Reginal Cluster Models and Georgia (USA example )

Lela Guledani
Ivane Javakhishvili Tbilisi State University Doctoral Student
Lela.guledani@yahoo.com

Abstract

The Economic Progress and gain a competitive advantage in the specific direction of the world market is vitally important for Georgia. This requires a serious effort of the resources and the launch of cluster policies, that almost advanced economy countries of the early 21st century addresses.

The basis for Georgia’s competitiveness must become a regional economy. Regional development strategies should be developed in the process of setting up and developing clusters in the region.

With the help of experts and researchers, Georgia should create its own methodology for defining and describing the cluster. First of all, the study and diagnostics of cluster’s potential should be based on regions, fields and firms, and then their correct formation and development of Georgia’s cluster mapping project.

Cluster Concept

In the beginning of the 21st century, almost every state with advanced economies addresses supporting of regional cluster development policies as a key contributing factor to the economic growth and development of the country.

Cluster is one of the most effective form of integration of financial and intellectual capital that provides competitive advantage at both, national and global levels.

Examples of world practice demonstrate that clustered form of production organization is the most advantageous for the innovative process. Cluster helps promote the cooperation of interested individuals, forming unique competences in the region, focusing on enterprises and organizations in a specific area.

The main idea of the concept of clustering is to create cooperative connections that enable to obtain new technologies and products. Cluster is characterized by the maximum geographical proximity, technology relation, common source of raw materials and availability of innovative components (1).

worldwide attention to Cluster development came in the 1990s, when Harvard University professor Michael Porter, created a theory of national competitiveness strategy, which is based on the regional clusters, where the country’s public and private sector, scientific / research and financial institutions, capacity, demand and competition create a such structure of the industrial union, which compairs with the world’s market-leading businesses.

According to Porter’s theory, the competitiveness of the country should be considered by the competitors of clusters. Porter claims that Cluster influence on competition in three directions: the first by growing of company’s productivity, the second – by driving innovation in the relevant field and the third – by stimulating new business.

Today, in the world, the process of describing and defining the cluster is not standardized. Economists, consultants and researchers in different developed countries are developing their own methodology for clustering. Any cluster analysis is based on assessment of local and regional employment samples based on industrial categorization (2).

Regional clusters in the USA

Regional economies are the building blocks of U.S. competitiveness. The nation’s ability to produce high-value products and services depends on the creation and strengthening of regional clusters of industries that become hubs of innovation. Clusters enhance productivity and spur innovation by bringing together technology, information, specialized talent, competing companies, academic institution, and other organizations. Close proximity, and the accompanying tight linkages, yield better market insights, more refined researches agendas, larger pools of specialized talent, and faster deployment of new knowledge.

Clusters exist where the economic activities in a set of related industries in a given location reach critical mass. It is at this point that local linkages begin to have a meaningful impact on the performance of companies, and that important opportunities for local collaboration among firms and other organizations in the relevant fields arise. Clusters emerge naturally in the market process, providing productivity benefits to companies as they grow in size. They become attractive to companies looking for a new location and grow through the performance of companies already located there. Companies in clusters gain access to specialized regional suppliers, service providers, and institutions, and can also benefit from deep pools of skilled employees and shared infrastructure dedicated to their needs.

As research over the past few decades has shown, clusters exist in all types of economies and are more prevalent in locations that achieve better performance relative to their overall stage of development. They play a fundamental role in driving regional economic competitiveness by encouraging higher rates of job growth, wage growth, new business formation, and innovation in the regions they are located in.

It is useful to view economies through the lens of clusters rather than specific types of companies, industries, or sectors because clusters capture the important linkages and potential spillovers of technology, skills, and information that cut across firms and industries. Viewing a group of companies and institutions as a cluster highlights opportunities for coordination and mutual improvement.

Every regional economy has its own distinct profile of clusters. In order to standardize clusters and allow for useful comparisons of clusters across regions, the U.S. Cluster Mapping Project provides a set of benchmark cluster definitions (or cluster categories) that are the same in all U.S. regions, whether they are states, economic areas, metropolitan statistical areas, or counties. To create these benchmark cluster definitions, the U.S. Cluster Mapping research team created an algorithm to group together narrowly defined U.S. industry codes that show significant inter-industry linkages based on input-output measures, labor occupations, and the co-location patterns of employment and establishments. Learn about how these cluster definitions were arrived at in Cluster Mapping Methodology (3).

Regional economies are made up of two types of clusters (4), each with different patterns of geographic presence and different competitive dynamics. Traded clusters are groups of related industries that serve markets beyond the region in which they are located. They are free to choose their location of operation (unless the location of natural resources drives where they can be) and are highly concentrated in a few regions, tending to only appear in regions that afford specific competitive advantages. Since traded clusters compete in cross-regional markets, they are exposed to competition from other regions. Examples of traded clusters include Financial Services in New York City, Information Technology in Silicon Valley, and Video Production and Distribution in Los Angeles. Traded clusters are the “engines” of regional economies; without strong traded clusters it is virtually impossible for a region to reach high levels of overall economic performance.

Local clusters, in contrast, consist of industries that serve the local market. They are prevalent in every region of the country, regardless of the competitive advantages of a particular location. As a result, a region’s employment in local clusters is usually proportional to the population of that region. Moreover, the majority of a region’s employment comes from jobs in local clusters. Since local clusters are tied to the regions in which they are located, they are not directly exposed to competition from other regions. Examples include Local Entertainment such as video rental services and movie theaters, Local Health Services such as drug stores and hospitals, and Local Commercial Services such as drycleaners.
While local clusters account for most of the employment and employment growth in regional economies, traded clusters register higher wages, and much higher levels of innovation. Local clusters provide necessary services for the traded clusters in a region, and both are needed to support a healthy and prosperous regional economy.

Clusters also function as an effective instrument for public policy and industry collaboration by having the capacity to harness many different types of policies and programs directed at economic development (5).

While many of the benefits of clusters arise on their own, active collaboration within a cluster can enhance the returns. In some clusters, cluster initiatives have arisen that strengthen the linkages between the various members of a cluster and serve as a platform for joint action. In other regions, organizations like regional competitiveness initiatives and institutions for collaborations play a similar role.
In order to accelerate economic growth, clusters in the United States form the working framework strategies for the clusters of the region. By enacting strategies, regions are trying to create clusters. A number of recommendations have been developed on the example of several US clusters based on internal researches and practices, which helps regions to form a highly effective growth strategy for clusters.

Cluster growth models

Strategies to support the growth of clusters can be broadly categorized into two models: cluster initiatives and cluster-oriented economic development plans (6).

Cluster initiatives are narrower in focus, but tend to provide more comprehensive support. They are created to support or accelerate the growth of a specific cluster. Their strategies include developing networks for business financing, suppliers, customers, and workforce development as well as creating opportunities to expand into markets nationally and internationally.

In the U.S., the private sector typically catalyzes cluster initiatives, although the federal government has been playing a greater role in supporting them. For example, the U.S. Small Business Administration (SBA) launched the Regional Innovation Cluster (RIC) Initiative in 2010. SBA currently supports 14 RICs, and, in partnership with other federal agencies, supports 58 cluster initiatives in total. In 2016, the SBA awarded $6 million to support the 14 RICs in its portfolio. The U.S. Economic Development Administration (EDA)’s Office of Innovation and Entrepreneurship also funds two cluster-focused programs (the i6 Challenge and the Seed Fund Support Grant Com- petition) through its Regional Innovation Strategies (RIS) program. In 2016, EDA awarded $15 million to 35 organizations across the country through these RIS programs.

As the name suggests, cluster-oriented economic development plans integrate cluster strategies into broader economic development plans, which typically target several clusters and include strategies that cut across all clusters (e.g., improved transportation or workforce development). Currently in the U.S., we see more cluster-oriented economic development plans than cluster initiatives, which are more common in Europe and other parts of the world. Cluster-oriented economic development plans are generally established by public economic development entities or public-private partnerships charged with economic development.

We are not advocating for one model for driving cluster growth over the other. City leaders should choose the model that is the best fit for their economic growth objectives and the capacity of their public and private sectors. Instead, we offer insights from two examples of each type of cluster growth model, representing different geographies and types of clusters, to help city leaders create more effective strategies and maximize their impact (7).

Recommendations for Designing High-Impact Cluster Growth Strategies

1. Choose the right cluster
The success of any cluster strategy depends first and fore most on whether the cluster actually represents a city’s competitive advantages. For example, with the explosion of high-tech sectors, city leaders may be tempted to replicate the success of other cities and try to become the next Silicon Valley or Boston. Unless their cities share the same assets as those they are trying to replicate, however, the cluster strategy will not have the same impact.

Every city needs to start by conducting a comprehensive analysis of the region’s strong and emerging clusters. Publicly available cluster data, such as the U.S. Cluster Mapping website, makes this task more feasible. The prioritization process to identify targeted clusters needs to be data-driven, but should also include input from relevant stakeholders. In addition, to ensure inclusive economic growth that creates equitable economic opportunities for all residents, cities need to identify inclusive clusters, those clusters that are strong in the region, city and inner city and that offer job opportunities for all residents.

2. Identify appropriate cluster interventions
Too frequently, cluster strategies include interventions popular in other cities (e.g., incubators and accelerators), but which may not be critical for all clusters. The industry and firm composition of clusters can vary depending on the cluster and the region. The Financial Services cluster in New York City, for example, may not have the same characteristics as the cluster has in Dallas, and it does not have the same composition as other clusters in New York City. Effective cluster interventions need to be developed in response to gaps within clusters, which can be identified through a comprehensive cluster diagnostic.
Analyzing cluster gaps
A cluster diagnostic that analyzes the following components will help guide the development of more effective cluster growth strategies:
– Industry composition within the cluster
– Firm composition (size and age) within the cluster
– Workforce requirements within the cluster
– Existing workforce within the city
– Sources and incentives for innovation within the cluster and the city
– Sources of capital within the city
– Land use patterns in the city
– Local, state and federal policies and regulations that impact the cluster

3. Be flexible about geography
Cluster boundaries rarely conform to political boundaries. Clusters that create jobs within a city may include businesses located outside of city boundaries. In addition, clusters exist not only within a city, but at the regional level. This implies that effective cluster strategies should not constrain their focus to specific city boundaries or sub-city boundaries. As one expert we interviewed stated, “You can’t draw a line around a part of a city and create cluster development in that area. It just won’t work.” Regional collaboration for all cluster strategies is also critical to maximize economic growth within a city.

4. Leadership needs to have relevant industry expertise
The organizations that manage cluster initiatives and cluster-oriented economic development plans are diverse. They include public or public-private economic development organizations, independent nonprofits, and university-based centers. However, to gain the respect of corporate leaders, which is essential for cluster growth, the leadership of these organizations needs to have deep industry expertise. This expertise is also essential for identifying and developing the right type of interventions to support cluster development.

5. Establish strong public-private partnerships

Cluster initiatives and strategies can create a mechanism, which often does not already exist, for constructive cross-sector collaboration. Representatives from the business community may be difficult to engage because of concerns over competition. They often need to be convinced that cluster growth will expand economic opportunities for all the businesses within the cluster. Cluster strategies that connect their broad objectives to company objectives such as R&D, workforce or supply chains are able to sustain the support of corporations. The success of the cluster strategies depends on the willingness of the stakeholders within the cluster, including those in competitive industries, to work together. Building coalitions is essential, especially within highly rivalrous industries and with mature firms.

6. Identify a sustainable business model
One of the biggest challenges facing cluster growth organizations, especially those created with federal grants, is establishing a sustainable business model. Public sector funding is often used to support the first years of operation, but ultimately that support needs to be replaced. This funding also may be less reliable than planned, as the recently proposed federal budget cuts for SBA’s RIC Initiative have highlighted. Sustainable business models include diverse funding streams from public and private sectors, fee-for-service models and equity stakes in new ventures.

Conclusion

Today, for Georgia is vitally important country’s economic growth and socio-economic development. To gain a competitive advantage in a particular direction on and leadership in the world market needs a serious efforts and requires cluster policies activation. First of all, we need the study and diagnostics of cluster potential, which should be based on regions, fields and firms, and then we need their correct formation.
The cluster policy should be a “cluster initiative” portfolio, which will take into account the risks and effects of clustering. The preconditions for the development and formation of clusters should be existing of the scientific potential, institutional (state, regional) and political support in Georgia.

The state should create the process of describing and defining the cluster and develop its own methodology for clustering with the help of experts and researchers. Cluster analysis should be based on assessment of local and regional employment samples based on industrial categorization. The project of Georgia’s cluster maps should be developed.

Regional economy should become the basis for Georgia’s competitiveness. In developing a regional development strategy which will facilitate the development of target clusters, it should be noted the level of productivity, innovation, competitiveness, profitability and employment in the region. Therefore it should be contributed to the international division of labor and the region’s specialization.
In order to achieve high efficiency of clusters, the following recommendations should be taken into consideration: the correct selection of clusters, identification of appropriate cluster intervention, geographical flexibility, relevant manufacturing experience of leadership, public and private sector partnership, identification of sustainable business model.

Bibliography
1. Porter, Michael. 2003. “The Economic Performance of Regions.” Regional Studies, Vol. 37 pp. 549.
2. en.wikipedia.org
3. Kimberly Zeuli, Ph.D., Senior Vice President and Director of Research, ICIC. June, 2017. “Building Strong Clusters for Strong Urban Economies .” JPMorgan Chase & Co. // ICIC 1 1.
4. clustermapping.us
5. Mercedes Delgado, Richard Bryden,Samantha Zyontz. n.d. Categorization of Traded and Local Industries in the US Economy.
6. Kimberly Zeuli, Building Strong Clusters for Strong Urban Economies June, 2017
7. Mercedes Delgado, Michael E. Porter, and Scott Stern. 2014. Defining Clusters of Related Industries. National Bureau of economic Research, August.