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Industry clusters can create a wave of business success

Analysis

Successful clusters of competing, complementary and interdependent businesses can boost the wealth of regions – including South Australia – if they are developed and supported in the right way, writes Richard Blandy.

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Adelaide Plains market gardeners in the Virginia region reportedly fear that an extra 20 gigalitres of recycled water they had been expecting to use to boost their businesses will instead be allocated to two Spanish firms.

The State Government announced last month that it would conduct a feasibility study into the Spanish consortium’s proposal to use the water from the Bolivar Waste Water Treatment Plant to produce crops in high-tech greenhouses, saying it could potentially create more than 5000 jobs.

This is classic “strong government” stuff: consider giving preference to a speccy project by an incoming foreign consortium that promises a job bonanza. How good is that? The State Government can claim the credit! Nobody would give the Government credit for the expansion of jobs created by the water going to the existing market gardeners.

Incidentally, are the claimed 5000 jobs construction jobs or long-term jobs? I’ll bet the former.

South Australia’s Adelaide Plains market gardeners are a major economic success in a state that is short on economic success. The reason is that they form a regional economic cluster. We have a number of successful and/or hopeful economic clusters on which the economic future of the state heavily depends.

The wine industry is our classic economic cluster, of course: myriad small, high-tech firms, networked together with strong intellectual and research foundations, and brilliantly marketed. Collectively, they produce a world-class product that sells competitively all over the planet.

Our dying car industry was another classic. But built around assembly by major foreign car companies behind a wall of protection from overseas competition, it was always vulnerable. It spawned a cluster of excellent component suppliers, a strong local design and engineering base, and marketing skill. When the protection was removed, that part of the cluster that depended on local assembly fell on hard times. But the bits that didn’t, like the R&D and design teams, survived.

Interestingly, those parts of the cluster that did not depend heavily on local assembly – such as specialist clutches and electronic componentry – continue to be viable.

Other South Australian clusters that have a strong (or potentially strong) future in a competitive world include higher education, medical technology and medical services, tourism, defence equipment (if we can get our act together), the creative arts, film and media (including applications of electronics), and much of agriculture. I invite readers to make cases for other clusters.

In the quarter century since Michael Porter’s path-breaking book The Competitive Advantage of Nations, it has come to be realised that the sources of jobs, income and export growth in economically advanced countries today arise increasingly out of regional clusters of related enterprises. These industry clusters are geographical concentrations of competitive businesses in related industries that do business with each other and that share needs for common talent, technology and infrastructure.

An industry cluster is a regional concentration of competing, complementary and interdependent firms that create the wealth of regions through exports to other regions as well as to other countries. Such exporting chains of firms are the primary drivers of each region’s economy, on whose success other businesses – such as retailing and construction businesses, for example – depend for their own viability.

Industry clusters are a powerful magnet for other businesses to locate in an area, and create a spawning ground for start-up businesses. They create large, diverse groups of experienced workers, attract suppliers who congregate in their vicinity for increased efficiency, and foster a competitive spirit that stimulates growth and innovative strategic alliances.

A relatively-recently-born example of a world-class Australian cluster is the surfing centre that has developed in Torquay, 20 minutes’ drive south of Geelong, near Bells Beach. The trigger was a couple of surfers in the late 1960s who liked surfing the coast bordering the Great Ocean Road and decided it was the place to start making surfboards.

The surfers began their enterprise in an old garage in Torquay, expanded with a business grant from the Victorian Government, and eventually split into two competing companies – Quiksilver and Rip Curl. Then Oakley sunglasses located there, as did various surfing manufacture, surf training and surf clothing suppliers.

Torquay is now home to (at least) the following enterprises associated with surfing: Quiksilver, Rip Curl, Mocean Surfboards, Scent Torquay, Strapper Surf, Billabong, Ghanda Clothing, U&I Design Studio, Industrial Surf Co, Watercooled Surf Co, Gash Surf Shop, Surf City Plaza, Surf City Motel, Surf Rider Café, Australian National Surfing Museum, Surf Coast Hardware and Plumbing Supplies, ATAL Surf Coast Building Supplies and Services, Surf Coast Health Team, Surf Sight Optical, Torquay Coast (Surf Club), Torquay Surfing Academy, Westcoast Adventure and Surf School, and Surf Adventure Torquay (lessons).

Not bad for a small country town in Victoria. Quiksilver and Rip Curl have now become world-famous brands, of course.

Instead of being scattered across Victoria’s landscape, many surfing-related enterprises have congregated in or near Torquay, where so-called external economies relevant to this surfing cluster are now to be found. These external economies have arisen because the many interacting businesses clustered together in Torquay have created a market for special supplies of products and services for the cluster as a whole. The surfing schools, for example, underpin the demand for surf clothing and equipment, by reducing the cost of learning how to surf.

Such interaction between a cluster and its externality-creating foundations creates a virtuous circle of increasing competitiveness and success. Businesses are attracted from elsewhere; start-ups proliferate; established firms expand rapidly. Regions, globally, now see their salvation in stimulating the evolution of successful local industry clusters.

Talk about cyberspace misses the fundamental point that creative work occurs primarily in face-to-face exchanges largely within teams, where people live and work in close proximity. This is why regions are so important to the formation of successful industry clusters.

The Organisation for Economic Co-operation and Development (OECD) concluded at its World Congress 15 years ago that successful regional clusters are founded on synergies between local businesses and other institutions. Policy for supporting the development of clusters, the OECD said, should involve local actors when it comes to the design of strategies and programs.

This view is consistent with the argument that innovation policy should be a matter of networking between many actors instead of being the result of “top-down” decision-making and implementation by government. The approach is the opposite of one that is government-driven, “top-down”, “dirigiste” and based on existing power structures.

“Top-down” delivery of Government programs may assuage a political desire to take credit and exercise control, but such an approach fails, in today’s economy, to deliver results, because “the people lose enthusiasm” (as one survivor of the Great Proletarian Revolution once told me).

As Lao Tzu, the famous Chinese general and philosopher, wrote many centuries ago: “When the best leader’s work is done, the people say, we did it ourselves”; and “To lead the people, walk behind them”.

That is why the South Australian Government should require the supposedly-incoming Spanish firms to bid for whatever water they need from Bolivar, without any preference or subsidy, in open and fair competition with our existing cluster of Adelaide Plains market gardeners.

If they are successful, I would hope that they would advance the operations of this excellent cluster of South Australian businesses.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily.

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