Hon Pete Hodgson
Wednesday, 28 November 2001, 2.00pm Speech Notes

Clusters and regional development

[Address to Ministry of Economic Development / Industry New Zealand Regional Development Conference, Rotorua Convention Centre]

We’re here to explore the ideas that will drive the next wave of regional development in this country.

The key idea I want to talk about is clustering. It is an idea that ties regional development, innovation and national economic transformation together.

Clustering is not a new idea to New Zealand. Michael Porter was talking about it here in 1991. Most of you will probably be familiar with it.

Some of you will have given short speeches on it, as I am about to do.

Clustering is easy to talk about. It’s harder to make it work. But when clusters start to kick in, they become very powerful economic drivers.

South Australia recently evaluated its cluster programme and found it generated net new exports of $30 for every dollar invested.

Wellington City Council evaluated its cluster programme after a year and found that the businesses involved were able to enter international markets to a greater extent, and that its clustered industries were driving growth in the region.

An econometric study in the United States identified 32 key exporting clusters and found they had outperformed the US economy as a whole over 21 years.

If you want to focus your thinking on the development of your region, clustering will give you that focus.

Clusters can grow anywhere, not just in the main centres. And while they cannot be deliberately created, they can be deliberately nurtured.

Civic entrepreneurs have an enormously important role. They are the people or groups who make themselves intermediaries for cluster development.

Economic development agencies are perhaps the most important civic entrepreneur agencies we have.

Civic entrepreneurs recognise clusters as they emerge, then help them develop further.

Civic entrepreneurs don’t own cluster businesses or run polytechnics. But they take responsibility for facilitating the growth of clusters – most importantly by taking responsibility for building the trust that’s necessary for a cluster to work.

Trust is the key. Because clusters grow from collaboration between competitors.

For many business people, collaboration with competitors is oxymoronic. But that is because New Zealand has a recent history of defining competitiveness in a Darwinian, dog-eat-dog way.

Fortunately that is changing. People are coming around to the more fertile idea of rivalry.

Indeed competition has had many meanings through history - and for much of its life it meant striving together … more of an All Blacks’ meaning than a corporate raider’s.

The competitors within a cluster have to be persuaded to trust one another, to believe in the value of the cluster, to commit themselves to the vision every successful cluster needs.

To deliver substantial growth, that vision must be international. A cluster of real power is one that claims a place in the global market.

A strong cluster will also have a negotiated agenda, rather than one dominated by a single party. Experience argues for co-chairs rather than a single leader, to make sure the agenda is genuinely shared.

A strategic process is essential, with the commitment of time, cash and belief from cluster members.

Above all, cluster companies must be prepared to take the risk of specialisation.

That is how clusters work.

Related businesses, typically small to medium sized, create collective market power by combining individual strengths.

Those strengths are inevitably specialised. If they are not out of the ordinary, there is no competitive edge.

A general engineering workshop, for example, becomes a specialised one. A general diagnostic lab becomes an expert one. A specialist manufacturer moves even further up the quality scale.

Specialisation happens around the cluster as well.

A local law practice becomes the expert law shop for the cluster’s business. The regional airport develops special cargo handling facilities. The local polytechnic builds its strength as a training provider.

Each cluster member will have its niche, but the cluster as a whole will also be specialised. Its niche, if it is successful, will be a global one.

For the firms involved, clustering delivers a market reach they cannot achieve on their own. In other words, clusters are powerful enough to enable a region of a nation to compete globally — like the chair makers of northern Italy, or the carpet makers around Dalton in the United States.

Specialisation increases the value that clusters create, improving their return on capital.

Typically it increases their R&D activity, and their capacity to commercialise the innovation that R&D provides.

Typically, good research, good development and good design underpin the cluster and propel it through the many changes in market conditions that the passage of decades brings.

Specialisation demands higher skills within a business, raising both the financial and motivational rewards of working there.

And specialisation brings interdependence between the businesses in a cluster. Interdependence requires trust – and builds it.

For a region, clustering lets those concerned with economic development focus resources on local strengths, rather than spreading effort too widely.

For those of us concerned with the transformation of the national economy, clustering brings the added value, innovation and technology uptake New Zealand needs to lift its game internationally.

Clusters increase economic resilience. That’s why some of them are centuries old.

If we look at the greatest of them, Silicon Valley, it has the strength of an organism or ecosystem: parts of it may suffer or fail without threatening the survival of the whole.

Examples of mature clusters that have died are relatively rare. Those that have expired, such as British shipbuilding, have typically been left behind by a major technology shift. But even that can be outlived. Swiss watchmaking lost the mass market to digital, but hung on to a niche at the top end.

Today I particularly want to stress the importance of civic and community recognition for successful cluster development.

The quality of the businesses concerned will ultimately determine the strength of a cluster. But community leaders can create the political and economic space for a cluster to grow.

Local knowledge is essential. That is why economic development agencies are so important.

Industry New Zealand is the Government’s contribution. It is a hugely valuable source of knowledge, experience and advice.

We are presently looking at how we could help further. That is why I chose this topic for my contribution to this conference.

But central government should not — and will not — try to identify and develop regional clusters itself.

Clusters can readily be found and nurtured outside the main centres. And it is regional civic entrepreneurs who will do that.

We already have examples.

The forestry cluster in Hawke’s Bay is focused on value-added timber manufacturing, following significant investment locally to move from wet-sawn timber production to kiln drying.

Forestry, wood processing and furniture companies are all involved. There is a furniture business incubator in the former meatworks and the cluster is working with the polytechnic to develop skills training.

In Taranaki, a specialised heavy engineering cluster has grown out of the region’s petroleum industry and is reaching into the international market for methanol plant construction.

I’m told that one of those firms was able to agree over the phone to a project being brought forward two months, because they knew the other members of the cluster would deliver. That’s trust.

The local economic development agencies have been key players in building both these clusters. The vision and commitment were there in each case, and the results are coming through.

And they are only two examples. Industry New Zealand has identified 50 cluster initiatives under way nationwide, in various stages of development.

Because I come from Dunedin you’re going to hear about Dunedin clusters, briefly.

All of them are embryonic.

One involves three toolmaking companies that are marketing themselves offshore together.

One has a multimedia theme about it, but not yet – in my view – enough substance.

A third – and I think the most promising – is bioSouth. It has a lot of its ducks in a row, but is only a year old. Its focus is biotechnology.

The region’s biotech companies are members, though there are too few of them in existence yet. The university is in, boots and all. The incubator opens in a few months. The investors are there, or thereabouts. There are venture catalysts in town. The IP lawyers are turning up to the meetings.

The Dunedin City Council’s role is pivotal.

bioSouth is one to watch.

Clustering is becoming a driving economic force in the regions, and regional economic performance decisively affects the strength of the national economy.

It is also at the regional level that the connections between economic, environmental and social conditions are most clearly seen and experienced.

That is why we are all here. It is why regional development matters. And it is why I hope you will leave with renewed determination to make it happen.

ENDS

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