Monday, 6 November 2017

Cluster scepticism

No government official ever got fired for promoting clusters—those concentrations of interconnected companies, specialized suppliers, service providers, training institutions, and support organizations formed around a technology or end product within one area or region. Popularized by Harvard Business School’s Michael Porter, cluster strategies have been promoted by governments throughout the world, which tout clusters’ key role in fostering entrepreneurship and economic competitiveness. Though entrepreneurial clusters do exist naturally and can be important elements of an ecosystem, there is only questionable anecdotal evidence that governments can play a major role in breeding them. In a rare critique of the cluster mantra, the Economist reported:

“Typically governments pick a promising part of their country, ideally one that has a big university nearby, and provide a pot of money that is meant to kick-start entrepreneurship under the guiding hand of benevolent bureaucrats….It has been an abysmal failure….Experts at Insead looked at efforts by the German government to create biotechnology clusters on a par with those found in California and concluded that ‘Germany has essentially wasted $20 billion—and now Singapore is well on its way to doing the same.’ An assessment by the World Bank of Singapore’s multibillion dollar efforts to create a ‘biopolis’ reckoned that it had only a 50-50 chance of success. Some would put it less than that.”

The problem is that over the years people have mistaken Porter’s description of the benefits of clusters for a prescription to go out and build them from scratch. In fact, in a 1998 article in this magazine (“Clusters and the New Economics of Competition”) Porter himself anticipated that the dynamics of clusters would be misunderstood by governments:

“Government…should reinforce and build on existing and emerging clusters rather than attempt to create entirely new ones….In fact, most clusters form independently of government action—and sometimes in spite of it. They form where a foundation of locational advantages exists. To justify cluster development efforts, some seeds of a cluster should have already passed a market test….”
The piece points too to the importance of sound legal and regulatory systems, and the risks in government sponsored venture capital funds that retard innovation by flooding the market with "overvalued, poor-quality deals".

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