TCILatinAmerica15 New Industrial Policy and Economic Development:What Role Can Cluster Efforts Play?

1 Copyright 2013 © Christian Ketels

New Industrial Policy and Economic Development:

What Role Can Cluster Efforts Play?

Dr Christian H. M. KetelsPresident, TCI Network

Institute for Strategy and Competitiveness Harvard Business School

18 June 2015


The Evolution of Industrial Policy

• Subsidies for firms/industries

• Creating new winners?

• Backing losers!

Old Industrial Policy

• Sector-specific upgrading

• Structural change into related fields

New Industrial Policy

FAILURE

• Generic, cross-sectoral policies

• Helping all?

• Helping few enough!

FrameworkConditions

PARTIAL SUCCESS

?


The Evolution of Industrial PolicyTwo Competing Motivations

Upgradingproductivity

Moving intomore attractive

sectors

Sectors/Industries as the objective

Sectors/Industries as a tool/channel

What you doHow well you do it


The Evolution of Industrial PolicyIssues for Emerging Economies

• The industrial composition differs systematically between more and less advanced economies

• Structural transformation is a critical part of the economic development process

Achieving structural transformation• Strategic approach

– Import-substitution policies– Export-led strategies, global value chains

• Strategic intent– Creating scale: Big push, strategic industrial policies– Creating capabilities: Linkages, economic complexity/product space

5 Copyright 2013 © Christian KetelsSource: Observatory of Economic Complexity

Product Space AnalysisColombia, 2012

• Where are you currently strong?• What related areas are opportunities?

• How do you get to the most central parts of the product space?


“Where you compete”: Understanding the Nature of Structural Change

• Sectorial composition is related to the stage of economic development

BUT

is sectorial composition a driver, a symptom, or an outcome?

• Emerging evidence suggests that sectorial composition is largely endogenous to business environment quality

• Use data on sectorial composition as a diagnostic tool

• Upgrade business environments to enable structural change

• But be careful about adopting sectorial composition as a policy target


Using Cluster Data as A Diagnostic Tool

• Overall share of employment in traded clusters

• Share of employment in strong clusters

• Share of employment in strong clusters gaining share

• Job creation/change of market position in strong vs. weak clusters

• Market position and profile of strong clusters

• Linkages among strong clusters

Strength of Core Clusters

Strength of Cluster Portfolio

Dynamics of Cluster Portfolio

820150510–Jerusalem Competitiveness Presentation Copyright 2015 © Professor Michael E. Porter

Traded versus Local ClustersExample: The City of Jerusalem

Tel Aviv Haifa Israel Jerusalem

59.47%

52.78% 52.67%

45.03%

Employment share of Traded Clusters

Sour

ce :

Cent

ral B

urea

u of

Sta

tistic

s

Copyright 2015 © Christian Ketels 9

Performance of Strong ClustersExample: The Great Lakes-St. Lawrence Region

• Strong clusters are those that reach critical mass in employment (top 25% in LQ)

• Strong clusters have in the Great Lakes-St. Lawrence Region suffered disproportionate employment losses, unlike the experience in other regions

• This has been true across many cluster categories, but especially in those that have been hit the hardest in overall employment

• These outcomes suggest fundamental challenges in the market positioning of many of the Region’s traditional clusters

Strong Clusters Elsewhere0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,0002003

2013- 9.8%

- 2.0%

Employment in…


Cluster-Based Economic Development

Upgrade existing clusters

Mobilizerelated clusters

Improve general

business environment conditions


Cluster-Based Economic DevelopmentPrinciples

• Scope defined by groups of related industries

• Geography-conscious, concentrating activities in specific locations with critical mass and capabilities

• Based on public-private collaboration, with clear division of roles

• Focused on competitiveness upgrading through improvements in company sophistication, cluster linkages, and business environment conditions


The Role of Cluster Initiatives

• Channel to deliver government programs• Workforce skill development

• Internationalization

• Access to finance

• SME Management support

• Technology transfer/extension

• Platform to discuss policy priorities• Inform government about market realities and company needs

• Inform companies about budget realities and government tools

• Requires robust organizational platform with capabilities, funding, independence, and integrity


Core Partners for Cluster Initiatives

• Multinational companies

• Leading local companies

• Business groups (chambers of commerce, industry associations)

• Academic institutions

• National economic development agencies

• Regional economic development agencies

• Political leaders


Clusters, Cluster Initiatives, and Performance

CLUSTERPRESENCE

CLUSTEREFFORT

ECONOMICPERFORMANCE

+ =

+ =

+ =


Cluster-Based Economic DevelopmentPolicy Tools

Existing Clusters Potential Clusters White Space

Needs

Tools

• Strengthen collaboration

• Address specific business environment weaknesses

• Integrate policies

• Explore market opportunities

• Connect potential parts of the cluster

• Address specific barriers for growth

• Enable entrepreneurs to test ideas

• Create an environment where new ideas can emerge

• Present economic base

• Opportunities given context

• Unknown

• Cluster efforts

• Cluster-oriented strategies with dedicated funding

• Creation of networks

• Removal of barriers

• Limited funding tied to performance

• General entrepreneurship environment

Specific Characteristics ofPolicies for Potential Clusters

• Accept and manage risk

• Create clear exit mechanisms

• Encourage exploration of market opportunities

• Make knowledge generated widely available

• Support projects, not institutions

• Be flexible on geographic and industry boundaries


• Pull; react to market signals• Support all clusters with critical mass,

willingness to act, and a plausible strategy

• Push; amplify weak market signals (and react to new signals)

• Apply strong market discipline to avoid rent capture

• Pull; react to market signals• Support and help coordinate regional efforts

Cluster Policy Across Different Levels of Government

Established Clusterswith national importance,

often with presence in multiple regions

Established Clusterswith regional importance

Potential Industrieswith limited current

presence and no clear regional concentration

• Pull; react to policy signals• Compete by providing best bus.

environment for potential industries

National Government

Regional Governments


Challenges – The Three C’s

• Capacity in government

• Capacity in the private sector

• Political economy

• Incentive effects of policy tools

• Global market context

Capacity

Capture

Context


Strategy

Implementation

SUCCESS

Economy & Finance

TCILatinAmerica15 New Industrial Policy and Economic Development:What Role Can Cluster Efforts Play?