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Thematic Focus: Developing Business Clusters in Europe

27 April 2015

 

The support and promotion of business clusters in Europe has been recognised by the European Commission and other European institutions since the late 1990s. This article introduces the European policy framework for business clusters and networks, and reviews some of the specific initiatives undertaken for their support. Navigator has been implementing cluster support projects in Poland and Lithuania since 2012 under the SeBPEN and InterCom projects.

 

The Theory of Business Clusters

The concept of business clusters dates to the emergence of trade-driven industrial centres during the late Renaissance and the early modern pe­riod, such as the London finance and insurance cluster or the Bordeaux wine cluster. More recently, the emergence of Silicon Valley as a centre of excellence in information and communications tech­nology, or manufacturing hubs such as the Shenzen Special Economic Zone in China, indicate the power and scale of clusters.

The concept of business clusters has gained particular importance in Europe­an and national policy-making in the last 40 years. Sparked by academic research by Michael Porter and other authors (1), many countries have developed explicit policy frameworks for business clustering, which in many cases include access to national and EU funding and other forms of financial support.

Michael Porter introduced the concept of an industry or competitive cluster in his 1990 book, The Competitive Advantage of Nations. This was followed in 1998 with his seminal work On Competition, which included a selection of essays on competition between firms, sectors and countries. One chapter was entitled Clus­ters and competition: New agendas for companies, governments, and institutions, which was widely distributed and cited by other authors. In it, Porter outlines several cases of business clusters, including their structure and operations, requirements for success, and their impact on productivity and competitiveness.

Porter (1998a) defines clusters as:

Clusters are a geographically proximate group of interconnected companies and asso­ciated institutions in a particular field linked by commonalities and complementarities. Clusters encompass an array of linked industries and other entities important to competi­tion, including governmental and other institutions – such as universities, standard setting agencies, think tanks, vocational training providers and trade associations.

The European Commission (2008) describes clusters as:

A cluster can be broadly defined as a group of firms, related economic actors, and in­stitutions that are located near each other and have reached a sufficient scale to develop specialised expertise, services, resources, suppliers and skills.

The Cluster Policy Whitebook (2004) provides six criteria for defining a business cluster as follows:

  1. Geographical Concentration: firms locate in geographic proximity due to hard factors, such as history; external economies of scale, as well as soft fac­tors such as social capital and learning processes;

  2. Specialisation: clusters are centred around a core activity to which all actors are related;

  3. Multiple actors: clusters and cluster initiatives do not only consist of firms, but also involve public authorities, academia, members of the financial sector, and institutions for collaboration;

  4. Competition and Co-operation: this combination characterises the rela­tions between these interlinked actors;

  5. Critical Mass: is required to achieve inner dynamics. The cluster life cycle: clusters and cluster initiatives are not temporary short-term phenomena, but are ongoing with long-term perspectives;

  6. Innovation: firms in clusters are involved in processes of technological, com­mercial and/or organisational change.

Research into business clusters has been furthered by a range of other insti­tutions including the Organisation for Economic Coordination and Development (OECD); the International Organisation for Knowledge Econ­omy and Enterprise Development; the European Cluster Observatory; and others.

A key issue to consider is that for most observers, clusters are typically the result of decades of shared economic activity. Porter, for instance, mentions the California wine cluster in his essay “Clusters and the New Economics of Compe­tition” (1998b):

It includes 680 commercial wineries as well as several thousand independent wine grape growers. … An extensive complement of industries supporting both wine making and grape growing exists, including suppliers of grape stock, irrigation and harvesting equipment, barrels and labels; specialised public relations and advertising firms; and numerous wine publications aimed at consumer and trade audiences. A host of local institutions is involved with wine, such as the world-renowned viticulture and enology program at the University of California at Davis, the Wine Institute, and special committees of the California senate and assembly.

It is useful to remember this longer-term, market-driven growth process when considering European policy and initiatives in this area.

 

2. The European Policy Framework: Towards World-Class Clusters

In November 2008, the European Commission issued communication COM (2008) 652 final entitled Towards world-class clusters in the European Union: Imple­menting the broad-based innovation strategy. This document was perhaps the first formal adoption of a cluster policy, which served to unify a number of disparate activities which had been occurring in recent years.

COM (2008) 652 states that:

Sustainable growth and job creation in the EU increasingly depends on excellence and innovation as the main drivers of European competitiveness. Recognising this fact, the EU adopted in 2006 a broad-based innovation strategy and identified strengthening clusters in Europe as one of the nine strategic priorities for successfully promoting innovation.

Building on the experience gained from regional, national and EU cluster policy efforts, the launch of the European Cluster Memorandum in January 2008 marked an important step towards further encouraging cluster development. More recently, the EU Heads of State or Government underlined the need to better coordinate the framework conditions for in­novation “including through improved science-industry linkages and world-class innovation clusters and the development of regional clusters and networks”.

The Commission used COM (2008) 652 to declare its support for the growth of world-class clusters by publishing the following policy agenda:

The Commission will:

  • Support Member States and regions in their efforts to improve their cluster policies, notably by providing objective information on clusters and cluster policies, as well as by facilitating policy learning across the EU;

  • Ensure better consistency and complementarities between different Community instru­ments in support of clusters, in full compliance with the subsidiarity principle;

  • Establish a European Cluster Policy Group to advise the Commission and Member States on possible strategic orientations for the emergence and growth of world-class clusters in Europe;

  • Encourage the development of a common European research and innovation space by facilitating practical trans-national cooperation between clusters;

  • Launch a European Pilot Initiative for Excellence of Cluster Organisation;

  • Improve the information on innovation support services available for SMEs offered by cluster organisations in Europe, in particular through the European Cluster Observatory and the Enterprise Europe Network

  • Support, under the Competitiveness and Innovation Programme, the development of new or better tools to facilitate the participation of SMEs in innovative clusters,

and invites the Member States to:

  • Fully integrate their cluster policies into the competitiveness pillar of the National Re­form Programmes, taking into account the EU dimension, and report on them;

  • Provide better support for SME participation in clusters, by further implementing the recommendations made in the Small Business Act;

  • Step up efforts to achieve more synergies and complementarities between different poli­cies, programmes and initiatives in the area of cluster policy.

By and large, most of these objectives have seen activities implemented in support. The European Cluster Policy Group and the European Pilot Initiative for Excellence for Cluster Organisations were both established and have imple­mented some activities since their inception. Yet the overall range and extent of their activities has been limited.

The European Excellence Initiative, for instance, ran for three years. When the project funding ended on 31 August 2012, the Initiative ended operations and fragmented into three follow-up organisations with limited resources.

The European Cluster Observatory received limited support to implement a European cluster mapping exercise, but perhaps not to the extent one would imagine from COM (2008) 652. The content of the Cluster Map reveals that this is essentially a highly fragmented directory, where the content of each cluster description reveals that:

  1. In many cases, the information appears to have been “scraped” or added mechanically with no real description of the cluster;

  2. At least 30% of all members listed are not clusters at all, but chambers of commerce, multi-sectoral science parks, individual universities or individual firms;

The limited, crowd-sourced directory-style application cannot really be considered a Cluster Map. Many of the newer cluster initiatives of the last four years (and there have been hundreds of such initiatives in the EU Member States in this time) are not listed at all.

The European Commission’s COM (2008) 652 clearly establishes the link between enterprise competitive­ness, innovation and regional development. The foresight it provides into the need for economies of scale and a market-driven approach are remarkable in a communiqué of this type:

Europe does not lack clusters, but persistent market fragmentation, weak industry-re­search linkages and insufficient cooperation within the EU mean that clusters in the EU do not always have the necessary critical mass and innovation capacity to sustainably face global competition and to be world-class…

As part of the renewal of the economy, new clusters are emerging over time as others lose their competitive edge. This is a healthy market-driven process and clusters which are not working should not be artificially kept alive. Such clusters should not become a channel for subsidies which would undermine competition and even the emergence of new competitive clusters.

New cluster initiatives should be carefully designed and underpinned by a very clear rationale based on precisely identified business interests, regional strengths, specific compe­tences, knowledge hubs of international excellence and market foresight. If such conditions are not fulfilled, it is unlikely that a cluster initiative will be successful. The challenge then is to avoid a proliferation of cluster initiatives with little chance of long-term success.

As has been observed in any number of countries, the role of EU funding dis­bursed through Structural and Cohesion Funds has often been exactly this out­come. In some EU countries, for instance, the minimum number of companies necessary to register a business cluster and apply for funding has been as low as only eight firms.

Additional distortions observed by Navigator in terms of EU and national funding for business clusters includes the following:

  1. According to many national programmes, any income produced by business clusters during the lifetime of the EU grant must be used to reimburse the original grant. In other words, there is a counter-incentive to developing revenue-generating activities during the lifetime of the cluster grant, which might support the sustainability of the clusters and the more effective work of cluster members. This is particularly the case when a cluster applies for more than one EU-funded project.

  2. The requirement for corporate contributions has often led to a “contribution in kind” or round-tripping of financial contributions from cluster members.

  3. The treatment of Value-Added Tax (VAT) has often imposed a real financial burden which in certain cases cannot be written-off.

Given these policy objectives, however, European policy towards clusters has likely taken the most appropriate course possible:

  1. It has established general guidelines and policy objectives at the central level;

  2. It has directly funded certain initiatives or organisations, but with a relatively low budget commitment, and certainly nothing on the scale of a permanent institution such as the European Institute of Technology and Innovation or similar institutions;

  3. It has given the initiative to Member States to emphasise cluster development via regional, sectoral and innovation/R&D programmes under their respec­tive national jurisdictions;

  4. It has provided additional funding mechanisms via grant programmes such as Lifelong Learning Programme, FP7, Horizon and similar initiatives.

This is both a “top down” and “bottom up” approach which is congruent with many European policies and policy objectives.

 

3. European Initiatives in Support of Clusters

A number of initiatives and programmes have been launched with the support of the European Commission as well as other actors in support of business cluster development.

3.1 European Cluster Observatory

The European Cluster Observatory (ECO) was launched in 2007 as a single refer­ence point for information on clusters and cluster policy in Europe. The Observa­tory provides data and analysis on clusters, an online library, and various training initiatives. The Observatory’s Cluster Map has identified over 2,000 cluster or­ganisations or initiatives in the EU-28, Norway, Iceland, Switzerland, Israel and Turkey. The Observatory is managed by the Centre for Strategy and Competitive­ness of the Stockholm School of Economics. http://www.clusterobservatory.eu

3.2 European Cluster Alliance

The European Cluster Alliance (ECA) was established in 2006 as an open plat­form for policy dialogue among national and regional authorities. It was funded by the Competitiveness and Innovation Programme (CIP) under the PRO INNO Europe initiative. In 2008, it became an open membership organisation, with individuals, companies and clusters free to join the Alliance. From 2010–2013, it received additional funding to expand its focus on innovation under the INNO-Nets cluster project called “TACTICS”. The European Cluster Alliance’s website (http://www.eca-tactics.eu) provides an information channel for cluster initia­tives and news.

3.3 European Cluster Excellence Initiative

The European Cluster Excellent Initiative (ECEI) (http://www.cluster-excel­lence.eu) developed and launched a Quality Label using a peer review assessment method. This was launched in September 2009, and included a total of 31 quality indicators in thematic areas such as cluster structure, governance, finance, strat­egy, objectives, services and recognition. Three certification levels were awarded: Bronze, Silver and Gold. ECEI has spun off two additional groups or networks:

  • The Cluster Collaboration Platform (http://www.clustercollaboration.eu/) provides an online workspace for cooperation, profiling and cooperation of business clusters;
  • The European Cluster Group acts as a continuing organisation for the Euro­pean Cluster Managers’ Club.

3.4 Europe INNOVA Initiative

The Europe INNOVA Initiative provided support for development, testing and promotion of new tools and instruments in support of innovation. Several strands concerned the funding of business clusters, associations and networks. Three European Innovation Platforms were supported, including knowledge-intensive services, cluster cooperation and eco-innovation. The initiative lasted from 2006–2012.

3.5 European Cluster Policy Group

The European Cluster Policy Group was established in October 2008 to pro­vide expert advice to the European Commission. This comprised 20 high-level members who participated in advisory meetings over a period of 18 months. The Group was disbanded in 2010.

3.6 European Union Funding

In addition to the formal initiatives established by the Commission, European clusters have benefitted greatly from a range of funding initiatives provided by European funding mechanisms. These include programmes administered and co-funded by national governments, as well as thematic programmes such as the 7th Framework Programme for Research and Development, Horizon, the Lifelong Learning Programme, and others.

3.7 Executive Agency for SMEs

The Executive Agency recently launched an internationalisational grant call for European business clusters.

 

Conclusions

The European Commission and associated institutions, including the European Coun­cil and the European Parliament, have relatively early on accepted the importance of and value of  business clusters. This is affirmed in key policy documents on innovation, competitiveness, enterprise policy and the specific policy documen­tation for clusters. There has been a relatively good interaction with industry groups such as the High Level Advisory Group on Clusters.

While the European Commission has affirmed the importance of clusters in COM (2008) 652, it has followed a largely decentralised approach towards the implementation of specific cluster initiatives. The Member States have therefore taken the lead in promoting regional or sectoral funding opportunities and support programmes for business clusters, and as a result, several hundred new clusters have been founded in recent years in the European Union.

Although the Commission itself warns that a key challenge is “to avoid a pro­liferation of cluster initiatives with little chance of long-term success”, its own process of providing limited funding for small initiatives illustrates this fragmentation.

On the one hand, the funding provided is often very limited in absolute size. On the other hand, such funding is usually bound by time constraints, meaning that project activities vary with funding levels. Clusters have certainly not benefit­ted from a permanent institutional framework in the same way that vocational education and training has (where there are at least three major institutions and agencies working) or improving living and working conditions.

Moreover, despite the clear objectives of COM (2008) 652 and related poli­cies, such as Europe 2020, it is clear that very often Member States have not focussed on qualitative criteria for supporting business clusters, but on quantita­tive criteria. This is seen, for instance, in the low required minimum number of SMEs participating in business clusters to be eligible for funding, or on the broad sectoral range of clusters eligible for funding.

Whether this is termed a “bottom-up” or an “equal opportunity” approach, the result has often been a multiplication of clusters with fewer than 20–25 members, which survive as long as public funding is available, but do not gain the economies of scale necessary for sustainability. In other cases, clusters are founded in highly competitive sectors which may be unsuited to the broader socio-economic region in which they occur.

These points notwithstanding, many European clusters are becoming increas­ingly competitive and well-organised. They are able to capitalise on close links with research organisations and universities, and develop highly valuable servic­es to members. Clusters are also able to support the process of internationalisa­tion, often ably supported by EU programmes such as Interreg, FP7, and others.

As cluster activities become more structured and embedded in the European policy context, and as more and more case studies of successful cluster initiatives emerge, it is certain that European policy will continue to adapt at the national, regional and EU levels. With the new programming period 2014–2020 launched, and the with the emphasis on innovation, science and technology seen in Hori­zon and other programmes, European clusters today have strong foundations on which to build, and exciting opportunities to develop.

 

1 A more detailed analysis of the academic background into cluster research is found in the Eu­ropean Commission Staff Working Document: The Concept of Clusters and Cluster Policies and their Role for Competitiveness and Innovation: Main Statistical Results and Lessons Learned, available on­line at: http://ec.europa.eu/enterprise/policies/innovation/files/clusters-working-document-sec-2008-2635_en.pdf

 

References

 

Andersson, T., S. Serger, Sörvik J., Hansson E., 2004, The Cluster Policies Whitebook. Malmo: International Organisation for Knowledge Economy and Enterprise Development.

Council of the European Union. Council Conclusions on a Broad-Based Innovation Strategy: Strategic Priorities for Innovation Action at EU Level. Brussels: 2769th Competitiveness (Internal Market, Industry and Research) Council Meeting, 4 December 2006.

European Cluster Alliance, 2010, Improving the Cluster Infrastructure through Policy Actions.

European Cluster Alliance, 2010, Identifying the main Objectives and Activities of Cluster Pro­grammes.

European Commission, 2008a, Towards World-class Clusters in the European Union: Implement­ing the Broad-Based Innovation Strategy. Brussels: COM (2008) 652.

European Commission, 2008b, Directorate General for Enterprise and Industry. The Con­cept of Clusters and Cluster Policies and their Role for Competitiveness and Innovation: Main Statistical Results and Lessons Learned. Brussels: Commission Staff Working Document SEC (2008) 2637.

High Level Advisory Group on Clusters, 2007, The European Cluster Memorandum. Promoting European Innovation through Clusters: An Agenda for Policy Action. Stockholm: European Cluster Observatory.

Ketels, C., Lindqvist G., and O. Solvell O., 2012, Strengthening Clusters and Competitiveness in Europe: The Role of Cluster Organisations. Stockholm: The Cluster Observatory, Stock­holm School of Economics.

Oxford Research, 2008, Cluster Policy in Europe: A Brief Summary of Cluster Policies in 31 Euro­pean Countries. Denmark: Europa Innova.

Porter, M. 1998a, On Competition. Boston: Harvard Business School.

Porter, M. ‘1998b, Clusters and the New Economics of Competition’, Harvard Business Review, Nov-Dec. 1998, pp. 77–90.

Porter, M. 2000, ‘Location, Competition, and Economic Development: Local Clusters in a Global Economy’, Journal Economic Development Quarterly, vol. 14, no. 1, pp. 15–34.

Porter, M., 1990, The Competitive Advantage of Nations. New York: Free Press.

Probst, L., E. Monfardini; Frideres L. and Bohn N., 2012, European Cluster Excellence Score­board: Pilot Version. Brussels: European Commission, Directorate General for Enter­prise and Industry.

 

About the Author

Philip Ammerman is a business consultant, entrepreneur and investment advisor. He has extensive experience in investment advisory and post-investment enterprise restructuring in Europe and the former Soviet Union since 1992. He specialises in commercial due diligence, vendor due diligence, financial forecasting, business planning and risk analysis across multiple sectors and industries. He works with institutional investors, family offices, sovereign wealth funds and other investors to identify, structure and executive transactions. Since founding Navigator, he has led or participated in over 170 projects, delivering over EUR 6 billion in invested resources.

Philip is involved in Navigator's business incubator, and is actively working as a business angel and accelerator for entrepreneurs both within our firm as well as external partners.

 

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