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4. Industrial Clusters: Prospects for Economic Development and Innovation

Thierry Warin, PhD, HEC Montreal, Harvard University & Cirano

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Case Study (mandatory readings):

  • The California Wine Cluster
  • Porter. M. (2002) Location, Competition, and Economic Development: Local Clusters in a Global Economy, Economic Development Quartery, vol. 14 no. 1, pp. 15-34.

Recommended readings:

  • Turkina, E. (2015), « Les pôles d’attractivité du Québec : des grappes industrielles », dans Québec International, CIRANO, édité par Sinclair-Desgagné, B., Van Asche, A, et Warin, Th.
  • Ge (2009), Globalization and Industry Agglomeration in China, World Development, Vol. 37, Issue 3, March 2009, Pp. 550–559.
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Lessons

    1. Agglomeration of industrial activities: industrial clusters
    1. Importance of industrial clusters for the regional economy (www.mondo.international: comparative analysis of international data on industrial clusters)
    1. A Special Case Study: Quebec
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Introduction on industrial clusters

  • Support for clusters, concentrations of companies and support actors (universities, research institutes) in one region were considered one of the strategic vehicules for regional development and innovation (Castells & Hall, 1995; Chesbrough, 2006; Link, 2006).

  • These clusters and eco-industrial parks represent a geographic concentration of companies, suppliers and institutions that work together to share resources and information (Cortright, 2006).

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Introduction on industrial clusters

  • A very important feature of clusters is that they depend greatly on INTER-firm networks, not only to share resources, but largely to benefit from co-location in a form of technology outspills and develop all kinds of innovations and new products.

  • These clusters are also important because of their attractiveness to foreign investment, which contributes to regional development (Cantwell & Mudambi, 2011; Cantwell & Janne, 2004; Cantwell & Piscitello, 2002).

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Introduction on industrial clusters

Although, for some time now, the concept of an industrial cluster has emerged as a central factor of innovation and regional competitiveness,

  • the mechanisms of these clusters,

  • the ingredients of their successes,

  • and their effects on the regional economy

... are still mysterious.

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1. Agglomeration of industrial activities: industrial clusters

The presence in the same region of a cluster of companies active in the same sector of activity, whether upstream or downstream, contributes to:

  • a synergy that accelerates the growth of the sector and the territory of location,

  • a dynamics where innovation and the transmission of information are accelerated, which contributes to the improvement of products and methods,

  • positive effects on productivity and business creation (Alcácer & Chung, 2010).

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1. Agglomeration of industrial activities: industrial clusters

The first study of industrial clusters was developed by Alfred Marshall (1890), who described these local concentrations as specialized activities as a "simple triad of external economies"

(1) availability of skilled labor,

(2) growth of support and auxiliary occupations, and

(3) specialization of different enterprises at different stages of production and different branches of production (Martin & Sunley, 2003).

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1. Agglomeration of industrial activities: industrial clusters

At the end of the 1980s, the concept of regional grouping was re-examined by Porter, who defined the regional groupings as:

"geographical concentrations of interconnected companies, specialized suppliers, service providers, related industries, and associated institutions (eg universities, government institutions and professional associations) in specific areas that compete but also co-operate" (Porter, 1990, p.197).

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1. Agglomeration of industrial activities: industrial clusters

At the same time, researchers in the field of Economic Geography and in International Business have also studied concentrations of firms and have developed a series of terms to characterize the spatial aspect and the nature of regional concentration, such as :

  • agglomeration economies, new industrial spaces, industrial complexes, local environment, neo-marshallian nodes, regional innovation clusters, network regions, and learning regions (Scott, 1998; Amin And Thrift, 1992; Harrison et al., 1996; Markusen, 1998; Asheim, 2000; Jenkins & Tallman, 2010)
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1. Agglomeration of industrial activities: industrial clusters

Typologies of industrial clusters

Porter (1990) developed a cluster typology based on the distinction between horizontal and vertical clusters.

  • Vertical poles are made up of industries / companies linked by buyer / seller relationships (these clusters represent supply chains).

  • Concerning horizontal clusters, they share a common factor. This factor can be the market for finished products, a common technology, skills or natural resources: interconnections between companies in the sharing of resources, for example knowledge management.

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1. Agglomeration of industrial activities: industrial clusters

Typologies of industrial clusters

Gordon and McCann (2000) refined Porter's typology by proposing a third type of industrial cluster: the pure agglomeration. They adopt the point of view of transaction costs and define three distinct types of clusters.

As in the case of Porter, this classification is also based on the nature of firms (R. Coase) in clusters and the nature of their relationships and transactions within the cluster:

1) the type of pure agglomeration,

2) the industrial complex (vertical cluster in the Porter classification) and

3) the social network between similar firms (horizontal cluster in the Porter classification).

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1. Agglomeration of industrial activities: industrial clusters

a. The pure agglomeration

  • Companies are atomistic and are likely to change their relationships with other companies and customers in response to market opportunities.

  • An example of a pure agglomeration cluster is a competitive urban economy. Consequently, characteristics such as the size of the regional economy, availability of skilled workers and public R&D spending have a positive effect on innovation performance in this type of cluster.

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1. Agglomeration of industrial activities: industrial clusters

b. The industrial complex

  • The industrial complex is characterized mainly by stable and predictable long-term relationships between firms form a cluster (Gordon and McCann, 2000). The justification for spatial regrouping in this type of industrial cluster is that proximity is necessary in order to minimize transaction costs between firms.

  • Companies that produce components within the space group commit to significant long-term investments. Industrial complexes are vertical clusters in the Porter typology; they are based on the supply chain.

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1. Agglomeration of industrial activities: industrial clusters

c. Social network

  • The third type of industrial cluster is the social network model.

  • This model focuses on horizontal relationships based on joint projects and cooperation between competitors (Granovetter, 1985, 1992; Grabher, 1993; Dyer and Nobeoka, 2000; Gulati et al., 2002) (R&D or informal alliances (Li, Bathelt, & Wang, 2012)).

  • Another particularity of a social network model is to give rise to intensive intersectoral partnerships: cooperation between companies and universities and research institutes (Link, 2006). This type of cluster is popular in high-tech industries (Lorenzen and Foss, 2002).

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1. Agglomeration of industrial activities: industrial clusters

c. Social network

  • Although the social network cluster model may be non-spatial, the geographical aspect is important because, according to Gordon and McCann (2000), spatial proximity tends to favor trust relationships characterized by collaboration, risk taking, and cooperation.

  • There is evidence that spatial proximity also has an influence on the frequency of collaboration between universities and firms (D'Este and Iammarino, 2010).

  • Since spatial proximity is necessary but not sufficient to enter the social cluster network, access to the network is partially open (Scott, 1988). Examples include the Silicon Valley, the Emilia-Romagna region of Italy (Castells and Hall, 1995; Sydow, 2008).

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1. Agglomeration of industrial activities: industrial clusters

  • Recent studies indicate that the network in which a firm is incorporated (with both types of vertical and horizontal links) has become increasingly important for the development of innovation (Omta, 2002; Pittaway et al., 2004)

  • Networks increase the flow of information and play an important role in the diffusion and adoption of innovations (Andersson et al., 2002).

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1. Agglomeration of industrial activities: industrial clusters

  • Industrial clusters intensify the INTER-firm network through intensive flows of knowledge, information and resources among cluster members (companies, universities, research institutes, and other relevant organizations).

  • It is important to note that not only the mere existence of an activity in an important geographical area (co-location), but also the intensity of the interaction between the members of the cluster The density or degree of connectivity between members of the cluster) are important.

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1. Agglomeration of industrial activities: industrial clusters

  • For innovation in particular, proximity of interaction, communication and collaboration between actors are important in the innovation process (Lundvall, 1992).

  • It is important to note that vertical links are important for innovation too, because they reduce communication and decision-making costs and the time needed to bring innovation to the market (Lundvall, 1992).

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1. Agglomeration of industrial activities: industrial clusters

  • Granovetter (1985, 1992) and Gulati et al. (2002) argue that the network is a strategic resource that influences the company's future capacity and expected performance.

  • Therefore, the performance and innovation of each company in a cluster depends on its level of integration in the cluster network. The position of a company in the network explains the company's exposure to new knowledge, ideas and opportunities (McEvily and Zaheer, 1999).

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1. Agglomeration of industrial activities: industrial clusters

  • External links with other clusters are also important to the success of the cluster and the performance of the cluster (Ellison and Glaeser, 1997).

  • Researchers argue that most clusters are not self-sufficient in terms of knowledge and innovation and that their performance depends on their ability to harness and absorb knowledge from a variety of external sources (Frost 2001; Chesbrough 2006; Cortright 2006; Asheim 2001).

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2. Importance of industrial clusters for the regional economy

  • For example, the Indian company of agricultural fertilizers IFFCO chose to install one of its factories in the industrial park of Bécancour among 40 other places around the world.

  • Mr. Richard, President of the Bécancour Industrial and Port Corporation, said: "Access to natural gas, rail and marine transportation are three of the main factors that influenced the decision of the cooperative."

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2. Importance of industrial clusters for the regional economy

The reasons explaining business location choices

  • The choices of the location of the activities of a company are the result of a greater or lesser number of factors whose weight and diversity may vary greatly from one situation to another (Mérenne-Schoumaker, 2011).

  • A foreign firm setting up in Québec is subject to the costs of relocating its production and must therefore have a specific advantage to exploit in order to remain competitive with other local firms (Hymer, 1976).

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2. Importance of industrial clusters for the regional economy

The reasons explaining business location choices

The criteria are as follows:

(1) if it can achieve economies of scale between these different sites, (2) if the implementation costs are relatively low, (3) if transport costs are rather high and (4) if the demand in the host market is high.

However, the heterogeneous model of Helpman, Melitz and Yeaple (2004) shows that only the most efficient firms in their industry can set up overseas.

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2. Importance of industrial clusters for the regional economy

The reasons explaining business location choices

The level of skill, education and cost of labor can also be determinants. Countries with cheap labor will attract foreign investors.

Dunning (2009) presents four main types of factors that influence a company's location choices:

(1) the availability of resources, (2) market access, (3) productivity and efficiency, and (4) strategic benefits.

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2. Importance of industrial clusters for the regional economy

The reasons explaining business location choices

  • The company will therefore seek a location with comparative advantages.

  • A company that has started exporting to a country may also decide to maintain its presence in that country by making foreign direct investments (Conconi, Sapir & Zanardi, 2010).

  • Conconi et al. (2010) show in particular that the probability of creating subsidiaries abroad is all the stronger because the firm has gained, via export, knowledge about the structure and market of the country.

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A Special Case Study: Quebec

The reasons explaining business location choices in Quebec

  • Quebec is known for its policy of support for industrial clusters and for its regional development policy based on these clusters.

  • In Quebec, several types of industrial clusters are active:

    1. aerospace, pharmaceutical and environmental clusters (Ecotech);
    2. a cluster of pan-Quebec aluminum has been established recently, as well as a mining cluster.
    3. In bio-food, the different types of production are grouped into sectors, although these structures have been rather inactive for some years.
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A Special Case Study: Quebec

The reasons explaining business location choices in Quebec

  • Québec is a province rich in natural resources, equipped with qualified human resources, which seeks to encourage the emergence of new specialized industrial or technological niches and which offers easy access to the large market of the United States and soon of the European Union with the Comprehensive and Economic Trade Agreement (CETA).

  • Multinationals seeking to exploit these resources and take advantage of these comparative advantages must sometimes settle in remote regions of large urban centers.

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A Special Case Study: Quebec

The reasons explaining business location choices in Quebec

Québec is composed of 17 administrative regions which can be classified into 3 main types:

  • The resource regions whose economy is based on the extraction and first processing of natural resources,

  • The central regions which are mainly based on the manufacturing sector and,

  • The metropolitan areas.

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A Special Case Study: Quebec

The reasons explaining business location choices in Quebec

  • In Québec, multinational companies are more efficient than the average Canadian firms in terms of productivity, wage levels, research and technological and organizational innovation (Gouvernement du Québec, 2008).

  • However, foreign multinationals occupy much less place in Quebec than elsewhere in Canada, representing 13% of employment in Quebec, compared with 20% or more in other provinces. However, they account for about 40% of the investment in business equipment in Québec.

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A Special Case Study: Quebec

The reasons explaining business location choices in Quebec

  • At the level of the Province of Quebec and its regions, it is rather the institutional context, public policies, the structuring of the labor market, etc. that will be taken into account.

  • At the level of the choice of the city, companies will evaluate access to the local market, availability of natural resources, availability of human resources, infrastructure, technological resources, institutional competitiveness, agglomerations and clusters, etc.

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A Special Case Study: Quebec

Importance of industrial clusters for the regional Quebec economy

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Conclusion

  • Towards a different economic development model
  • Traditional approaches no longer work
  • We need to identify more clearly the determinants of growth
  • New directions to take:
    1. focus on competitiveness
    2. have an approach in terms of industrial clusters
    3. build on existing forces
    4. an overall strategic plan rather than a list of actions
    5. a data-based plan (evidence-based policies)
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Case Study (mandatory readings):

  • The California Wine Cluster
  • Porter. M. (2002) Location, Competition, and Economic Development: Local Clusters in a Global Economy, Economic Development Quartery, vol. 14 no. 1, pp. 15-34.

Recommended readings:

  • Turkina, E. (2015), « Les pôles d’attractivité du Québec : des grappes industrielles », dans Québec International, CIRANO, édité par Sinclair-Desgagné, B., Van Asche, A, et Warin, Th.
  • Ge (2009), Globalization and Industry Agglomeration in China, World Development, Vol. 37, Issue 3, March 2009, Pp. 550–559.
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