Michael Stumpf is a consultant in community planning, economic development, and market analysis, based in New Berlin, Wisconsin.

1

Place Dynamics

When Are Industry Clusters an Appropriate Economic Development Tool? By Michael Stumpf, January 2006

ndustry clusters may be defined as groupings of firms using similar technologies or serving similar markets, together with closely linked

suppliers, a local talent base, and supporting institutions. Economists have noted that these clusters tend to stimulate continuous upgrading, generate spin-offs from larger firms in the cluster, and encourage innovation and entrepreneurship. The regions in which clusters can be found will also exhibit specialized and advanced production factors such as talent, capital, and infrastructure.

Cluster initiatives carried on by economic development organizations seek to encourage and build upon these traits. While this has become a popular approach to economic development, many of these initiatives are bound to fail either because they are not appropriately organized, or in reality, no cluster exists on which to build a program. A cluster initiative is not an attempt to create an industry grouping where nothing exists, but rather, it is a catalyst to improve the competitiveness of the region and spur new growth. They are most effective when applied to emerging and naturally-occurring clusters.

Silicon Valley still gets the most attention, but clusters do not need to be high tech or exist in such tightly defined geographic areas. This is especially true in rural places. The meat pro-cessing industry, for example, is concentrated in a broad swath of the western plains, from Texas up to Nebraska. This example is particularly good at demonstrating another fact about clusters. They can migrate. Proximity to places where large number of cattle are raised, improvements to transportation and refrigeration, and high union wages combined to cause many meat processors to relocate from places like Iowa, Illinois, and Wisconsin.

While most cluster initiatives center around manufacturing, there are exceptions like "creative services" in Portland, Oregon or media in Santa Fe, New Mexico. Rural places have similar op-portunities for cluster development. Agricultural Industries may come to mind first, but some less obvious choices include wind energy in the Dakotas or meteorology in Oklahoma. Regardless of the industry, the boost provided by an effective cluster initiative can prove to be a catalyst for regional economic prosperity.

I

2

Place Dynamics

A new industry cluster is forming around natural and organic foods in Colorado, where 130 firms have a combined total of over $2.5 billion in annual sales. The cluster program will work to brand the region as "the center of the natural foods universe." It seeks to expand markets for state products, encourage new business formation, and reduce production costs by fostering collaboration among businesses.

Along with manufacturers, the cluster includes natural foods distributors and retailers, marketing and legal firms catering to the industry, and organic produce growers. As an initiative, it dis-plays nearly all of the critical elements for success.

So what are the factors that contribute to a sound cluster strategy? Recent analysis of cluster in-itiatives has pointed to a number of shared char-acteristics. To begin with, the initiative is not viewed as an economic development plan in itself, but as part of a broader strategy to improve the business climate. It is a partnership of firms, government, and academic and research institu-tions, usually led by a champion from the business community. Finally, it is based on a true assessment of the current profile and competi-tiveness of the cluster.

Cluster initiatives are remarkably consistent in focusing on six areas of concern:

1) research and networking;

2) cluster expansion;

3) innovation and technology;

4) education and training;

5) commercial cooperation; and

6) policy action.

These are all issues around which there can typically be some consensus, even among competitors.

Putting theory into practice, the first thing eco-nomic developers need to do is to determine if there truly is a cluster in their territory. If so, does it extend beyond their service limits and should a regional effort be considered? The analysis should identify the primary businesses within the cluster along with clients, suppliers, and service pro-viders.

The second critical factor is widespread industry support. If industry is not an active player then the effort is not likely to take root. In reality, most successful cluster initiatives get their leadership from within the industry, rather than from a public agency.

Once it has been determined that the elements necessary to pursue an industry cluster initiative are in place, there is a need to develop strategic plan. Again, this must be industry-driven. Economic developers need to take a back seat at this point, and realize that the effort is all about creating a better business environment. It is not about business attraction.

As an economic development tool, industry cluster initiatives are long-term programs to develop regional competitiveness. Where appropriate, they can have a profound impact on the local or regional economy. But they may not be the right strategy for every place. Communities should be cautious about expending the resources on cluster approaches if they do not support the right conditions or if they are looking for different results. O

© 2006 Place Dynamics