Industry Clusters:Industry Clusters:

Theory, Practice and DefinitionsTheory, Practice and Definitions

Joe CortrightJoe Cortright

October 2005

I. Cluster History & DefinitionsI. Cluster History & Definitions

What are they? Who defines them?

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What Kind of Economy?What Kind of Economy?

While most jobs and businesses in every state area are the same

Restaurants, grocery stores, hospitals, beauty salons

About a third differs: Traded sector

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Traded Sector Drives GrowthTraded Sector Drives Growth

Traded/Export Sector

Suppliers

Local

Sales to the rest of the world

Most jobs are here: schools, hospitals, grocery stores, restaurants

But firms in this sector drive the economy

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Porter: ClustersPorter: Clusters

Starts from the business strategy standpoint

Rediscovers A. Marshall ca. 1890

Popularizes clusters

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Schools of ThoughtSchools of Thought

Neoclassical economics Regional Science Urbanism Industrial Organization Business Strategy Geography and Urban & Regional Planning New Economic Geography Urban Economics Economic Development Practitioners

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Clustering is CriticalClustering is Critical

Economic success isn’t random

Similar and related businesses draw advantages from proximity

Clustering holds for most “traded” goods: autos, carpets, RVs, others

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DefinitionDefinition

Cluster: A geographically bounded group of similar or related firms--connected by common markets, technologies or knowledge--their suppliers, their skilled workers and supporting institutions

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High Tech CentersHigh Tech Centers

Seattle

Portland

Silicon Valley

San Diego

Austin

Salt Lake CitySacramento

Minneapolis

Boston

Research Triangle Park

Denver

AtlantaPhoenix

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High Tech is SpecializedHigh Tech is Specialized

Seattle- SoftwarePortland

- Semiconductors- SME/EDA- Display- Computers

Silicon Valleyeverything!

San Diego- Communications

Austin- Semiconductors- Computers- SME

Salt Lake City- Software- Medical Devices- Storage Technology

Sacramento- Computers

Minneapolis- Computers- Medical Devices

Boston- Computers

Research Triangle Park- Software

Denver- Telecommunications- Satellite- Storage

Atlanta- Database- Telecommunications

Phoenix- Semiconductors

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Typologies of ClustersTypologies of Clusters

Buyer-Supplier and Value ChainInter-Firm RelationshipsGeographic ExtentCluster Life CycleOther Issues (Awareness)

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Stages of ClusteringStages of Clustering

Concentrations of firms and workersAwareness, Conscious Action &

CommunicationFormal Organization

Concentrated Connected Organized

A Cluster Continuum

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Cluster Life CycleCluster Life Cycle

PotentialEmergingMature

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Types of Cluster OrganizationsTypes of Cluster Organizations

Targeted industry of OECDD, PDC, etc. (display, food processors, etc.)

Self-identifying- (Salem artisan cheesemakers, PADA art galleries)

Trade associations (SAO)American Electronics Association v.

Display?Are they all clusters?

II. Why Cluster?II. Why Cluster?

How do they work?

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Micro-foundations of ClustersMicro-foundations of Clusters

Labor Market PoolingSupplier SpecializationKnowledge SpilloversEntrepreneurshipPath Dependence and Lock-InCultureLocal Demand

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What makes Clusters Tick?What makes Clusters Tick?

Rivalry & Cooperation

Customers

Suppliers

Inputs

Source: Michael Porter, Harvard Business School

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Oregon’s Microbrew ClusterOregon’s Microbrew Cluster

Competition & Brewer’s Guild

Savvy Beer Drinkers,HomebrewersSmall Restaurants

Equipment Makers,Creative Services

Hops, Water,Brewmasters

RivalryRivalry

SuppliersSuppliers

CustomersCustomersInputsInputs

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Context for Firm Strategy and Rivalry

Related and supporting industries

Factor (Input)

Conditions

Demand Conditions

• A local context that encourages appropriate forms of investment and sustained upgrading•Vigorous competition among locally based rivals

Factor (input) quantity and cost

Natural resourcesHuman resourcesCapital resourcesPhysical infrastructureAdministrative infrastructureInformation infrastructureScientific and technological infrastructure

•Factor quality•Factor specialization

• Presence of capable, locally based suppliers•Presence of competitive related industries

• Sophisticated and demanding local customer(s)•Customers’ needs that anticipate those elsewhere•Unusual local demand in specialized segments that can be served globally

Source: Porter (2000)

Porter’s Diamondof CompetitiveAdvantage

Data available vs. cluster needs Data available vs. cluster needs

Let’s hear from the clusters.

Measuring Clusters:Measuring Clusters:

Data & MethodsData & Methods

Joe CortrightJoe Cortright

October 2005

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Sectors versus ClustersSectors versus Clusters

SECTORS

Most quantitative analysis relies on data organized according to the SIC or NAICS classification schemes to define industries

CLUSTERS

Qualitative analyses define clusters according to local relationships. Cluster theory maintains that clusters cut across sector lines; many clusters are highly specialized

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Criteria for Identifying ClustersCriteria for Identifying Clusters

More Concentrated– Location Quotient

Faster Growing– Outperformed Same Industry Nationally

Higher Paid– Exceeds US average for same industry

Groups of Industries in which Oregon is:

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Oregon Cluster GroupingsOregon Cluster Groupings

Industry Cluster JobsHigh Technology/Software 66,850 Forest/Wood/Paper Products 62,412 Food Processing 48,208 Apparel/Sporting Goods 18,413 Transportation Equipment 14,972Creative Services 16,345Recreation 11,907Metals 9,215Nursery Products 10,247Professional Services 4,417Biomedical 3,404

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Define regionDefine region

Identify Key PartnersIdentify Key Partners

Quantitative AnalysisQuantitative Analysis

Qualitative AnalysisQualitative Analysis Competitiveness AnalysisCompetitiveness Analysis

Identify Economic Development Policies & ActionsIdentify Economic Development Policies & Actions

Industry cluster groupsOregon Employment DepartmentIndustry & Trade Associations

Researchers at universities

Local economic developersOthersUse CEW data & identify clusters

using 3 criteria:LQ > 1.25Average wages = 10 % above US averageGrowth rate > national growth rate

Conduct interviews or focus groups with industry representatives. Collect data about the industry sectorin general, cluster connections and relationshipscluster drivers, support factors, and challenges.

Collect additional information about particular cluster such as Patents, key products, major geographic concentrations, top 10 leading firms, entrepreneurial activity, competitor regions for specific cluster. Conduct Shift-Share analysis.

Define geographic area for whichcluster analysis is done.I.e. Portland-Vancouver, OR-WA PMSA

Policies and actions should be identifiedin collaboration with key partners. Should address state, regional, and local scale.

ProductsProducts

Identificationof DataSources

Identificationof CandidateClusters

Differentiation of- Existing Clusters- Emerging Clusters- Target Industries

Cluster-basedEconomicDevelopmentStrategy

Identify metrics and performance indicators.

Strategy development and assessment is ongoing.

IndustryIndustry

FirmFirm

OngoingOngoing

Cluster Methodology

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Cluster AnalysisCluster Analysis

Define Cluster

Convene Firms

Gather Data

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How Good Are You?How Good Are You?

High Tech– Produce 10% of all

US semiconductors– High Location

Quotients in Employment & R&D

– Relatively Higher Wages

– Outperformed US industry

Biotech– Rank in 30s in size

of industry/research

– Very Low Location Quotient

– Wages below US average

– No significant growth

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High Tech MetricsHigh Tech Metrics

Region Electronics SoftwareSan Jose 13.1 11.3Austin 4.9 2.8Raleigh-Durham 3.7 1.4Portland 2.6 2.7Boston 2.2 4.8Seattle 1.9 3.5Minneapolis 1.8 1.1Chicago 1.3 1.4Washington D.C. 0.6 1.8Denver 0.6 1.3

Location Quotients, 1997

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Clusters as a Framework for PolicyClusters as a Framework for Policy

An organizing principle for engaging a region in a discussion of its economic strengths and weaknesses

A flexible tool at the intersection of analysis and policy-making

Best efforts integrate quantitative and qualitative methods

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