Cluster Theory and Industry Policy: An Overview

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Cluster Theory and Industry Policy: An Overview

Author: Stanislav Bucifal Australian National University September 2008

Executive Summary
This paper examines the potential of cluster theory to inform industry policy. In the economic sense, clusters are production networks of strongly interdependent firms linked to each other in a value-adding production chain (Roelandt et al 1999). A defining characteristic of clusters is the presence of positive externalities which enhance firm competitiveness and stimulate innovation. High geographical concentrations of business activity not only intensify competition but also promote collaboration. Theoretical explanations of clustering focus on various aspects such as economies of scale, proximity to markets and supplier networks, and access to highly skilled human capital. From a policy perspective, cluster theory has a number of strengths and weaknesses. The strengths include a greater focus on interdependencies; better alignment of policies with the true nature of business; reduced trade-distortion; and greater transparency. Among the weaknesses perhaps the most serious is the potential for clusters to retard innovation, under certain circumstances, rather than promote it. While many of the concepts have been around for a while, new economic geography has brought to awareness of some important phenomena in modern business that had been largely neglected in the past (Schmutzler 1999). Cluster-based industry policies are common in many developed nations across the OECD. The three types of policy instruments used by governments in the implementation of cluster programs include the engagement of actors; provision of collective services; and promotion of larger-scale collaborative research and development projects (OECD 2007). Australia, however, has very few clusters by international standards, and even fewer active cluster development policies (Marceau 1999). There are several legitimate rationales for government involvement in cluster development, all of which are in some way related to competition, innovation, and the presence of externalities. These need to be balanced against the potential risks of inadequate industry diversification, lock-in commitments, and the use of inappropriate policy instruments (OECD 2007). The government has potentially four roles in the business environment: as a macroeconomic manager; as an institution builder; as a catalyst for competitive advantage; and as a facilitator of networking (Roelandt et al 1999). The geographical scope of clusters can guide the analysis and help identify appropriate policies. Cluster analysis typically involves a combination of statistical techniques and qualitative case studies. There are a number of operational problems that stem from conventional industry classifications; data quality, and the limitations of qualitative assessments. For policy implementation, Martinez (1998) proposes five practical generic strategies for cluster development, focused on fostering innovation and enhancing competitiveness. Despite the at times disappointing experiences of the past and practical issues that make policy implementation complicated, there is a role for government policy in supporting cluster development in Australia as part of a wider national economic strategy.

Cluster Theory and Industry Policy: An Overview

Stanislav Bucifal

The goal of this paper is to discuss the potential of cluster theory to inform industry policy. The essay surveys recent literature published in Australia and in other OECD countries 1 and draws out some of the key issues relevant to policy decisions. The discussion is organised in five sections. The first three sections lay the intellectual foundations by outlining the nature of the theory, identifying some of the strengths and weaknesses of the cluster approach, and highlighting the main contributions of the theory. Section four analyses the policy dimension of cluster...
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