21 December 2007

Companies Find Advantages in Moving Near Fiercest Competitor

Business clusters increase innovation, economic development experts say

By Elizabeth Kelleher
Staff Writer

Washington -- There is a joke in Silicon Valley, California, that says, “If two people from different high-tech companies go out to lunch together, by the time they’re eating dessert, a third company has been formed.”

Silicon Valley is a “business cluster” -- an area where competitive companies in the same industry (in this case, high-technology) co-locate.  And Silicon Valley is the envy of economic development officials across the United States and beyond. 

The tale of the business lunch that yields a new company is not much of a stretch, according to Samuel Leiken, director of policy studies for the Council on Competitiveness.  Business clusters, whether in Silicon Valley or in countries with emerging economies, can improve the efficiency and productivity of the associated firms, even if they are direct competitors. 

Locating competitors together, which might seem counterintuitive, helps an entire industry to succeed, according to many economic development experts.  It increases business innovation and boosts wages, according to Michael Porter, a business cluster expert and professor at Harvard University.

“Boundaries used to exist, turning into walls against innovation,” said Leiken. But clusters of competitors from any given industry end up helping the companies to grow faster and attract higher-quality employees, in addition to spurring product innovation, proponents say.

The geographic proximity helps companies learn from each other to spur product development, pool resources to market their industry, attract common suppliers to locate in the same area and gain the attention of government officials to fix industry problems.

“It’s a matter of critical mass,” Leiken said, “if enough companies need a supply of X, they’ll be able to get more suppliers to locate in the area.”  He said local governments increasingly encourage such alliances because, as an area becomes the hub of an industry, it creates a demand for amenities -- coffee shops, restaurants and stores -- that provide even more jobs and increase the tax base.

Christian Ketels of Harvard University’s Institute for Strategy and Competitiveness points to Oregon -- where forest products, sports apparel and high-tech industries have a significant presence -- as a successful business cluster.  There, the state government is focused on helping the firms in the clusters to sell products and services outside state borders.  One of the state’s emerging clusters in the city of Portland consists of renewable energy companies and firms that design “green” buildings.  The city is home to the largest number of certified green buildings of any U.S. city, with 35 such buildings.

Oregon companies offer solar-power solutions for customers all over the world, according to Duncan Wyse, the president of the Oregon Business Council.  “An emerging technology involving wave energy is being supported at the University of Oregon,” he said.  His organization has connected community colleges and universities to the needs of local companies, resulting in new wind technician programs at the local colleges.

There is no scientific data to prove definitively the arguments of cluster proponents that the strategy works.  But there are plenty of anecdotal avowals.  “Our [publicly] traded sector-clusters outperform their peers,” Wyse said.

Ketels also points to the medical device industry in Massachusetts, which recently formed an organization, MassMEDIC, to help all of the companies there improve sales and profits.  In an area of North Carolina called Research Triangle -- anchored by the cities of Raleigh, Durham and Chapel Hill -- a cluster of communications-related and high-technology companies has boomed in recent years, Ketels said. 

Amy Keiter of the Oregon state economic development bureau said there is interest around the world in business clusters.  She recently hosted a conference for the Competitiveness Institute. The conference was attended by representatives from 42 nations, including the Dominican Republic, United Arab Emirates, Italy, Pakistan, Mexico and several African countries.

Among developments in business clusters in the United States are these:

• Universities are becoming more involved in business clusters.  The Illinois Institute of Technology recently built a “research park” that includes offices and laboratory space that will be shared by local companies’ scientists and the institute’s graduate students.  In addition to the shared workspace, the building offers a common lunchroom to encourage informal contacts.

• Stanford University’s Center for Innovations in Learning will host a conference on “innovation journalism” to help reporters learn to cover innovations in technology and business.

• Organizations beyond governmental economic development arms or individual companies are helping clusters to form.  In Ohio, a consulting group called Ohio MAGNET (Manufacturing Advocacy and Growth NETwork) provides services to manufacturing companies in a 16-county area.  MAGNET is a hybrid, with a nonprofit arm and a for-profit consulting company.  It has held competitions among companies to develop better practices, served as a single voice in advocating for manufacturers with state government and sponsored initiatives to attract qualified workers to fill a labor shortage in northeast Ohio.

• “Culinary tourism” is creating the latest buzz in cluster development, especially in rural areas.  The idea is to attract food-processing facilities, restaurants and famous chefs to areas where produce and vegetables are grown and thereby bring tourists -- who will pay for dining, tours or seminars.

Clusters are not really new, explains Keiter.  “They are as old as the guilds of London … but they help you look at how you can differentiate your economy. You get away from one-time deals, and attract new companies to your region.”