Cluster Policy and Industrial Development at the Focus of TCI 2017 Global Conference Discussions
The 20th (anniversary) conference of the Association of Cluster Practitioners and Experts (TCI Network) is over; Russia was represented by Evgeny Kutsenko, Head of the HSE ISSEK Russian Cluster Observatory. He shares his observations, and exchanges with advanced designers and practitioners of industrial and cluster policies.
This year the conference took place in Bogota, the capital of Colombia. The key items on the 2017 agenda were new industrial policy; clusters as a tool for entrepreneurial discovery in the framework of smart specialisation strategies; cluster mapping; evaluation of cluster policies; best cluster governance practices; promoting exports and S&T development through clusters; and clusters as instruments for building peace.
A report about the twenty years of the TCI network’s activities was presented, which among other things also addressed Russian cluster policy. Next year the global conference will be held in Toronto — which is quite appropriate considering the launch of the first national Canadian cluster support programme (see below for more).
Industrial policy without subsidies
The key speakers at the 20th TCI Network Conference were Ricardo Hausmann (Harvard University), Ernesto Stein (Inter-American Development Bank), and Piero Ghezzi (the former Peruvian Minister of Production). Their presentations were devoted to industrial policy.
As was expected, Ricardo Hausmann started off with his economic complexity theory, juxtaposing it to institutionalism as the main economic development/decline factor in the eyes of the majority of present-day economists. Hausmann believes economic success depends on the number of “building blocks” — technologies available for application in the industry to manufacture new products (like with a meccano construction set). The more such building blocks a country or a region has, the more opportunities they have to create new industries. According to Hausmann, diversification should be the main industrial policy goal (“there’s no smart specialisation, there’s smart diversification”). Not any diversification would do, though: you have to correctly identify the areas where the region has the largest number of building blocks and then take the next step towards more complex products, without getting too enthusiastic about long-term fantasies but not stubbornly sticking to the current specialisation area either, noted Ricardo Hausmann.
Most of the world’s strongest clusters de facto confirm this hypothesis. E.g. Frédéric Miribel of the Invest in Lyon Agency noted that a number of clusters located in that city trace their history back to the 1500s, when the silk industry emerged in Lyon — which in turn promoted emergence of the textile and chemical industries. The textile industry (including manufacturing of relevant machinery) provided a foundation for development of automobile and aircraft parts industries, while the chemical industry promoted emergence of pharmaceutical, cosmetic, and food industries.
The building blocks idea leads us to a new understanding of industrial policy: promoting development of an industry requires not provision of subsidies to companies (which obstructs competition and encourages rent-oriented behaviour), but creating conditions for development of the whole industry. Such conditions are understood broadly, ranging from infrastructure to security, banking, staff training, corporate law, standards, etc. Some of it can be left to the market, but other aspects require government intervention (subsidies will have no effect whatsoever in such situations). Note also that different industries may lack different building blocks, and it’s not possible to tell in advance what those might be; you’ll have to start a strategic dialogue with the industry/clusters and choose (or design) adequate support tools “as you go”.
Hausmann described a few principles for starting a dialogue between the government and existing industries/clusters: self-organisation of the professional community around common problems or opportunities; discussing public inputs or coordination failures, as opposed to subsidies; focus on increasing productivity of the whole industry, not specific companies’ revenues; companies should be willing to invest in accomplishing common objectives; transparency of the dialogue, etc. Starting an effective dialogue with emerging industries requires another set of principles: setting up a special body responsible for identifying new opportunities; putting in place relevant industrial and commercial platforms; identifying the right investors (as opposed to inviting just anybody), etc.
Ernesto Stein supplemented Hausmann’s presentation by speaking, among other things, about public-public cooperation mechanisms, specifically mesas ejecutivas (see below). Interestingly, Ernesto pointed out an inherent cluster policy limitation as a possible public-public cooperation tool. Cluster policies are typically implemented by regions, while existing industry-level problems can only be solved by national authorities.
It can be added that even if this policy is implemented on the national level it doesn’t at all automatically imply willingness (or ability) to solve the industry’s problems instead of just handing out subsidies to specific companies. And I’d like to point out another cluster policy feature: each cluster is a unique mix of industries limited by the borders of one or more regions, so they don’t represent any industry on the national scale. To simplify, if you gather representatives of an industry you can come up with a list of common problems hindering the overall productivity. If you gather representatives of clusters, you get a list of problems specific to various industries. On the other hand, clusters allow to see the barriers hindering development from the value chain perspective — thus reducing the risk of industry-specific lobbying.
Piero Ghezzi took further Hausmann’s idea that new industrial policy should focus on overall productivity, not revenues and subsidies, and should not be limited to conventional industrial activities (industry is not a “what”, it’s a “how”: in today’s world agriculture and knowledge-intensive business services (KIBS) are also based on industrial principles). The key to solving relevant problems is cooperation between businesses and the state, and it should be transformed from a principle into an institution. In Peru, Mesas Ejecutivas (ME) became such an institution — whose efficiency was noted in the previous presentation by the Inter-American Development Bank representative.
MEs are permanent, industry-specific, national-level working groups whose objective is to improve efficiency of government agencies responsible for promoting successful industrial development (and not generally, but as specifically as possible). Each group meets once a week or once a fortnight; some of the members are responsible for monitoring progress in dealing with identified issues.
Altogether, eight MEs were established in Peru in 2015-2016: for forest industry, aquaculture, creative industries, textile, gastronomy, agricultural exports, logistics, and high-impact entrepreneurship. Each ME comprises 20-25 members.
E.g. the Forest Industry ME comprises representatives of 6 government ministries, regional and local authorities, businesses (including SMEs, which self-organise and form industrial associations to take part in MEs). According to the former minister, for the first time the sector’s potential and the problems it was facing were fully comprehended. In the 18 months the ME was operating it has drafted a special law giving forest plantations the same status as agricultural ones; a special fund was established to promote investments in the industry; licences for moving timber from plantations were abolished; the time required for registering ownership of forest plantations’ products was cut from a year to three days; and work began on attracting direct foreign investments in the industry.
Interestingly, after the change of government MEs were initially abolished but then re-established due to pressure from businesses.
MEs activities demonstrate that industrial policy can be implemented without subsidies. However, it wouldn’t be enough just to talk about synchronisation, eliminating bottlenecks, etc. Speaking about the secrets of maintaining a successful dialogue between business and the state to increase the overall industrial productivity, Piero Ghezzi noted the following:
- The analytical stage (identifying problems and drafting agenda) shouldn’t take too long; the list of issues normally can be put together quickly enough, and adjusted later on. The main thing is to select 3 or 4 problems and start dealing with them (and keep reporting to the minimum).
- Start with one industry and gradually move on to others.
- Have frequent and regular meetings (as opposed to all sorts of events);
- Involve all government ministries relevant to the industry;
- Make sure you have support from the top (to be able to deal with certain objectives, and maintain cooperation between various ministries);
- Set up a group which will be monitoring progress;
- You don’t need a clear roadmap for years ahead; the main thing is to start doing things important to the industry quickly, understand what works and what doesn’t, and flexibly adjust along the way.
- Be ready to change your support tools as you immerse into the industry’s problems deeper;
- Successfully dealing with problems creates a momentum; “institutional memory” emerges, which prevents forgetting about previously created support institutions and helps to maintain them even if the government changes.
A few recent cluster policy case studies
In 2016 the new Canadian government decided to launch the first national cluster support programme (on the regional level clusters have been successfully developing in Quebec for quite some while, and at least one cluster initiative — TOHealth — is under way in Toronto). The new programme got an ambitious name — Innovation Superclusters. The mission: setting long-term development priorities by identifying growth points with the biggest critical mass and a potential for international recognition. The objectives are rather typical for this kind of programmes: commercialisation of platform technologies, providing support to business-initiated joint R&D projects, promoting cooperation between businesses, research organisations, and the public sector, and strengthening Canadian firms’ positions in new markets. No more than five superclusters are expected to be selected to concentrate government efforts on.
The above looks quite similar to the Russian Ministry of Economic Development’s priority project to support innovative clusters — leaders in terms of international investment appeal. But a few significant differences are immediately apparent.
Firstly, it’s the set of priorities: advanced production technologies, agriculture and food industry, clean technologies, digital technologies, transport and infrastructure. Despite the varied mix of technologies and industries, additional incentives to promote innovative development obviously wouldn’t hurt us either.
Secondly, the Canadians have been selecting applications for two years already; according to the government representative I spoke with, they approached this matter very seriously indeed.
Thirdly, they have a significant support budget — about 750 million USD (950 million Canadian dollars) for 5 years.
Fourthly, there’s a heavy accent on businesses’ initiatives. Like everywhere else in the world, public support for clusters is based on at least 50% participation of private businesses in funding. Public subsidies will be provided in advance, but in instalments during a five-year period. The money will be paid to the (non-commercial) cluster organisation — an obvious difference from the Russian Ministry of Industry and Trade’s programme.
Nothing more can be said about the programme’s design yet: clusters are still being selected (a two-stage process; during the first stage 9 applications were shortlisted out of 50, the final list of no more than 5 clusters will be published by the end of November, 2017). But some things already seem to be noteworthy.
Another interesting news is that Kazakhstan decided to re-launch its cluster policy. As everybody knows, it started off ahead of Russia by inviting Porter to conduct a standard industry analysis, but didn’t go any further (actually, little was known about cluster initiatives then, which is the main cluster policy tool; there’s not a word about them in the book by abovementioned Porter). Now other consultants were invited in Kazakhstan (from the World Bank, the European Foundation for Cluster Excellence, the Basque Country’s InfydeID from), and new ambitions are being pursued. The top-down approach is supplemented with collecting “grassroots” applications. 6 clusters are expected to be selected out of 18 applications submitted (the industry mix is quite varied: pharmaceuticals, construction materials, mechanical engineering, agriculture, tourism, etc.). The support mechanism is still being developed. Well, good luck!
As is well known, Australia never had a national cluster support programme, but various pilot initiatives are now emerging in agriculture and food industry. Interestingly, a private association — Food Innovation Australia Ltd (FIAL) — has launched a programme of this kind. National authorities commissioned it to design Australian Agricultural Sector Development Strategy Until 2025, so the Association invited clusters to apply for support in the scope of the identified challenges/priorities. It believed the participating firms, R&D organisations, and universities would propose integrated projects combining competencies and resources to implement the chosen priorities.
The selected clusters will receive support strictly on the basis of 50% private participation in funding (public support is welcome but is not counted upon in the calculations). Grants will be paid to the cluster organisation to support its activities and implement the projects (quarterly, after progress reports are approved).
By the way, agro-industrial clusters as an S&T policy tool are mentioned in the Attachment to the Long-term S&T Foresight Study of the Russian Agricultural Sector, and we have discussed this topic twice during the current year with representatives of the Russian Ministry of Agriculture — at the Innovation Forum in the Stavropol Region and the “Golden Autumn” forum in Moscow. The trend towards cluster-based development of the sector seems to be rather obvious.
Colombia has no national cluster policy (if you don’t count the Platform which indicates there are 90 cluster initiatives in the country). But some regions seem to be quite active, and Bogota (which has DC status) is among them. The main cluster development driver (and the host of this year’s TCI Network conference) is the Bogota Chamber of Commerce. All cluster managers are employed by this organisation. It’s quite normal at the initial stage, particularly since some of the cluster initiatives are gradually turning private — register special companies which begin earning income. The Chamber of Commerce cluster managers, like their European colleagues, are actively attracting investments into cluster participants’ joint projects — which they also help to prepare. In addition to private resources, there are a number of national (research, innovation, competitiveness) and international programmes (the World Bank and the Inter-American Development Bank).
The first day of the conference is traditionally devoted to cluster tours — various familiarisation trips, in this case to textile, tourism, construction, financial, creative, and health clusters. This year I was interested in the health cluster (at TCI 2016 in Holland I chose the sports innovations industry — we clearly need to involve other industries than hi-tech and manufacturing in cluster initiatives). Like other Bogota clusters, this one was obviously at the very beginning of its life.
What was interesting: a curious mix of clusters in the meta-cluster (or like we would call it following the Moscow Region’s example, cluster consortium): the Bio-Hub comprises health- and pharmaceuticals-related cluster initiatives; there are plans to establish biocosmetics and functional foods clusters. Despite the fact that cluster managers are employed by the Chamber of Commerce, the cluster is managed (like it’s typically done in Europe) by the Cluster Council where businesses play the key role (8 private clinics, 2 insurance firms, 2 producers of medical equipment, representatives of national and regional health authorities). Altogether, there are 200 cluster participants (which doesn’t mean very much given absence of membership fees). Projects include dissemination of best hospital management practices; shared services including metrology; cooperation with universities to improve staff training; promotion of medical services in international markets (mainly medical tourism from Caribbean countries and Ecuador in such areas as orthopaedics and oncology); hosting large health-related congresses; cooperation with public authorities; bio/nanotechnology accelerator.
The position of the regional health secretariat towards the cluster was quite interesting. Since most of the participants are private clinics, the state discusses with the cluster various issues of common concern such as infant mortality, and matters like general logistics, shared use of equipment and laboratories, databases, and efficient allocation of resources. In a number of cases public hospitals do not have necessary equipment and have to procure relevant services from private clinics, but the opposite can also be true: e.g. there’s a public clinic specialising in burns treatment where private hospitals refer their patients (insurance holders).
- Positive effect of national cluster support programmes (including emergence of new “no subsidies” cluster initiatives) implies the state needs to adopt a long-term approach in this area: not only (and not necessarily) provide subsidies but legitimise cluster initiatives and relevant activities of regional authorities;
- Designing several specialised programmes may turn out to be a more efficient solution than having a single one aimed at dealing with all cluster-related issues in all industries;
- Department-specific traditions manifested in preferred support programme designs affect new programmes’ specific features stronger than country- or industry-specific features do. Transparency and mutual learning are crucial for overcoming possible “path dependence” effects — i.e. department traditions which ceased to be productive.
- Industry-specific priorities should be taken into account when cluster policy is implemented. Regions’ experiments with industrial policy shouldn’t be curtailed; optimising risk allocation seems to be a better approach. When industries not particularly well-developed in the region are supported from the federal budget, private and/or regional funding share should be higher;
- Promotion of the service sector (including KIBS), cultural and creative industries should be seen as a full-fledged (and in a number of cases the only) regional development priority.