This document discusses clusters and economic competitiveness. It makes three key points: 1. Clusters refer to geographic concentrations of interconnected companies and institutions in a particular field. Being located within a cluster provides companies with advantages in terms of access to specialized suppliers, skills, information, and opportunities for collaboration. 2. Successful clusters are an important factor in regional prosperity and economic growth. Statistical analysis shows a strong correlation between the percentage of employees working in strong clusters and GDP per capita across European regions. 3. Cluster-based economic development policies focus on enhancing competitiveness through collaboration between firms, educational institutions, and regional authorities within individual clusters. This "bottom-up" approach contrasts with traditional top-down economic planning

1. Setting the Stage:
Competitiveness, Innovation, and Clusters
1 Copyright 2008 © Christian Ketels
Christian H. M. Ketels, PhD
Institute for Strategy and Competitiveness
Harvard Business School
TCI Conference Cape Town
October 2008
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),
“The Microeconomic Foundations of Economic Development,” (with C Ketels, M Delgado) in The Global Competitiveness Report 2007, (World Economic
Forum, 2007), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998),
and the Cluster Initiative Greenbook (Ivory Tower, 2004) by C Ketels, O Sölvell, and G Lindqvist. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of the
author.
Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu

2. Cluster Development: New Approach to Economic Policies
Intervention
Cluster-
2 Copyright 2008 © Christian Ketels
Intervention
Laissez Faire
Cluster-
policy

3. What Creates Sustainable Prosperity?
Productivity Competitiveness
Prosperity
3 Copyright 2008 © Christian Ketels
Productivity
Innovative Capacity
Competitiveness

4. Business Environment Quality: The Diamond
Context for
Firm
Strategy
and Rivalry
Factor
(Input)
Conditions
Demand
Conditions
Local rules and incentives
that encourage investment
and productivity
– e.g. salaries, incentives for
capital investments,
intellectual property protection
Vigorous local competition
4 Copyright 2008 © Christian Ketels
Access to high quality
business inputs
– Natural endowments
– Human resources
– Capital availability
– Physical infrastructure
– Administrative infrastructure
(e.g. registration, permitting)
– Information infrastructure
(e.g., transparency)
– Scientific and technological
infrastructure
Related and
Supporting
Industries
Availability of suppliers and
supporting industries
Presence of clusters instead of
isolated firms
Sophistication of local
customers and needs
–Strict quality, safety, and
environmental standards
Vigorous local competition
– Openness to foreign and local
competition
Source: Michael Porter (1990)

5. Key Dimensions of Clusters
Geography
PROXIMITY
5 Copyright 2008 © Christian Ketels
IndustriesActors
LINKAGESINTERACTION

6. Cluster Strength and Regional Prosperity
EU-15 Countries
40,000 €
50,000 €
60,000 €
70,000 €
GDP per Capita (PPP adjusted), 2004
6 Copyright 2008 © Christian Ketels
y = 83342x2
- 16467x + 22886
R2
= 0.3941
10,000 €
20,000 €
30,000 €
40,000 €
0% 10% 20% 30% 40% 50% 60% 70% 80%
Share of Employees in Strong Clusters*, 2005
Note: Strong clusters defined by LQ>2; NUTS Regions excluding Portugal and Greece.
Source: European Cluster Observatory. ISC/CSC cluster codes 1.0, dataset 20070510

7. Cluster Initiatives
• Upgrading of
company operations
and strategies
• Upgrading of cluster-
specific business
environment
Cluster initiatives are collaborative activities by a group of companies, public sector
entities, and other related institutions with the objective to improve the competitiveness of a
group of interlinked economic activities in a specific geographic region
7 Copyright 2008 © Christian Ketels
and strategies
across a group of
companies
• Strengthening of
networks to enhance
spill-overs and other
economic benefits of
clusters
environment
conditions

8. The Process of Economic Development
Shifting Roles and Responsibilities
Old Model
• Government drives economic
development through policy
decisions and incentives
New Model
• Economic development is a
collaborative process involving
government at multiple levels,
8 Copyright 2008 © Christian Ketels
decisions and incentives government at multiple levels,
companies, teaching and
research institutions, and
institutions for collaboration
• Competitiveness must become a bottom-up process in which many individuals,
companies, and institutions take responsibility
• Every community and cluster can take steps to enhance competitiveness

9. What is New about the Cluster Approach?
Own Strength
9 Copyright 2008 © Christian Ketels
Region
Bottom-Up
Co-operation