Theoretical bases of Clusterization and backgrounds of their introduction to Georgia

Evgeny Baratashvili, Doctor of Economic Science Full Professor, Georgian Technical University Nodar Dzidzikashvili, Expert for strategic planning Nana Nadareishvili, Doctor of Geography,Associated Professor, Georgian Technical University Jandri Zardania,

The project was made possible with financial assistance of the Georgian National Science Foundation (grant No: GNSF/ST06/2-067).

All views in the present article belong to authors and do not necessarily reflect views of the Georgian National Science Foundation
Part II. Beginning in # 9

Clusters involve all profits and priorities in all directions of the union:
• New entrepreneurs from other fields quickly develop, encourage scientific and research activities and maintain introduction of new strategies with necessary means;
• Free information exchange and quick dissemination of updates by suppliers’ and customers’ channels, having relations with a number of competitors;
• Inter-cluster relations are often absolutely unexpected, they show new ways of competitiveness and reflect the newest possibilities;
• Human resources and ideas create new combinations;
While talking about clusters, we may distinguish two strategies, filling each other:
• Strategies directed to rising knowledge usage within existing clusters.
• Strategies, directed to creating new networks within in-cluster cooperation;
Little by little effectively operating clusters attract state’s attention and big capital investing. Clusters become more important than a simple sum of their separate parts. Several strong companies often represent cluster centers. Competitive relations among the companies are kept. In this regard a cluster differs from a cartel or a financial group. Competitors, their buyers and suppliers concentration supports effective specialization of enterprise. Cluster employees a number of small companies and small industries. Besides, cluster approach of an organization leads to a special form of innovation – jointed innovative product.
Joining a cluster on the basis of vertical integration forms a certain system of knowledge and technologies. Besides, forming stable, connecting network among each cluster participant is an important condition for invention innovation as well as effective transformation of innovations to competitive priority.
Therefore, cooperation becomes a necessity, although it carries a certain threat in itself – possibility of losing independence (new technologies etc).
This is why effective cluster strategies built on business activity centers gained importance in number of countries. They have already shown their strength and competitiveness on world market.
Governments of many countries make a lot of efforts to support existing clusters and to create new company networks, that didn’t cooperate with each before. In this case, a state not only supports the cluster creation but also becomes its participant.
Cluster strategies are widely used in every developed country, including European countries.
The program making bio technological cluster Bio Region has been operating since 1995. Government of Great Britain defined regions around Edinburgh, Oxford and South eastern England as major regions of bio technological companies. Norwegian government encourages company cooperation in Navy Industry; The Finnish forest cluster includes a wide range of industries: forest economy, packaging industry, chemical industry, printing industry, industrial engineering. Cluster participants’ close cooperation in sharing knowledge guarantees competitive advantage.
According to experts, Finland is a leader in research and technological cooperation (World Economic Forum data proves it).
Therefore, majority of European countries have worked out cluster strategies, in spite of various approache differences.
Countries and regions implementing the strategies are: Denmark, Netherlands, Flamande – region of Belgium, Quebec Province (Canada), Finland, South Africa. As for France and Italy, they may be considered the countries that have been using peculiar cluster strategies called ‘Industrial Regions’.
Nowadays experts describe 7 major characteristics of clusters, the combination of which are the bases of various cluster theories:
• Geographical: forming spatial clusters of economic activities. Beginning with local level (for instance gardening in Netherlands) ending with the global importance (Air spatial cluster);
• Horizontal: several fields/sectors may be included in bigger luster (for instance Mega Cluster system in Dutch economy);
• Vertical: Industrial process adjacent stages can be found in clusters. It’s noteworthy, if any exact network participant is an initiator within a cluster.
• Lateral: Different sectors, that are able to maintain economics, join clusters. This leads us to new combinations (for instance, multimedia clusters);
• Technological: Unity of fields, that uses the same technologies (such as: biotechnical cluster);
• Focus: Companies cluster, gathered around one centre – industry, scientific-research institute or educational institution.
• Qualitative: the way companies cooperate is important. Networks aren’t always able to stimulate innovation development. Sometimes it happens just opposite, innovative processes are hampered and safety activities are encouraged. Interrelations with suppliers may stimulate innovative processes; thought may be used for violating partner’s financial interests. In this case, network is not stable.
Therefore, classical approach, used for competitiveness researching in the beginning, had been realized for solving more and more objectives, namely:
• While analyzing state, region, filed competitiveness;
• Basis of common state industry policy;
• While working out regional development programs;
• Basis of innovative activity promotion;
• Basis of large and small business co-activity;
Model discussion on technological cluster at Silicon Valley and Shoes cluster in Italy may be considered as a classical example. Its scheme is given in M. Porter’s book [4].
Cluster is characterised by special innovative environment, by means of developing horisontal connections and close coperation among companies that increases competitiveness. Small countries turned into cluster policy pioneers of increasing competitiveness. For this purpose governments of small countries researched small and medium entreprise clustarisation issues in advance. They take experts viewpoints into consideration, use special indicators, inquiries, studding trade and innovative activities’ experience [8].
Regional governemt or local unins of enrepreneurs are able to play an important role in cluster policy implementation. Main characteristics of small European countries:
• Scientific Clusters: mainly being technology generators, having temporary coalitions and cooperate with research institutes and stete institutions on orientedmarkets.
• Traditional Clusters: Long- term cooperation among companies. Local cooperation is based on interactions among local suppliers and state organizations. Exsisting technologies are used for innovation activities.
Cauterization is a Post-Fordism industry organization method, that has started dominating since 1970’s. State cluster policy became an essential tool in organizations’ common complex that is directed to increasing competitiveness of small countries. Reaching increased level of competitiveness and creating new forms by spatial organization is directly connected to education level. High effectiveness of the approach is proved by successful experience of European countries. That is why highly developed countries’ experience in the policy of rising competitiveness is not recommended for counties like Georgia.
In our opinion, Georgia should research experiences of small European countries, especially of Scandinavia and Ireland and use it considering existing situation and perspectives of Georgia. We believe, Georgia should develop financial, wine, tourist and resort, construction, bio-pharmaceutical technologies, educational, agricultural, production processing, water clusters. The latter is given below:
Georgia will benefit from using competitiveness rising experiences of small European countries. Namely, practical experience of forming a cluster for the purpose of activating innovative activities. Despite the innovative potential that Georgia possessed, destructive events of 90’s covered practically all fields of national economy, including scientific and technological. Number of scientific institutions decreased by 17%, number of scientists decreased by 39 %. Accordingly, total amount of budgetary funding decreased four times. The same happened with the demand on innovation, as the main customer – industry, practically wasn’t interested in new technologies. European Union worked out competitiveness and innovation estimation parameters for member states, named European Rating Table for Innovative Development. Estimation consists of 18 indicators grouped in four parts: Human Resources, Creating and using Knowledge, Innovative funding and entering market.
We believe current situation and planned events for promoting competitiveness and innovation in Georgia should be estimated according to the above mentioned criteria.
Therefore, existing conditions in Georgia and experience of small European countries indicate that radical increase of production competitiveness by means of improving innovative activities, rational usage of existing potential and creating corresponding clusters should become the strategic task of country’s economic development.
Changes and amendments were put in Georgian Law on Science, Technologies and their development in 2005. According to the changes, differentiated approach to research, processing and industry should be implemented. This necessarily requires reorganization of participating structures and thematic estimation of implemented work in competitive environment. With this aim National Scientific Foundation has been conducing thematic competition of scientific works for funding for two years. The same amendments specified aims and tasks of Georgian Scientific Academy. They consider creating national innovative system, effective usage of scientific technological researches, scientific personnel quality improvement, supporting united functioning of science and education and deepening international scientific and technical cooperation. We believe that all the above mentioned should be subjected to principal strategic task: radical competitiveness increasing of produced goods. The world experience should be used for realizing mixed priorities, namely forming supporting and promoting export oriented industrial clusters the high effectiveness of which had been proved by Canada, Norway, Finland, Austria, Chile. Besides, small and medium local enterprises should be formed for using innovations. China and Taiwan are the best examples of it.
We could provide perspectives examples of cluster forming in Georgia:
Rustavi – Madneuli industrial cluster (processed gold, copper concentrate, steel tubes, nitrogen fertilizer and cement production)
Chiatura – Zestafoni industrial cluster (magnesium ore concentrates, magnesium ore ferroalloy)
Shida kartli – Industrial cluster (growing and processing different types of fruit)
Imereti – Tourist recreational regional cluster
Kakheti – Industrial cluster (regional grape wine production)
High mountain areas – Mountain tourism regional cluster.
Cluster is one of important tools for region development. Number of experts believe that cluster approach has no alternative. Especially while there are Point Success preconditions for creating clusters in regions. Unfortunately lack of knowledge and leader organizations that are able to practically develop cluster forming idea hampers the process.
As an international experience indicates, number of projects were implemented with the assistance of business organizers. Robert Mondavi, having family wine business in north California, was able to break the monopoly of Fracne in the sphere of wine production. It is his deserving that world famous California wine cluster was created (4). Professor Terman was an important figure in the history of the Silicon Valley. He decided to create special conditions for two talented scientists B. Hulet and D. Packard so that they could realize their ideas. They established Hewlett-Packard Company, with an investment of of USD 538. the company soon turned into HP cmpany with annual turnover of USD 43 billion.
We truley believe that a cluster approach is optimal for the development of Georgian regions’ competitiveness. Cluster is only a form of interaction. It doent neccesserily require official registration. What really bears importance is a suitable wenvironment for business. For instance, wine cluster in California was not created on purpose. It was formed following the business interests. In our opinion the reason clusters are not developed in Georgia lies in lack of knowledge and disability to fix internationally developed methods with local conditions. Neither busieness nor the governent are trained in it. Information bar hampers the cluster development (legal or financial data of companies are not published. Company rating is callculated ony on the basis of PR or some other vaigue methodics). This leads us to unfair competition and mistrust among cluster potential participants. The value system created during the past 15 years does not allow representavies of governent and business to speak the same language. They dont share the same values and the same view on future. State strategy for the development of Georgia may be considered as the base of Constructive dialogue, that will enable the government and business to work out locally long term action policy. Small business, as the field of all dynamic changes ‘feeds’ cluster. It is aware of government’s future view.
Effective restructuring of outdated industries requires deep interrelations between small and large businesses, authority and scientific institutions. Cluster approach gives necessary tools and methodology of analysis. Cluster methodology application leads to intensive development of small and medium enterprise. Though motivation for joining cluster is important, number of small companies find it difficult to manage this type of cooperation. The success of small companies lies in their individuality and flexibility as a rule. Accordingly, close cooperation with competitors, suppliers or customers may be a real threat. That is why the cooperation requires higher level strategic thinking even from a small enterprise. Small companies need to define their level of cooperation, type of shared knowledge. All these require high level of inter organization.
Breaking traditional fields and vagueness of new fields’ future perspectives makes it impossible to make long term investment in this sector of country’s economy. It has a short term application that hampers stable business formation. It is essential to distinguish and support the trends that will create a basis for stable development of Georgian economy as a whole or its separate fields and increase its competitiveness.
While the world’s different countries have gathered a huge experience in successful implementation of clusterization, Georgia is at the beginning stage of choosing clusterization tools.
According to Harvard Business School, where Michael Proters’ idea was approbated and completed, clusters in the US maintain 32% of employment in economics (except for budgetary sector). 39% of employed population is included in Swedish clusters. It’s noteworthy, that labor productivity and wages in clusters are high; for instance in US state, where industry sectors organized by cluster principles export service or goods, salaries exceeds average American by 29%. As for labor productivity, it is 44% more.
Moreover, cluster sector is considered to be major tool for local market serving fields’ development. The following is Porter’s the most important conclusion: the more clusters are developed in separate countries, the higher standard of living, company and entire country’s competitiveness is.
Number of countries artificially grow clusters and quite successfully. Cluster policy is implemented in several developed and developing countries – Japan, South Korea, Singapore, Finland, Slovenia and Canada. For instance, three-year 60 clusters development program entered into force with the budget of Euro 1,5 billion in France in 2005.
115 British pounds are given to the fund that will support innovative clusters’ creation in Britain. Kazakhstan launched the project in 2006 that aims to diversify country’s economy by means of clusters [19].
We believe authority does not estimate the role of a cluster approach properly, especially for the development of depressed regions. It’s a discovery these type of regions. Each region has its own unique possibilities. All that we need is to find them.
It is necessary to look for new development opportunities in depressed regions. Leaders offering us new approaches are needed for that. We should look for this type of people everywhere and create proper conditions for them.
We are concerned that nowadays a cluster concept may become next myth and its idea may lose values, just like securities’ market in Georgia. Unfortunately the same policy attempts may be noticed even today. A beautiful brand, with nothing but a well performed PR, will be introduced to a society.
Cluster is a tool for regional strategy realization together with the following: region development programs, specific business project implementation on separate territories. Clusters are long-term action tools. Our authority is oriented on getting quick results, as it changes in Georgia every 4-5 years. The cluster creation process does not allow having quick results. The competitive cluster creation process varies from 5 to 10 years [20].that is why the authority should not only initiate the cluster creation process, but also attract the maximum number of business, non governmental organizations, higher education institutions and research centres’ representatives. Business should get initiative from the government at the fist stage. Business in this case doesn’t have time limit. In our opinion, there are special places for clustarization, former industrial regions (Tbilisi, Rustavi, Imereti region) industrial groups or companies’ conglomerate, that closely cooperate with each other. The following clusters are perspective in our country: tourism and recreation, financial, educational, healthcare, construction, wine, water, pharmaco-chemical and microbiological clusters (on bacteriophage basis) although additional researches should be conducted to reveal their potential. Some state authorities’ approach towards clusters is not right. Authority chooses prior field according to its contribution to Regional Domestic Product (RDP).
While discussing field cluster creation, they try to distinguish a number of priority fields as a result of which we have a kind of industrial policy prototype. We believe, all clusters should be equally important for the authority, suitable conditions should be created for them and their number should not be limited on certain territories. For instance in Spain, province of Catalonia, 20 clusters have been distinguished, number of micro clusters exceeded 100. Shardeni Street in Tbilisi may be considered as a micro cluster embryo. For the last three years it turned into a place where companies open cultural and amusement (recreational) places. Cafes, discos, restaurants, exhibition halls, museums (Qarvasla) painters and designers’ studios, boutiques, miniature theatre and religious institutions of different confessions. All the above mentioned units share common problems regarding ecology, production, service supply and have suitable location. In case an initiator offers to the owners to turn this place into the best cultural rest island in Tbilisi and if owners agree on cooperation, it will be possible to talk about real micro cluster. So, it’s not the lack of potential, micro clusters do exist, but unofficially. This is why authority can not notice them and does not know how to work with them.
Besides, businessmen do not know and guess that they have already started to work with the micro clusters’ rules. The knowledge problem is essential in this case. Everyone needs to learn, as these issues had not been taught before. Authorities, businessmen, scientists need to be involved in a learning process and have seminars on cluster development issues. Otherwise, we’ll have to watch wine cluster in Kakheti or Dighomi Hospital cluster in Tbilisi being oriented only on native customers. The major objective of a cluster is to issue competitive products on regional or world market.
We have tried to form an application perspective of one of the effective tools for economic development for Georgian reality.
It is quite clear that the present work is not universal and practical realization of the given ideas require additional researches. We hope representatives of authority and business will pay proper attention to the mentioned important issue.