1. Infrastructure, Agglomeration, Cluster Development and Cluster Policy
Sayed H. Saghaian (Mehdi),
Associate Professor
University of Kentucky
Lexington, Kentucky
The First Iranian Conference of Urban Economics
Mashhad, Iran
23 – 24 Nov 2011

2. Economic Geography
What happens where?
Why do firms and people tend to concentrate in a few locations ?
What explains the variety of economic activities and land uses in a region?
What are the economic diversification prospects for low-population places that are costly to get to and from?
Why some regions achieve significantly higher growth rates than others?

3. Economic Geography Spatial Economics Theory of Spatial Equilibrium
Understanding the role of distance
Theory of Spatial Equilibrium
Production Location Theory
Land Economics
Study of land use and value
Regional Economics
Sub-national economics
Rural Economics
Urban Economics

4. Foundation Stones
Three foundation stones: an understanding of spatial and regional economic problems built on three facts of life:
Natural resource advantages,
Economies of concentration, and
Costs of transportation and communication.
A fundamental view: the importance of trade-offs among:
Scale,
Transport costs, and
Endowments
in explaining the economics of establishment location.

5. Urban-Rural
The important role of local public goods and amenities to explain household and establishment location choices.
The emergence of auto transport by mid–twentieth century made commuting to urban employment the mode to engage with urban economies.
Increased accessibility to urban markets key factor to prosperity of regions.

6. Urban-Rural Urban growth cause of rural-brain-drain
The pull effect of the higher urban returns to human capital
Highest skilled will leave
Exurban sprawl fuel adjacent rural growth
Job growth complementary to population growth through increased commuting.
60% of local non-metro job growth is due to commuting, 30% through migration.

7. Urban Centers
Urban centers and spatial concentration of production provide:
Product variety:
Intermediate inputs for firms
Final goods to consumers
Monopolistic competition (more firms)
Average cost pricing
Higher profits

8. Agglomeration Trade-Offs:
It is geographic concentration of related economic activities.
The agglomeration of related economic activity is a central feature of economic geography.
Agglomeration arises from interdependencies across complementary economic activities that give rise to increasing returns.
Trade-Offs:
Either enjoying agglomeration economies of scale,
or avoiding transportation costs wrt spatially immobile resources.

9. Agglomeration Agglomeration may arise from:
Two potential types of agglomerating forces:
localization (increasing returns to activities within a single industry) and
urbanization (increasing returns to diversity at the overall regional level).
Agglomeration may arise from:
specialization of a region in a particular industry where firms share common inputs or knowledge (so called localization economies).
exploiting the overall diversity of industries in an entire regional economy (so called urbanization economies).

10. Agglomeration At least three distinct drivers of agglomeration:
input-output linkages,
labor market pooling, and
knowledge spillovers.
Additional agglomeration drivers:
local demand,
specialized institutions and
the structure of regional business and social networks

11. Agglomeration
In a given location, limitations on resources can result in diminishing returns.
This can lead to convergence in economic activity (employment, income, productivity) across regions over time
Each of those mechanisms is associated with cost or productivity advantages that result in increasing returns to geographically proximate economic activity.
Free trade remove barriers to agglomeration and foster growth of clusters.
Clustering of economic activity is wisely recognized as resulting in economies of agglomeration.

12. What is Competitiveness?
Competitiveness is the productivity with which a nation uses its human, capital, and natural resources
Productivity sets the standard of living
Productivity growth sets sustainable economic growth
Productivity and prosperity depends on how a nation competes, not what industries it competes in
Relentless innovation necessary to drive productivity growth and enable standard of living to rise
Technology, products, and organizational methods

13. Competitiveness & Diamond Framework
Many things matter for competitiveness:
Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing.
Porter Diamond Model for Competitive Advantage
The Diamond Framework has four dimensions:
Context for Firm Strategy and Rivalry
Factor (Input) Conditions
Demand Conditions
Related and Supporting Industries

14. Diamond Framework

15. Diamond Framework

16. Diamond Framework

17. Context for Firm Strategy and Rivalry
A local context and rules that encourage productivity
incentives for capital investments and intellectual property protection
Incentive systems based on merit
Open and vigorous local competition, especially among locally based rivals

18. Factor (Input) Conditions
Availability of high quality, specialized inputs available to firms:
Human resources
Capital resources
Physical infrastructure
Administrative infrastructure (e.g. registration, permits)
Information infrastructure (e.g. economic data, corporate disclosure)
Scientific and technological infrastructure
Natural resources

19. Demand Conditions More sophisticated and demanding local customer(s)
Local customer needs that anticipate those elsewhere
Unusual local demand in specialized segments that can be served nationally and globally

20. Related and Supporting Industries
Access to capable, locally based suppliers and firms in related fields
Presence of clusters instead of isolated industries

21. What is a Cluster?
Michael Porter defines clusters as “geographically proximate groups of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”.
Clusters have become the focal point of many new policy initiatives globally in the last few years.
The goal is to become the most competitive and dynamic knowledge based economy.
Clusters are a leverage point for action, not just a description of economic reality.
A way to realize location-based complementarities.

22. Anatomy of a Cluster -Industry neutral Federal Agencies Labor
Sources of
Capital
Labor
Organizations
Support Industries
Workforce
Development
& Training
Driver Industries:
Local &
State Gov’t
Suppliers:
Customers:
Public
Infrastructure
-Industry neutral
Universities
Community
& Technical
Colleges
Nonprofits

23. Cluster Characteristics
Firms and institutions in a cluster share four critical characteristics:
Proximity; they need to be sufficiently close in space to allow positive spill-overs and sharing of common resources to occur
Linkages; their activities need to share a common goal, for them to be able to benefit from proximity and interaction
Interactions; for positive cluster effects to occur some level of active interaction has to be present
Critical mass; needs to be sufficient number of participants for interactions to have a meaningful impact on performance
Understanding these four dimensions is more important than defining specific benchmarks for firms and institutions to be called a cluster.

24. Clusters and Innovation
Clusters allow to be more productive and innovative.
Clusters provide a particularly fertile ground for innovations.
Clusters reduce barriers to entry for new business creation relative to other locations.
Innovation occurs in non-sequential interactions of different universities, research institutions, and companies.
Different from traditional model where R&D centers turned universities’ basic research into applied products and processes.
Clusters of Innovation: locations face to compete on innovation and productivity.

25. Roles of Private and Public Sectors
Cluster initiatives an opportunity to redefine the roles of the private and public sector in economic policy.
Economists focus on clusters as geographic concentration of interconnected companies and institutions in a particular field.
Clusters offer a crucial opportunity to take the necessary steps for modernizing economic policies.

26. Cluster and Macro Policy
The turn to cluster policy is a shift in priorities from macro to microeconomic issues.
Monetary and fiscal policies are increasingly well understood.
But macroeconomic progress turned out to be only necessary, not sufficient to achieve higher prosperity.
Targeted microeconomic efforts in a new partnership with private sector, universities, and other institutions is required to translate the macroeconomic achievements into real productive improvements.

27. Cluster Development
Efforts for cluster development and for regional economic development need to be better integrated.
Cluster development should not aim to create clusters, but to activate them.
Activating an existing base of companies and institutions to jointly upgrade their cluster is more effective than creating clusters from scratch.
The state of cluster development is a measure of active policies to strengthen clusters, and the overall cluster rank is a measure of necessary ingredients for clusters.

28. Cluster Policy
Clusters are a useful way to organize efforts and launch effective action initiatives.
Need to strengthen home clusters to exploit their roles.
Cluster Policy:
provide budget for cluster development, and use clusters to set policy priorities.
Providing better data on clusters, convening joint public-private research groups for clusters, and supporting regional cluster initiatives are the key roles.

29. Cluster Mapping
Employing cluster approach to regional growth policy is crucial.
regional employment patterns in groups of industries could be defined as clusters.
There is a need for a Cluster Mapping Project.
cluster mapping: quantitatively identify and profile clusters.
cluster mapping efforts could cover municipalities, counties, urban economies, or national economies.
need to conduct and compile cluster case studies.

30. Policy and Practice Must Change
Unprecedented challenges require innovative solutions for creating jobs and promoting regional prosperity.
From Silos …
… to Collaboration.
Economic and Industry Policy: maintaining a robust economy in which innovative activity thrives and supporting industry development.
Education Policy: identifying skill shortages and training needs for re-skilling or up-skilling and investing in skill development programs.
Science and technology policy: supporting collaborative research involving networks with industry and stimulating the commercialization of research.
Regional Policy: building competitive regions by developing skills and initiatives that boost local economic activity

31. Regional Clusters
Implies bounded area characterized by inherent social, environmental, economic, and cultural assets
Transcends socio-political boundaries
Include both urban & rural
BioTech example – stress that every region can not go after every passing Fad – but that clusters that they seek to promote and grow should be based on inherent, indigenous strengths of the local region.

32. Five Key Components to Consider When Defining Unique Regional Assets:
ECONOMIC
BASE
ENTRE-
PRENEURSHIP
TALENT
INNOVATION
& IDEAS
Location, Infrastructure, Amenities, Factor Costs, Natural Resources
What you make, including your existing & prospective industry clusters
Your capacity to create companies wholly new or from existing firms
What you do: your workforce skills & human capital base
Your capacity to innovate and generate new ideas
The basic conditions defining the economic milieu of the region 32

33. Regional Innovation Clusters
Latin: To make new or renew
The value-added commercialization of a new idea that produces new goods, services, and/or processes.
The recombination of existing goods, services and processes that results in new or renewed goods, services, and/or processes.
Because innovation can be widely applied it can occur in both emerging and traditional industries

34. Regional Innovation Clusters
Presence of spatially proximate organizations that share active commercial interaction channels, specialized infrastructure, labor markets, and services.
Share a common goal to maximize regional prosperity
Link to trans-regional and global networks.
A series of coordinated economic development activities related to the comprehensive economic development strategy for a given region. Clusters, from EDA’s perspective, typically cross political boundaries (representing the ‘economic’ region), and include related or complementary businesses, with active channels for business interactions and that share specialized infrastructure, labor markets, and services.  Moreover, such regional clusters draw on the expertise of local universities and related institutions to serve as centers of innovation and drivers of regional growth, building upon the region’s unique competitive advantages through the promotion innovation and entrepreneurial activity.
EDA specifies that to be a cluster a business grouping must build upon the region’s unique competitive advantages and contribute to the growth of the region’s gross domestic product by fueling increases in the region’s production of goods or services through the promotion of innovation and entrepreneurial activity.
Clusters are designed to Collaboration maximizes opportunities and limit threats.

35. Regional Cluster Policy
One of the first regions to apply cluster policy in its economic policy was the Basque country in Spain.
In deep economic crisis of its steel and ship building, public and private sector leaders adopted the cluster approach to change their economic trajectory.
A decade later, the region is one of the richest regions in Spain and has achieved a GDP per capita level equal to the EU average.
Many countries employ clusters in their policy. For example, the Netherlands and Denmark.

36. Regional Clusters: Evidence
Regional clusters: groups of closely related and complementary industries operating within a region.
There is significant evidence for cluster-driven agglomeration.
Industries participating in a strong cluster register higher employment and wage growth, number of establishments, and patenting.
New regional industries emerge where there is a strong cluster environment.
The presence of strong clusters enhances growth opportunities in other industries and clusters.

37. Regional Clusters: Surveys
Most surveyed clusters are dominated by small or medium-sized companies.
Most surveyed clusters serve global markets.
R&D and advanced services available within a particular field in many clusters.
Clusters tend to be young, growing, and among the national leaders in their fields.
The Global Competitiveness Report provides comparative data on overall cluster strength for 75 countries.

38. Thank You!