An Overview of Cluster Theory and Industry Policy in Australia

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

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