March 24, 2015

The new economics of economic development

Honestly said, I just read now the classical 1998 article of Michael Porter: the Clusters and the new economics of competition. It summarizes perfectly what I think about the new approaches of economic development and investment promotion. Shortly: cluster development should be the future of economic development, because location-related benefits are what really matter.

"Clusters are not unique, however; they are highly typical—and therein lies a paradox: the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, motivation—that distant rivals cannot match."
Porter says: the global economy made easy to access capital, goods, technology and information from around the world, so the old school competitive advantages are over. Competitiveness of a company is fundamentally impacted by location-related features. Clusters can deliver 3 essential benefits:
  1. Productivity: the better access to specialized employers and suppliers, the access to specialized market and technology information, the support of complementary businesses, the access to industry-related institutions and public goods, the better motivation and measurement result a much better business environment and companies located in a cluster can benefit from these productivity-increasing benefits.
  2. Innovation: "Because sophisticated buyers are often part of a cluster, companies inside clusters usually have a better window on the market than isolated competitors do." And market understanding is the base of product development and innovation.
  3. New business formation: "Clusters are conducive to new business formation for a variety of reasons. Individuals working within a cluster can more easily perceive gaps in products or services around which they can build businesses. Beyond that, barriers to entry are lower than elsewhere. Needed assets, skills, inputs, and staff are often readily available at the cluster location, waiting to be assembled into a new enterprise. Local financial institutions and investors, already familiar with the cluster, may require a lower risk premium on capital. In addition, the cluster often presents a significant local market, and an entrepreneur may benefit from established relationships. All of these factors reduce the perceived risks of entry—and of exit, should the enterprise fail."
OK, clusters are essentials for corporate compatitive advantage. But what are the lessons for you as an economic developer? First of all: recognize that new companies select your location based on these advantages. If you can provide target industry (cluster) -related, highly specialized infrastructure, human resources, suppliers, customers, public institutions, financial institutions etc.  - you shouldn't say any other words, your business environment sell your location.

As a start, I recommend to select your target industries wisely. All locations of the Earth target sexy industries like IT and biotech - but be honest, can you list any local fundaments to target sexy industries? Sometimes it's better to focus on existing strength: industries what have past and presence probably have future. You can upgrade existing local clusters, upgrading productivity, innovation and new business formation.

Finally, here is a brand new presentation of Professor Porter about economic development and clusters. If you watch only one 69-minute-long economic development video in your life, it should be that:

I hope you find this blog post useful - please share with your partners and colleauges, maybe they find it useful too.