Regional Economic Development: Exploring the Role of Government in Porter s Industrial Cluster Theory.

1. Regional Economic Development:Exploring the ‘Role of Government’ in Porter’s Industrial Cluster Theory. Dr Mark Wickham School of Management. University of Tasmania, Australia. Mark.Wickham@utas.edu.au

2. Industrial Cluster Theory This research was based on Porter’s (1990) Competitive Advantage of Nations. Industrial Cluster Theory (and its centre-piece: the “Diamond Factor Model”) was the cornerstone of his thesis. Explained observed instances of ‘localised’ industries in an age of global opportunity Intuitively sound Well accepted by academics Adopted by many federal and state governments around the world as a basis for economic policy development

3. Porter’s (1990) Diamond Factor Model

4. However….. Despite its explanatory power, Porter’s DFM has been criticised for its apparent weakness at providing a predicative framework for economic policy development. Brown (2000) suggests that its poor performance is almost entirely predicated on the ‘confused role of government and its policy makers’, a statement echoed by Porter himself in 2002, when he stated that: …in Australia, what is less understood is that the government has some positive roles, like innovation and training, infrastructure, and things like that. I think that the real frontier is [understanding] the positive roles to be played by government whilst avoiding the distortion or intervention in competition (in Trinca, 2002:39).

5. What are the issues? The first major issue is that Australian government policy development has largely been focused on descriptive information gathering rather than on achieving either business participation in, or greater understanding of the complex industrial clustering process (Davies, 2001). The second major issue surrounds an assumption by Australian policy-makers that the facts explaining the existence of industry clusters around the globe are readily generalisable to the Australian context (Boddy, 2000). The third issue concerns the record of Australian governments’ penchant to ‘pick winners’. In such cases, a cluster strategy serves more often as a means of allocating scarce resources to ‘currently successful exporters’ rather than as a way to build the linkages and future inter-industry synergies documented so frequently in successful clusters.

6. Research Opportunity…. To examine the history of an internationally competitive industry cluster, and examine the role that its regional government played therein. Necessarily a Longitudinal Study Prudent to consider the industry life-cycle. Secondary data search – which Australian cluster? Qualitative (semi-structured) interviews that included all major actors in the cluster’s history: All Tasmanian State Premiers 1977 – Present Key Bureaucrats (Past and Present) Cluster Firm Members (All Founding Members) Nud*Ist and Requisite Follow Up

9. The Tasmanian Light Shipbuilding Cluster. At its peak, it commanded 40% of the $1.6b p.a. market. During 1998, fully half of all fast ferries operating in the world were built by the combined effort of the cluster. Between 1994-1998, its sales represented 23% of Tasmania's merchandise exports, and accounted for the employment of 2 500 people One of Australia’s most prominent cluster successes (Industry Audit, 1998).

10. The Role of Government: The Introductory Stage of the life-cycle. The first was the government’s initial non-committal stance towards the specific development of the state’s ‘new’ shipbuilding industry. The private sector alone was responsible for researching and developing new technology. The second role centred on the enhancement of the state’s reputation, within the domestic Australian market, as a centre for maritime research and training (the state has a long standing reputation as a maritime innovator). The third role was the government’s financial support (‘loan guarantee’) for Incat, but only after it became apparent that the company was a potential source of significant economic growth and employment for the regional economy.

11. The Role of Government: The Growth Stage of the life-cycle. The first was the Tasmanian government’s continued effort to enhance the reputation of the regional economy, although now to the global marketplace. The second was the Tasmanian government’s direct involvement in Incat’s sales negotiations processes with its international customers: The third was the Tasmanian government’s policy initiatives that served to maximise the synergistic relationship that existed between the clustering firms:

12. The Role of Government: The Maturity Stage of the life-cycle. The first key role was the continued enhancement of the regional economy’s reputation as a world centre for maritime manufacturing excellence. The second role was to formalise the relationships that existed within the regional shipbuilding and marine manufacturing industries. The third role was the Tasmanian government’s deliberate strategy to dilute Incat’s importance and impact upon the regional economy.

13. Conclusions and Implications…. This research indicates that the government’s support for any emergent entrepreneurial activity should ideally be commensurate with its relevance to the region’s natural competitive advantages (and/or ‘social capital) and the likelihood of the activity’s commercial success in export markets. We have had some examples, back in the ‘80s, …they called it “strategy” for God sake, it attracted a number of growth businesses for a while, … and now most of them have moved to Fiji and elsewhere. It was totally unsustainable because the minute another government grants a greater subsidy, they packed up and left … they would have been mad not to. It was totally unsustainable. So, we are very careful not to financially support activities which haven’t got reasons, independent of the government’s financial support, to profit in business here (Jim Bacon. Personal Interview, 2002).

14. The second implication surrounds the importance of the government’s role within the DFM. The research indicates that the government of a regional Australian economy needs to recognise itself as a central and highly influential variable within DFM, not just an ‘innocent bystander’: I think the government in smaller economies inevitably have a bigger role to play. The larger economies have got critical mass, pretty much run under their own steam and it is really an choice for government as to how much it gets involved. A regional economy is different, the government has a key role in bringing people together, providing leadership, not in how to run enterprises but to provide leadership in terms of the direction that we go, the things we concentrate on (Jim Bacon. Personal Interview, 2002). Conclusions and Implications….

15. The third implication is that the role of the government in IC development is necessarily variable over the cluster’s life cycle. As a result it needs to have the capability to identify and monitor the set of natural industries that exist within the region, and their stage of development. It is also important for the government to avoid the adoption of a ‘one size fits all’ policy regime for its set of industrial clusters, as each will have its own requirements given their own particular stage of development. Conclusions and Implications….

16. The fourth implication of this research is that government must understand the nature of “chance events” as they occur – Chance events need to be managed in terms of their relevance to the ‘natural advantages’ and/or ‘social capital’ of the region: …and therefore provide the relevant infrastructural needs of developing industrial clusters! However, the manner of its provision is clearly demonstrated by the Tasmanian government in this case. The needs of the TLSI cluster were not pre-empted by the government. Instead, the government awaited a claim from the private sector firms, with demonstrable evidence that without its provision, growth and employment within the industry cluster would stagnate. Conclusions and Implications….

17. The fifth implication is the need for the government to actively dilute the importance of dominant hub-firms as the sophistication of the supplier firms advance. It is necessary to safeguard the viability of the cluster firms (and indeed the region’s entire set of industry members) against a reliance upon one major entity for their sales growth and ongoing innovative capacity. Conclusions and Implications….

18. Porter’s Diamond Factor Model adapted for a regional Australian economy?

19. Porter’s Diamond Factor Model adapted for a regional Australian economy.

20. Discussion and Questions… Thank you for your time…..