Infrastructure, Agglomeration, Cluster Development and Cluster Policy

1. Infrastructure, Agglomeration, Cluster Development and Cluster Policy Sayed H. Saghaian (Mehdi), Associate Professor University of Kentucky Lexington, Kentucky The First Iranian Conference of Urban Economics Mashhad, Iran 23 – 24 Nov 2011

2. EconomicGeography • What happens where? • Why do firms and people tend to concentrate in a few locations ? • What explains the variety of economic activities and land uses in a region? • What are the economic diversification prospects for low-population places that are costly to get to and from? • Why some regions achieve significantly higher growth rates than others?

3. Economic Geography • Spatial Economics • Understanding the role of distance • Theory of Spatial Equilibrium • Production Location Theory • Land Economics • Study of land use and value • Regional Economics • Sub-national economics • Rural Economics • Urban Economics

4. Foundation Stones • Three foundation stones: an understanding of spatial and regional economic problems built on three facts of life: • Natural resource advantages, • Economies of concentration, and • Costs of transportation and communication. • A fundamental view: the importance of trade-offs among: • Scale, • Transport costs, and • Endowments in explaining the economics of establishment location.

5. Urban-Rural • The important role of local public goods and amenities to explain household and establishment location choices. • The emergence of auto transport by mid–twentieth century made commuting to urban employment the mode to engage with urban economies. • Increased accessibility to urban markets key factor to prosperity of regions.

6. Urban-Rural • Urban growth cause of rural-brain-drain • The pull effect of the higher urban returns to human capital • Highest skilled will leave • Exurban sprawl fuel adjacent rural growth • Job growth complementary to population growth through increased commuting. • 60% of local non-metro job growth is due to commuting, 30% through migration.

7. Urban Centers • Urban centers and spatial concentration of production provide: • Product variety: • Intermediate inputs for firms • Final goods to consumers • Monopolistic competition (more firms) • Average cost pricing • Higher profits

8. Agglomeration • It is geographic concentration of related economic activities. • The agglomeration of related economic activity is a central feature of economic geography. • Agglomeration arises from interdependencies across complementary economic activities that give rise to increasing returns. • Trade-Offs: • Either enjoying agglomeration economies of scale, • or avoiding transportation costs wrt spatially immobile resources.

9. Agglomeration • Two potential types of agglomerating forces: • localization (increasing returns to activities within a single industry) and • urbanization (increasing returns to diversity at the overall regional level). • Agglomeration may arise from: • specialization of a region in a particular industry where firms share common inputs or knowledge (so called localization economies). • exploiting the overall diversity of industries in an entire regional economy (so called urbanization economies).

10. Agglomeration • At least three distinct drivers of agglomeration: • input-output linkages, • labor market pooling, and • knowledge spillovers. • Additional agglomeration drivers: • local demand, • specialized institutions and • the structure of regional business and social networks

11. Agglomeration • In a given location, limitations on resources can result in diminishing returns. • This can lead to convergence in economic activity (employment, income, productivity) across regions over time • Each of those mechanisms is associated with cost or productivity advantages that result in increasing returns to geographically proximate economic activity. • Free trade remove barriers to agglomeration and foster growth of clusters. • Clustering of economic activity is wisely recognized as resulting in economies of agglomeration.

12. What is Competitiveness? • Competitiveness is the productivitywith which a nation uses its human, capital, and natural resources • Productivity sets the standard of living • Productivity growth sets sustainable economic growth • Productivity and prosperity depends on how a nation competes, not what industries it competes in • Relentless innovation necessary to drive productivity growth and enable standard of living to rise • Technology, products, and organizational methods

13. Competitiveness & DiamondFramework • Many things matter for competitiveness: • Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing. • Porter Diamond Model for Competitive Advantage • The Diamond Framework has four dimensions: • Context for Firm Strategy and Rivalry • Factor (Input) Conditions • Demand Conditions • Related and Supporting Industries

14. Diamond Framework

15. Diamond Framework

16. Diamond Framework

17. Context for Firm Strategy and Rivalry • A local context and rules that encourage productivity • incentives for capital investments and intellectual property protection • Incentive systems based on merit • Open and vigorous local competition, especially amonglocally based rivals

18. Factor (Input) Conditions • Availability of high quality,specialized inputs available to firms: • Human resources • Capital resources • Physical infrastructure • Administrative infrastructure (e.g. registration, permits) • Information infrastructure (e.g. economic data, corporate disclosure) • Scientific and technological infrastructure • Natural resources

19. Demand Conditions • More sophisticated and demanding localcustomer(s) • Local customer needs that anticipatethoseelsewhere • Unusual local demand in specialized segments that can be served nationally and globally

20. Related and Supporting Industries • Access to capable, locally based suppliersandfirms in related fields • Presence of clustersinstead of isolated industries

21. What is a Cluster? • Michael Porter defines clusters as “geographically proximate groups of interconnectedcompanies and associated institutions in a particular field, linked by commonalities and complementarities”. • Clusters have become the focal point of many new policy initiatives globally in the last few years. • The goal is to become the most competitive and dynamic knowledge based economy. • Clusters are a leverage point for action, not just a description of economic reality. • A way to realize location-based complementarities.

22. Anatomy of a Cluster Federal Agencies Labor Organizations Sources of Capital Support Industries Driver Industries: Workforce Development & Training Local & State Gov’t Suppliers: Customers: Public Infrastructure Universities Community & Technical Colleges Nonprofits

23. Cluster Characteristics • Firms and institutions in a cluster share four critical characteristics: • Proximity; they need to be sufficiently close in space to allow positive spill-overs and sharing of common resources to occur • Linkages; their activities need to share a common goal, for them to be able to benefit from proximity and interaction • Interactions; for positive cluster effects to occur some level of active interaction has to be present • Critical mass; needs to be sufficient number of participants for interactions to have a meaningful impact on performance • Understanding these four dimensions is more important than defining specific benchmarks for firms and institutions to be called a cluster.

24. Clusters and Innovation • Clusters allow to be more productive and innovative. • Clusters provide a particularly fertile ground for innovations. • Clusters reduce barriers to entry for new business creation relative to other locations. • Innovation occurs in non-sequential interactions of different universities, research institutions, and companies. • Different from traditional model where R&D centers turned universities’ basic research into applied products and processes. • Clusters of Innovation: locations face to compete on innovationand productivity.

25. Roles of Private and Public Sectors • Cluster initiatives an opportunity to redefine the roles of the private and public sector in economic policy. • Economists focus on clusters as geographic concentration of interconnected companies and institutions in a particular field. • Clusters offer a crucial opportunity to take the necessary steps for modernizing economic policies.

26. Cluster and Macro Policy • The turn to cluster policy is a shift in priorities from macro to microeconomic issues. • Monetary and fiscal policies are increasingly well understood. • But macroeconomic progress turned out to be only necessary, not sufficient to achieve higher prosperity. • Targeted microeconomic efforts in a new partnership with private sector, universities, and other institutions is required to translate the macroeconomic achievementsinto real productive improvements.

27. Cluster Development • Efforts for cluster development and for regional economic development need to be better integrated. • Cluster development should not aim to create clusters, but to activate them. • Activating an existing base of companies and institutions to jointly upgrade their cluster is more effective than creating clusters from scratch. • The state of cluster development is a measure of active policies to strengthen clusters, and the overall cluster rank is a measure of necessary ingredients for clusters.

28. Cluster Policy • Clusters are a useful way to organizeefforts and launch effectiveaction initiatives. • Need to strengthen home clusters to exploit their roles. • Cluster Policy: • provide budget for clusterdevelopment, and use clusters to set policy priorities. • Providing better data on clusters, convening joint public-private research groups for clusters, and supporting regional cluster initiatives are the key roles.

29. Cluster Mapping • Employing cluster approach to regional growth policy is crucial. • regional employment patterns in groups of industries could be defined as clusters. • There is a need for a Cluster Mapping Project. • cluster mapping: quantitatively identify and profile clusters. • cluster mapping efforts could cover municipalities, counties, urban economies, or national economies. • need to conduct and compile cluster case studies.

30. Policyand Practice Must Change Unprecedented challenges require innovative solutions for creating jobs and promoting regional prosperity. From Silos … … to Collaboration.

31. RegionalClusters Implies bounded area characterized by inherent social, environmental, economic, and cultural assets Transcends socio-political boundaries Include both urban & rural

32. Five Key Components to Consider When Defining Unique Regional Assets: ENTRE- PRENEURSHIP ECONOMIC BASE INNOVATION & IDEAS TALENT Location, Infrastructure, Amenities, Factor Costs, Natural Resources Regional Assets What you make, including your existing & prospective industry clusters Your capacity to create companies wholly new or from existing firms What you do: your workforce skills & human capital base Your capacity to innovate and generate new ideas The basic conditions defining the economic milieu of the region

33. Latin: To make new or renew The value-added commercialization of a new idea that produces new goods, services, and/or processes. The recombination of existing goods, services and processes that results in new or renewed goods, services, and/or processes. Because innovation can be widely applied it can occur in both emerging and traditional industries Regional Innovation Clusters

34. Presence of spatially proximate organizations that share active commercial interaction channels, specialized infrastructure, labor markets, and services. Share a common goal to maximize regional prosperity Link to trans-regional and global networks. Regional Innovation Clusters

35. Regional Cluster Policy • One of the first regions to apply cluster policy in its economic policy was the Basque country in Spain. • In deep economic crisis of its steel and ship building, public and private sector leaders adopted the cluster approach to change their economic trajectory. • A decade later, the region is one of the richest regions in Spain and has achieved a GDP per capita level equal to the EU average. • Many countries employ clusters in their policy. For example, the Netherlands and Denmark.

36. Regional Clusters: Evidence • Regional clusters: groups of closely related and complementary industries operating within a region. • There is significant evidence for cluster-driven agglomeration. • Industries participating in a strong cluster register higher employment and wage growth, number of establishments, and patenting. • New regional industries emerge where there is a strong cluster environment. • The presence of strong clusters enhances growth opportunities in other industries and clusters.

37. Regional Clusters: Surveys • Most surveyed clusters are dominated by small or medium-sized companies. • Most surveyed clusters serve global markets. • R&D and advanced services available within a particular field in many clusters. • Clusters tend to be young, growing, and among the national leaders in their fields. • The Global Competitiveness Report provides comparative data on overall cluster strength for 75 countries.

38. Thank You!