Saturday, October 13, 2007

Around the World, Clusters Aren't Working

The Palmetto Institute, a Columbia, South Carolina-based non-profit think tank, hired Harvard professor Michael Porter to develop an economic game plan to improve per capita income and wealth in the state.

In 2004, Darla Moore, a member of the Palmetto Institute board, said Porter's foundational principles are that "we must...identify and grow inherent industry clusters, and two, that economic development must be led by the private sector in cooperation with government."

Now The Economist reports that private/public clusters in Europe have been a huge waste of money. The magazine reports that all across Europe, government bureaucrats have been "obsessed with creating geographic clusters like Silicon Valley. The French have poured billions into pôles de compétitivité; and Singapore, Dubai and others are doing much the same. There are dozens of aspiring clusters worldwide, nicknamed Silicon Fen, Silicon Fjord, Silicon Alley and Silicon Bog. Typically governments pick a promising part of their country, ideally one that has a big university nearby, and provide a pot of money that is meant to kick-start entrepreneurship under the guiding hand of benevolent bureaucrats.

It has been an abysmal failure. The high-tech cluster in and around Cambridge, England, is the most often-cited counter example. Hermann Hauser, of Amadeus Capital, a leading British venture capitalist (who, curiously, also hails from Vienna), is an optimist: “Silicon Valley is still the lead cow but Cambridge is the best in Europe.” Perhaps, but that is faint praise. The main problem, argues Georges Haour, of IMD, a Swiss business school, is that Cambridge suffers from the Peter Pan complex: “inventors never want to grow up, they are happy with modest success.” One veteran of the city's start-up scene even argues that its success came “in spite of, not because of” government and university support.

Experts at Insead looked at efforts by the German government to create biotechnology clusters on a par with those found in California and concluded that “Germany has essentially wasted $20 billion—and now Singapore is well on its way to doing the same.” An assessment by the World Bank of Singapore's multi-billion dollar efforts to create a “biopolis” reckoned that it had only a 50-50 chance of success. Some would put it less than that."

Like convention centers and professional sports teams, government planned clusters are not the key to prosperity. If community leaders really want to create a more prosperous society, the best thing they can do is get out of the way. Simplify or eliminate red tape. Insist on a meritocracy. Do not prop up or protect companies or industries that cannot compete in a global marketplace. More than accepting the creative destruction that innovation brings, they should insist on it. Recognize that the most successful innovations are the ones that make the most trouble for the status quo.


Alan S Michaels said...

I agree completely with your suggestion that, “If community leaders really want to create a more prosperous society, the best thing they can do is get out of the way.” I believe (98% sure) that Porter would agree too – that he is for clusters, not government/public clusters. I think he even wrote about Japan’s economic problems in the 90’s were a direct result of the government’s approach to intervention, subsidies, and protectionist forces isolating it from the realities of free market competiton.

Ben Rast said...
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Ben Rast said...

Would Porter agree that successful industry clusters are the unintended result of complex factors that are easily identified in hindsight, but nearly impossible to foresee? No one ever said, "Let's make the area south of San Francisco Bay a high tech, venture capital center that will be the envy of the world." No one saw how the early combination of well-educated researchers, the fledgling technology of radio, a culture of meritocracy, and money from military contracts would become the world's most successful business culture of spectacular innovation. Given that, I'm not sure that innovation that is envisioned, planned, and funded by a government committee is true innovation. In fact, cluster-planning for innovation looks an awful lot like the Japanese government's plan to pick industrial winners. Industrial policy, in other words.