe, supply chain improvements and specific efforts to upgrade the business environment,

particularly the transportation infrastructure, dominate. But investment attraction is gaining in

importance

o Think Tanks organized under the umbrella of EPCA have identified opportunities for

improving supply-chain collaboration through horizontal and vertical collaboration

o An effort for collaboration of European chemical sites has been launched in 2005 under the

name ECSPP to provide potential investors with more accessible information on chemical

sites throughout Europe

� In Asia, investment attraction and the infrastructure development are the main activities that

cluster initiatives tend to engage in





4. Conclusions

Based on a discussion of the role of clusters in global competition, this report has analyzed the

available data on clusters in the chemical industry, focusing on Europe. More data is needed, on the

performance of chemical clusters in a wider range of indicators besides employment, on the specific

profile of these clusters in terms of activities and market focus, and on the strength of the regional

economies and business environments in which these clusters operate. More data is also needed on

the many different cluster initiatives and other policy efforts to improve the competitiveness of the

chemical industry and specific chemical clusters. But while the available data is in many ways only a

beginning, a number of important observations are emerging.

First, this report underlines the importance of location in global competition. The economic

activity in the chemical industry is concentrated in a number of competing and cooperating clusters

around the world. Clusters benefit from their proximity to key markets. But being in a growing market

is clearly not enough. Within Europe, different clusters have experienced quite different development

paths. Strong clusters can create levels of productivity that can make them an attractive basis of

operation for serving foreign markets, even if they are facing high factor prices. But there are multiple

ways to success; not all successful clusters look the same. In Europe and in the world economy,

different clusters and different nations have developed different patterns of specialization within the

chemical industry.

Second, this report here contributes to the understanding of the clear strengths but also the visible

challenges that the European chemical industry is facing. Europe is the home of many strong

chemical clusters and many European countries have important positions in global chemical trade.

But these positions are under threat and many strong European clusters have lost employment and

market position, to Asia but also to other parts of Europe, in recent years. The maturity of European

cluster supports high productivity but it comes with a legacy of assets that now have to compete with

facilities in Asia that can exploit potential economies of scale and new technologies to a higher

degree. And there are also signs that the level of consolidation has not progressed as much in

Europe as in other parts of the world.

Third, this report argues that a new approach is required to fully leverage the opportunities of

cluster-based efforts as tools to upgrade the competitiveness of the European chemical industry.

� Companies need to overcome the tendency to view productivity improvements as the result of

internal innovation or stronger competitive pressure on suppliers; the next level of productivity

improvement will depend on concerted changes across many companies and government

policies.



� Cluster initiatives need to broaden their perspective from a natural focus on supply-chain

collaboration to a broader agenda of identifying the specific strategic positions of individual

clusters and upgrading all relevant parts of their respective business environments; more

changes – with some variation across different cluster locations depending on their respective

strategic positions – will be necessary to sustain the potential for further productivity growth.

� Collaboration between companies and the private sector needs to move to a new model. Many

of the key challenges that the European chemical industry is facing – the emerging bottlenecks

in transportation infrastructure and the increasing pressure from demanding product regulation –

can only be addressed if companies and the public sector find a productive platform for dialogue.

Cluster initiatives can form the foundation for such a dialogue and create a context of mutual

understanding that allows trade-offs between different goals to be made based on facts rather

than ideological positions.

During 2007, many industry groups within the European chemical industry, including the EPCA Think

Tanks on Supply-Chain Collaboration, worked on new concepts to improve the competitiveness of the

European chemical clusters. On 14 June 2007 the European Commission formally decided to set up

a High Level Group on the Competitiveness of the Chemicals Industry in the European Union.

Cluster data – a much more detailed collection of cluster-specific facts should be a priority – and

cluster initiatives are key tools for these efforts to succeed.

Europe has the ability to develop its strong chemical industry further. And it is increasingly showing

that it has the willingness to do so as well.



Selected publications on chemical clusters

Bathelt, Harald (2000), Persistent structures in a turbulent world: the division of labor in the Germanchemical industry, Environment and Planning C, Vol. 18, pp. 225 – 247.

Chapman, Keith (2005), From ‘growth center’ to’cluster’: restructuring, regional development, and theTeeside chemical industry, Environment and Planning A, Vol. 37, pp. 597 – 615.

Croufer, Edouard, Pieter-Jan Mermans, and Christian Weigel (2005), The Staying Power of Europe’sChemical Industry, Arthur D. Little, Prism, Vol. 1, p. 29 – 43.

EPCA Think Tank (2007), A Paradigm Shift: Supply Chain Collaboration and Competition in andBetween Europe’s Chemical Clusters, EPCA: Brussels.

European Chemical Industry Council (2004), Chemical Industry 2015; Roads to the Future, CEFIC:Brussels.

European Commission – DG Enterprise (2005), European Industry: A sectoral overview, CommissionStaff Working Paper SEC (2005) 1216, Brussels.

European Commission – DG Enterprise (2000), Competitiveness of the Chemical Industry Sector inthe CEE Candidate countries, Brussels

He, Canfei, Yehua D. Wei, and Xieuzhen Xie (2006), Globalization, Institutions, and IndustrialLocation: Economic Transition and Industrial Location in China, Regional Studies, forthcoming.

Janne, Odile E.M. (2002), The emergence of corporate integrated innovation systems across regions:The case of the chemical and pharmaceutical industry in Germany, the UK and Belgium, Journal ofInternational Management, Vol. 8, pp. 97–119.

Ketels, Christian, Jeffrey Fear (2006), Cluster Development in Mitteldeutschland, HBS Case 707-004,Harvard Business School Press, Boston.

Koch, Thomas (2004), Global Chemicals: China remakes an industry, McKinsey Quarterly, 2004special edition.

Mariani, Myriam (2000), Networks of inventors in the chemical industry, mimeo., MERIT

McCann, T.J. (1999), Chemical industry integration, Journal of Business Administration and PolicyAnalysis.

O’Mahony, Mary and Bart van Ark (ed.) (2003), EU productivity and competitiveness: An industryperspective, European Commission: Brussels.

Patel, Mitesh (2004), Competitiveness of Singaporean Petrochemical Industry, paper presented atthe Bottom Line Improvement Conference, Singapore.

Patti, Anthony L. (2006), Economic clusters and the supply chain: a case study, Supply ChainManagement, Vol. 11, No. 3, pp. 266–270.

Pillai, Jayarethanam (2006), Importance of Clusters in Industry Development: A Case of Singapore’sPetrochemical Industry, Asian Journal of Technology Innovation, Vol. 14, No. 2.

Sikorski, Douglas (1997), Public Enterprise in the International Petrochemical Industry: The case ofSingapore, Energy Resources, Vol. 19, pp. 309 – 323.

Wang, Jason H J, Henry Wai-chung Yeung (2000), Strategies for global competition: transnationalchemical firms and Singapore's chemical cluster, Environment and Planning A, Vol. 32, pp. 847 – 869.

THE EUROPEAN PETROCHEMICAL ASSOCIATION

Documents

Harvard Report on Chemical Industry Clusters