miller_paul

Page 1 of 8

Business Clustering: Panacea or Placebo for Regional Australia?

Professor Julian Lowe and Dr Paul Miller
julian.lowe@ballarat.edu.au, p.miller@ballarat.edu.au

Introduction
According to Michael Porter, a cluster is a geographically proximate1 system of interconnected companies
and associated institutions linked by commonalities and complementarities. Due to the emergence of external
economies, its value, as a whole, is greater than the sum of its parts. For this reason, clustering has been
extolled as an almost universal cure for ailing economies, be they national or regional. According to its
popularisers, clustering is the economic grail of productivity, development, and wealth creation. A growing
number of governments have begun to develop a clustering approach to economic development, believing
they can maximise their resources by focusing on their core competencies key sectors in specific places.
But have policymakers responded too enthusiastically? asks Edward Feser. Does the presence of collocated
firms deliver real benefits for regional economies, or is clustering no more than a developmental placebo
given to humour a patient who, though perhaps making a modest recovery, will eventually succumb to the
forces of the global market? Feser believes that the logic behind many clustering initiatives is often poorly
specified and that, at the local level in the U.S. at least, the approach often involves little more than the
application of traditional development initiatives to industries that have a regional specialisation.

Theory
Casual observation of economic development suggests that location matters, and even in the information age,
it can play a vital role. The importance of clusters stems from:

A process which might start with an initial natural advantage or chance use of a location, leading to
collaboration among several firms.
These firms might attract common suppliers or prove to be a magnet for the attraction of customers
who can go to one location to find a group of firms offering similar products. The technical term for
these attractions of a cluster is network externalities.
Over time the firms within a cluster develop relationships which depend on close proximity and trust.
We can call this relational capital. This improves productivity and innovation and serves as a further
attractor to new entrants.
Research and training facilities develop around the cluster which serve to enhance the inventiveness
and productivity of existing firms.
Eventually a cluster may stop growing or decline as the customer and knowledge base changes.

These steps are illustrated in Figure 1.

Figure 1: The Cluster Process.

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 2 of 8

An alternative view of the cluster process is provided by Michael Porter of Harvard (see Figure 2). In his
book, The Competitive Advantages of Nations, Michael Porter makes the case for thinking about economic
development in a different way than public policy makers have done in the past. Porter argues that economic
vitality is a direct result of the competitiveness of local industries and that local conditions have a profound
effect on international competitiveness. Conditions affecting competitiveness are not, however, always costrelated factors or natural resources.

Figure 2: Sources of Locational Competitive Advantage.

The four key determinants of competitiveness, which Porter calls the Diamond of Competitive Advantage,
are based on cases from around the world:
1. factor conditions, such as a specialised labor pool, specialised infrastructure, and sometimes selective
disadvantages that drive innovation;
2. home demand, or demanding local customers who push companies to innovate, especially if their tastes or
needs anticipate global or local demand;
3. related and supporting industries, internationally competitive local supplier industries who create
business infrastructure and spur innovation and spin-off industries; and
4. industry strategy, structure, and rivalry, intense local rivalry among local industries that is more
motivating than foreign competition, and a local culture which influences individual industries attitudes
toward innovation and competition.
In addition to these four areas, Porter includes the roles of chance and government. Often historical accident
and/or government actions play significant roles in the early development or site location of local industry
clusters.

The importance of clusters stems from the assumption that economic development flows from innovation and
productivity, which are driven by cluster collaboration and competitiveness rather than resources and factors
of production. Hence:

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 3 of 8

Examples of the impact of clusters through this process include:

Australia:

Torquay and the surf products cluster

Daylesford and tourism
Albury/Wodonga and food processing
IT in North Sydney
Horse breeding around Scone

and overseas

The Basque country

Cambridge (Mass. and UK)
Italian leather
Silicon Valley.
Clusters can be broad or narrow. The existing timber products and winery clusters in Western Victoria are
relatively narrow and not yet fully developed. However, the potential for expansion vertically (along the
supply chain) and horizontally (bringing in firms in similar product market space) is illustrated by the maps of
wine and timber products clusters in California and Sweden respectively (see Figures 3 and 4).
Clusters and Public Policy

Outside the confines of interventionist approaches to clusters (where economic development might seek to
build clusters), the only approach that commands significant support in modern market economies is one
which helps to support and upgrade clusters. Extending support for clusters in a local economic context might
involve:

Complementary assets: help create training programs, research institutes, roads and infrastructure
Technology transfer: link SMEs with technology providers at home and overseas
Linking with seed capital and venture finance
Lobbying: work collaboratively with firms and other institutions to build local facilities and attract
government funded research
Fostering networks: provide information and forums
Attract investors: prioritise key investors, develop investor recruitment marketing plans
Seed develop advanced and specialised factors
Map, benchmark and encourage: maintain a data base on the cluster
Rates relief
Develop reputation and image of the cluster.

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 4 of 8

Figure 3: The California Wine Cluster

Source: Porter, M. On Competition, 1998.

Internationally competitive industry.

Figure 4: Forest Products Cluster in Sweden
Source: Porter, M. On Competition, 1998.
Clusters are central to economic development but their impact is greater in some areas than others. In brief,
clusters seem to attract capital (new investment) and lead to knowledge spillovers. These twin effects help
promote productivity and innovation which, in the long term, has a direct impact on economic development
and jobs growth.
There is a role for government in cluster development, however it is not the same role as that seen in
http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 5 of 8

interventionist public policy. Instead, it is to support and upgrade all clusters and to lobby for a particular
region.
Clustering and Collaboration in the Food Processing Industry: Some Examples.
Japan

As for Ballarat, the potato industry is a mainstay industry in Hokkaido, as are the beet, bean, and wheat
industries. Cluster managers in Hokkaido have described how potatoes can form the heart of a cluster which
creates new businesses and industries through research and development and the promotion of cooperation
within industrial fields other than agriculture. For example, potato production can expand into the field of new
materials through the application of potatoes to polymer technologies and machinery.
Hokkaido have developed a rich cluster model centering on potatoes which involves the following fields:

Biotechnologychemical free agriculture

New production technologythe development of labor-saving machinery can lead to the development
of robots which work under severe conditions, Processing technology
New materialspolymer and biodegradable technology, extraction of pigments, starch production
Environmentalutilisation of micro-organisms
Energy and resourcesheat treatment technology, utilisation of waste liquid
Storage and distribution
Tourism.

Washington and Brazil

In Washington, several food-processing companies share the cost of a common industrial wastewater system.
In Brazil, one major food processor has integrated independently operated meat, bakery, and distribution
plants in order to minimise logistical costs.
Minnesota

The Initiative Fund of Southeastern and South Central Minnesota together with the State and Local Policy
Program conducted an industrial cluster study which identified four principal clusters including food. To
ensure the growth of these clusters the study recommended increased workforce training and education as a
priority. The study also pointed out that the food processing industry benefited from close proximity to
suppliers.
Mid-Murray

The Mid-Murray region is made up of the Goulburn Valley and Southern Riverina areas. It contains 109 firms
in the food-processing sector. A recent study of this region recommended:

Building more extensive clusters of economic activity

Developing new export opportunities
Reducing the reliance on imported capital equipment
Strengthening the local sales market
Developing alternate sources of finance and marketing.

Sydney

The Sydney Food Group is a network (rather than a cluster) of food-related businesses. Regular contact
between network members has led to new business contacts or opportunities, a change in the level of business
involvement with people working for firms in the network, an increase in the sharing of resources with others
in the network, and an increase in the dollar value of business with other firms in the network.
Hunter Region

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 6 of 8

The Hunter Regional Development Organisation (HURDO) was formed in 1994 under the Federal Labor
Governments Regional Development Program. To date they have identified 23 clusters including
agribusiness, of which food processing is a sub-category. They have set themselves the goal of building a
more diverse agribusiness cluster in the region with a focus on export opportunities.
The Role of Government

If, as W. W. Arthur argues, a complex economy is best viewed as process dependent, organic, and always
evolving then policies succeed better by influencing the natural processes of formation of economic
structures than by forcing static outcomes. Indeed, governments should avoid both extremes of coercing a
desired outcome and keeping strict hands off, and instead seek to push the system gently toward favored
structures that can grow and emerge naturally. And this is perhaps the key point. Rigidity is the bane of
cluster development. The role of governments should be to maximise the dynamics of related industries and
to ensure blockages do not occur.
Governments role in economic development has moved from selective intervention and spotting winners
to the promotion of traditional macro-stability and the achievement of micro efficiency. Specifically, in the
context of cluster development we can see what this means through Porters competitive diamond (see Figure
5).

Figure 5: Government Influences on Cluster Upgrading

Source: Porter, M. On Competition. 1989.
The essence of a cluster based economic development policy is not the picking of specific areas for upgrade
but rather upgrading across the board. Government policy must be directed at:

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 7 of 8

Ensuring public sector investment relates to and supports local clusters

Through its own policies and practices, motivate and facilitate collective action by the private sector
Identify and support training and research and development initiatives
Encourage and target new investment with complementary cluster characteristics
Facilitate information networks between cluster organisations.

Recent work on food processing firms in Ballarat highlights these points. The existing linkages between these
firms indicates that the industry is important to employment and economic development in the city, but no
more so than many other areas in Victoria and less than some. In the context of food processing in Ballarat
the following forms the basis of a possible approach to cluster upgrade:

Target food processing investment in general but also specific firms which might complement the
existing Ballarat cluster: users of flour and bakery mixes, alternative users of potato and potato waste,
SMEs in microbrewing, Asian foods, gourmet meals, petfoods, and a magnet firm in dairy foods
Develop an investor recruitment plan and work alongside Austrade in the attraction of new Foreign
Direct Investment
Support the development of a niche applied research and consultancy food nutrition institute
Assist in location of overseas technology partners for local SMEs
Sponsor a regular Food Expo in Ballarat possibly working with other councils in the Wimmera and
Central Highlands
Support local networks and the collection and collation of cluster specific information with a web site
and printed material
Support and enhance ancillary industries in packaging, hi-tech and refrigerated transport, restaurants
and waste recovery
Establish and support Ballarat and western Victoria as the Clean Green centre for food processing
Work with local companies (particularly SMEs) in the promotion of exports.

Ballarat (like most regional centres) is still a relatively small player on the world food stage. However the
reduction of tariffs and non-tariff support in Europe and the US may provide significant opportunities for a fit
and dynamic Ballarat industry. A critical issue for Ballarats regional and global competitiveness is the extent
to which SMEs can maintain world class standards in productivity and innovation.
One route to helping firms could be to implement a supported technology transfer scheme, similar to ones
already tried, with considerable success, in Canada and the UK
This could support individual firms and assist in the development of initiatives around areas of current core
competencies (e.g., potato processing). It would help the region access partners, investors and new technology
from other parts of the world where there is complementary expertise to that which already exists in Ballarat.

Conclusion
An analysis of the recent literature on clustering shows that there is a lack of consensus as to the existence of
clear causative links between clustering and economic development. There is considerable dispute as to what
policies are best suited to achieving desired results, and even whether they canespecially as globalisation
becomes more intense. It seems unlikely that this dispute will be resolved for some time.
But what is clear is that many commentators make the mistake concentrating on a limited number of factors
as being THE main factors affecting economic success. As with all success stories, cluster development is a
propitious combination of many forces. The right place is only one element in a complex formulation that
economic models can not hope to describe nor discursive case studies hope to explain. Given that location
lies at the heart of theories of cluster dynamics, and given that no two locations are identical, descriptions of
how clustering occurs in Italy are perhaps of little value in assisting the development of clusters in Bendigo,
Ballarat, or Birchip. Unless all the factors which influence cluster development are properly balanced and
nurtured, clustering may indeed be a placebo rather than a panacea for economic development in regional
Australia.

References
http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06

miller_paul

Page 8 of 8

Arthur, W. B. (1999) Complexity and the Economy, Science. Vol. 284 (5411). Pp. 107-109.
Kuhn, M. E. (1998). Shared Facilities Provide Competitive Advantages For Savy Processors. Food
Processor. Pp. 67-68.
Feser, Edward J, (1998) Enterprises, External Economies, and Economic Development. Journal of
Planning Literature, Vol. 12 (3). Pp. 283-303.
Feser, E. and E. Bergman. (2000) National Industry Cluster Templates: A Framework for Applied Regional
Cluster Analysis. Regional Studies, Vol. 34 (1). Pp. 1-19.
Fulop. L. (1995). A Survey of Industry Network Initiatives in NSW, Report Three: Sydney Food Group.
Kingswood, NSW: University of Western Sydney, Nepean.
McKean, C. ed. (1999). Australian Food: The Complete Reference to the Australian Food Industry. 2nd
edition. East Melbourne, Vic : Agri Food Media in association with Australian Food and Grocery Council.
Porter, M. E. (1998). The Competitive Advantage of Nations 2nd ed. London, MacMillan Press.
---. (1998). On Competition. Boston : Harvard Business School.
1 The

geographic scope of a cluster can range from a single city to a network of neighbouring countries.
Powered by Regional.Net
http://www.regional.org.au

http://www.regional.org.au/au/countrytowns/options/miller.htm?print=1

2014-10-06