clusters, Korea, creative economy,

1. Transforming Korea into a Creative
Economy: The Role of Clusters
1
Dr. Christian H. M. Ketels
Institute for Strategy and Competitiveness
Harvard Business School
President, TCI Network
KICOX 50th Anniversary
15 September 2014
Seoul, South Korea

2. Korea 2014
2
• One of the most impressive
success stories of the last
50 years
– Economy
– Innovative capacity
– Global recognition
• But can the current model
deliver progress for the
next generation?
– Two-tier economy
– Middle class blues
– Demographics

3. Korea’s Answer: The Creative Economy Action Plan
Measures to Establish a Creative Economy Ecosystem
3 Goals
3
6 Strategies
24 Tasks
Changing the
business
environment
Fostering
collaboration

4. Becoming A Creative Economy: The Role of Clusters
• Clusters, Creativity, and Economic Performance – what do we know?
• Cluster-based Economic Policy – what works?
4
• Implications for Korea and KICOX

5. Clusters are the Building Blocks of Modern Economies
Related Industries + Geographic Proximity + Linkages
5

6. Regional Economies have Distinct Cluster Portfolios
Leading Clusters by US Regions
6
Boston, MA-NH
Analytical Instruments
Education and Knowledge Creation
Biopharmaceuticals
Medical Devices
San Jose-San Francisco, CA
Business Services
Information Technology
Agricultural Products
Communications Equipment
Biopharmaceuticals
Los Angeles, CA
Entertainment
Apparel
Distribution Services
Hospitality and Tourism
New York, NY-NJ-CT-PA
Financial Services
Biopharmaceuticals
Jewelry and Precious Metals
Publishing and Printing
Seattle, WA
Aerospace Vehicles and Defense
Information Technology
Entertainment
Fishing and Fishing Products
Chicago, IL-IN-WI
Metal Manufacturing
Lighting and Electrical Equipment
Production Technology
Plastics
Denver, CO
Business Services
Medical Devices
Entertainment
Oil and Gas Products and Services
Raleigh-Durham, NC
Education and Knowledge Creation
Biopharmaceuticals
Communications Equipment
Textiles
Pittsburgh, PA
Education and Knowledge Creation
Metal Manufacturing
Chemical Products
Power Generation and Transmission
San Diego, CA
Medical Devices
Analytical Instruments
Hospitality and Tourism
Education and Knowledge Creation
Atlanta, GA
Transportation and Logistics
Textiles
Motor Driven Products
Construction Materials
Dallas
Aerospace Vehicles and Defense
Oil and Gas Products and Services
Information Technology
Transportation and Logistics
Houston, TX
Oil and Gas Products and Services
Chemical Products
Heavy Construction Services
Transportation and Logistics
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard
Bryden, Project Director.

7. Linkages Across Clusters
7
Plastics
Oil and
Gas
Chemical
Products
Pharma-ceuticals
Aerospace
Vehicles &
Defense
Lightning &
Electrical
Equipment
Power
Generation
Financial
Services
Publishing
and Printing
Hospitality
and Tourism
Leather
and
Sporting
Goods
Entertainment
Education
and
Knowledge
Creation
Information
Technology
Transportation
and Logistics
Communi-cations
Equipment
Medical
Devices
Analytical
Instruments
Apparel
Agricultural
Products
Processe
d Food
Furniture
Building
Fixtures,
Equipme
nt and
Services
Sporting,
Recreation
and Children’s
Goods
Business
Services
Distribution
Services
Fishing &
Fishing
Products
Footwear
Forest
Products
Heavy
Construction
Services
Jewelry
&
Precious
Metals
Construction
Materials
Prefabricated
Enclosures
Textiles
Tobacco
Heavy
Machinery
Aerospace
Engines
Automotive
Production
Technology
Motor Driven
Products
Metal
Manufacturing

8. Quantifying the Importance of Clusters
• Close to 50% of U.S. private payroll, 96% of patents, and (by
definition) 100% of exports are generated in economic sectors that
‘cluster’ in specific locations
• In the US and Europe, roughly 15% of employment (45% of all
cluster employment) is in strong clusters; i.e. regional clusters with
8
significant critical mass

9. Cluster Presence and Economic Outcomes
Prosperity Entrepreneurship Structural Change
9
Positive correlation between
share of regional
employment in strong
clusters (breadth of clusters;
related cluster strength) and:
•Wages
• Productivity
• Job growth/resilience
• Patenting
Positive correlation between
share of regional
employment in strong
clusters (strength of related
cluster) and:
• New business formation
in new/existing industries
• Survival of new firms
• Job growth in new firms
Path of structural change
(emergence of new clusters)
in regional economies is
driven by legacy of
composition (portfolio of
existing clusters)
e.g. Porter (2003), Greenstone (2008).
Delgado/Porter/Stern (2012),
Ketels/Protsiv (2013), Aharonson et al
(2013)
e.g., Delgado/Porter/Stern (2011),
Lindqvist/ Wennerberg (2008)
e.g., Neffke et al (2009);
Boschma et al. (2013)

10. Clusters and Business Environment Quality
10
WEAK
Business Environment
STRONG
Business Environment
Specialization measured by employment LQ
Impact of higher
employment LQ
on wages
1
Source: Ketels/Protsiv, 2013
3
2

11. The Case for Cluster-Based Economic Development
11
• Clusters emerge naturally in the
market process
BUT
• Collaboration within a cluster is
beneficial yet not automatic;
government can help to alleviate
collective action problems
• Government policies are motivated
by market failures, not the
presence of clusters alone
BUT
• The effectiveness of these policies
can be enhanced by focusing them
on clusters, aligning them with the
common needs of groups of firms
Encouraging
collective action
in clusters
Organizing
government policies
around clusters

12. How Important are Cluster Initiatives?
• The European Cluster Observatory lists more than 2000 cluster
initiatives and related organizations; a similar list in the US has a
growing number as well
• The highest number of cluster initiatives (absolute, per employee) is in
information technology and biotech
• Most OECD countries and many regions have cluster-related policy
programs
• Spending on cluster-related programs is meaningful but only a
modest percentage of total spending per policy area
12 Copyright 2013 © Christian Ketels

13. Clusters, Cluster Initiatives, and Performance
+ =
13 Copyright 2013 © Christian Ketels
CLUSTER
PRESENCE
CLUSTER
EFFORT
ECONOMIC
PERFORMANCE
+ =
+ =

14. What Drives the Success of Cluster Efforts?
External
Internal
14 Copyright 2014 © Christian Ketels
Setting
• Cluster with critical mass of existing economic
activities
• Broader policy environment focused on
competitiveness upgrading
Organization
Activities
• Capabilities of the Cluster Initiative Manager
• Private sector logic needs to drive the
organization, public sector critical to create the
right environment
• Strategic action agenda grounded in understanding
of the relevant market
• Operational effectiveness in individual activities

15. Types of Cluster Organizations
Different Models of Public-Private Engagement
15
MassMEDIC
Boston
Aerospace
Hamburg
Clusterland
Upper Austria
• Founded by
private sector-leaders
on their
own initiative
• Led by
companies
• Core financing
through
membership fees
• Founded by
companies in
response to
public program
• Led by
companies
• Core financing
through public
programs
• Founded by
public sector
• Run as quasi-public
entity
serving firms
• Core financing
through public
budget
Initiative
Operation
Funding

16. Cluster Efforts and the Creative Economy
Action Domains
16
Channel to support
effective upgrading of
the Business
Environment
Platform for collective
action to mobilize
creativity across all
sectors of the
economy
Mechanism to
strengthen specific
new groups of
related creative
industries

17. Translating the Cluster Approach to the Korean Context
• History of successful government-led development
– Government provided sharp, market-based incentives
– Development of industries in line with evolving competitive
advantages
– Alignment of industry support with competitiveness upgrading
• National specialization in specific industries
• Collaboration in chaebols instead of clusters of independent firms
• Strong regional concentration of economic activity around Seoul
• The learnings from cluster research in other parts of the world are highly
relevant to South Korea
• But the policy conclusions drawn will need to reflect the country’s
specific circumstances
17

18. Cluster Policy in Three Different Contexts
• Cluster initiatives are
often public sector
initiated
18
• Clusters have
emerged in a market-driven
process
• Cluster initiatives are
bottom-up, often
private sector driven
• Clusters have
emerged in a market-driven
processer
• Industry
specialization has
been driven by
government policies
• Cluster initiatives are
often public sector
initiated
Government-driven
Market-driven

19. Cluster Policy to Foster Innovation and Creativity
From Hard Infrastructure to Soft Linkages
Changing roles of the support organization
Changing demands on its skills and capabilities
19
Dedicated infrastructure
and incentives
Technology transfer
and linkages
• From service provider to
facilitator
• Developing a strategic
positioning for the cluster
• Packaging of available
policy instruments
Cluster engagement
and support

20. New Tasks for Korean Cluster Organizations
• Move beyond the geographical boundaries of industrial parks and
20
the companies they host
• Strengthen two-way interaction between the cluster and government
– What does government have to offer that the cluster can use?
– What should government do to enhance the cluster’s
competitiveness?
• Facilitate collaboration among companies in the cluster
• Develop linkages to related clusters, at home and abroad
• Connect clusters to regional competitiveness efforts
• Move from providing cluster services to encouraging cluster efforts

21. Korea Entering a New Era:
Is More Creativity Enough?
21

22. Korea’s Competitiveness Profile 2013
Macro (42)
Political Institutions
(97)
Rule of Law
(57)
Human Development
(38)
Context for Strategy and
Rivalry (80)
Related and Supporting
Industries (27)
Demand Conditions
(23)
Factor Input Conditions
(26)
Micro (30)
Comm. (9)
Innov (23)
CLUSTER
Logistic. (12) Skills (27) Capital (80)
GDP pc (26)
GCI (33)
Social Infra-structure
and Pol.
Institutions (51)
Macroeconomic
Policy (1)
National Business
Environment (32)
Company Operations
and Strategy
(26)
Source: Unpublished data from the Global Competitiveness Report (2013), author’s
analysis.
Significant
advantage
Moderate
advantage
Neutral
Moderate
disadvantage
Significant
disadvantage
Admin (33)

23. Observations on Korea
• Innovation performance is strong in specific industries
• Performance is strong on technology-driven innovation
• Performance is strong in innovation-driven economic outcomes
• The ‘Korean wave’ is one indication that the country’s culture combines
discipline and repetition with significant creative capacity
Key challenges
• Dominance of large companies
• Regional imbalances within the country
• Level of academic excellence
• External linkages have grown, but remain limited relative to peers
• Increasing concerns about inequality
23 Copyright 2013 © Christian Ketels

24. Korea’s Current Challenge – Is More Creativity Enough?
Putting Cluster Efforts into Context
• Korea is facing a broader transformation as an economy and society
• Korea does NOT lack the ideas or creativity for this transformation
– Korea has made impressive strides in building its innovative capacity
– Korean companies are competing globally on innovation and brand
– The Korean Wave is one sign of the country’s creative power
• But Korea needs to overcome structural barriers that limit the potential
24
for these assets to be fully utilized
The export-oriented industries
remained overly dominated by a few
Korean MNCs
The domestic economy lacks
dynamism and competitive pressure
for structural change

25. Korea’s Current Challenge – Is More Creativity Enough?
Putting Cluster Efforts into Context
• The government’s ‘Creative Economy Action Plan’ is already outlining
an agenda that is much broader than ‘more creativity’
• But more clarity in communicating how Korea needs to change would
25
be helpful to ensure impact…
• …and some additional efforts on opening up local industries and
dominant companies might be needed
• Cluster efforts and support organizations like KICOX can then play a
critical role in supporting Korea’s new growth path

26. Back-Up
26

27. New Tasks for South Korea’s Cluster Policy
• Existing Korean cluster efforts in science-driven special economic zones
have achieved measurable success
• But achieving full impact in the future will require more than increasing
the number and size of the existing efforts
• Encourage innovation in non-science driven areas
• Encourage the bottom-up emergence of cluster organizations
• Organize government activities in other policy areas (workforce skill
upgrading, investment attraction, …) around clusters
27

28. Creative Economy Action Plan
Six Strategies
▲ Creating an economic ecosystem where creativity is fairly rewarded
where business startups are easier (strategy 1)
▲ Promoting venture capital firms and small-to-medium businesses playing
a leading role in the creative economy and make inroads into global
markets (strategy 2)
▲ Creating the growth engine for pioneering new industry and markets
(strategy 3)
▲ Fostering the global creative human capital talent who have the vision
and wherewithal to become a vital part of the creative economy (strategy 4)
▲ Expanding the nation’s science technology and ICT innovation
capabilities, which lay the foundation for the creative economy (strategy 5)
▲ Initiating the creative economic culture that promotes the involvement of
both government and people (strategy 6)
http://english.mosf.go.kr/eco/view.do?bcd=E0005&vbcd=N0001&seq=3289
&bPage=1
28

29. Towards a New Mix of Corporate Models in Korea
• The Korean model is based on large business groups with scale and
global reach
– This model was well placed to serve an economy in catch-up mode, where
large scale, capital-intensive operations had to be build up
– Used suppliers essentially to keep costs low, drawing on their lower wage
costs, etc.
• But the role of large MNCs is changing…
– Increasingly the ‘orchestrators’ of global value chains
– Best in leveraging and scaling innovations, not necessarily in creating them
• …and with it the demands on their SME suppliers and partners
– Need to reach high quality to meet the operational demands of MNCs
– Need to deliver create many of the innovations that the MNCs can market
• Is Korea changing in line with this model?
29 Copyright 2013 © Christian Ketels