The Clustering Alliance - Number 14

Rod Brown

February 2001

This newsletter is for 200 + members/friends of Clusters Asia Pacific
– the largest cluster network in the southern hemisphere.

Our Mission - To improve the competitiveness of industries and localities within Australia and New Zealand by enhancing cluster-based development initiatives.

Cairns Cluster Conference – September?

A phone hook-up was held on 30 January between John Dean and Tracy Scott-Rimington (Cairns REDC), David Dodd (USA), Paul Miller (Ballarat Uni) and me. The outcome of the discussion was to gauge early interest via this newsletter in a conference. Aspects are:

• Momentum is building in the US and Australia re clustering. A conference, including workshops in Cairns for August or September 2001 has been suggested.
• Cairns is one of the clustering hot-spots in Australia, and a world-class conference location.
• Likely audience – clustering practitioners, companies, regional development bodies, government agencies, academics, researchers etc.
• Clusters Asia-Pacific (CAP) is particularly interested in gauging interest in whether a Conference would be useful in strengthening investment linkages, global supply chains and R&D collaboration.
• Conference could be ‘roll up the sleeves’ exercise over three days – perhaps Wed-Friday – with possibly 3-4 break-out sessions on clusters in specific industries e.g. selected from biotechnology, IT, agrifood, tourism, heavy engineering, environment, timber, wine, arts or others.
• On the weekend, participants might visit attractions (Great Barrier Reef, Daintree Forest etc.) and overseas participants could then spin off to other locations in Australia or NZ the following week if they wish.
• Looking for a minimum of 100 participants – but could go as high as 300-400. Play it by ear. We would be seeking sponsorship of $50-60k to defray expenses – perhaps $10k from 5-6 organisations.
• The idea is for A-NZ groups to take the opportunity at the conference to pursue collaborative prospects with other clusters by (the Linking Clusters philosophy). This would require preparatory work between clusters well in advance of the conference. Clusters Asia Pacific could provide a match-making service in this regard.
• Preliminary thinking is to get 3-4 international speakers – drawn from the AEDC, OECD, TCI and CAP networks. Malaysian interests have been mentioned, as well as JETRO etc.
• The aim is to keep the conference costs down to a reasonable level - $A800-$A1,000 conference fee (for 3 days), plus very competitive air fares and accommodation costs. Most of overseas friends would appreciate our low $A (=$US 0.55)
• Ballarat University, CREDC, AEDC and CAP are very interested in working to make this happen. Such a conference has been discussed in recent months with TCI and OECD.
• Member organisations of CAP plus any interested readers of this newsletter are asked to email any of the below with your comments re desired themes, and how many people from your organisation or region or country might be interested in attending, and whether your organisation might be sponsor.
• Please email ASAP to Rod Brown - apd@orac.net.au, or John Dean – ceo@credc.com, or Paul Miller – p.miller@ballarat.edu.au or David Dodd – DADCONSULT@aol.com

Barcelona

Dr. Ralph Hantschel, VP Business Development at COMPETITIVENESS.COM in Barcelona has expressed interest in the work of Clusters Asia Pacific. The company has been involved in consulting on clustering for eight years - 80 clusters consulted in 30 industrial sectors. President of the company is Emiliano Duch – also President of The Competitiveness Institute.

Competitiveness.com specialises in the implementation of business to business vertical portals with a cluster approach. The group originally operated as a strategic consultancy firm in a variety of manufacturing industry sectors.

Its off-line work focuses on seeking new ways of co-operation among firms in order to improve their competitiveness. Internet and the new technologies are now giving us the opportunity of providing better and cheaper services to the industry by reducing the time needed for the different operations and by purchasing more effectively.

The project is to form a network of vertical portals that are being implemented in different industries and share common services in terms of technology, administrative and legal management and marketing – for example, http://www.ceramicaclusters.com/ and http://www.textileclusters.com/ and http://www.mobelclusters.com/

The website www.competitiveness.com provides further information. Hopefully they can attend the Cairns conference and play a role in supply chains between Europe and A-NZ.

Defence understands locational advantages

The Department of Defence has announced that 700 jobs will transferred from Canberra to bases across Australia during the year. Major-General Peter Dunn is quoted in the Canberra Times (28/1/01) as saying that the transfers are part of moves to better manage large-scale military projects, such as upgrading the F-111, and the frigate and submarine projects. Most of the jobs are understood to relate to logistics support infrastructure. General Dunn said that the tradition of separating the original procurement specialists from projects once they were assembled at Defence bases was flawed, and Defence had had to ‘learn the hard way’.

This is good news for regional centres looking to build capacity in engineering, electronics etc.

Food Science

We recently met with the CEO of Food Science Australia, Dr Michael Eyles, to discuss the potential of food clusters to facilitate innovation in the food industry. FSA is a joint venture between CSIRO’s former Division of Food Science & Technology and the Australian Food Industry Science Centre. Its mission is to make Australian food companies among the most comeptitive in the world.

FSA offers services from four laboratories – its Sydney headquarters in North Ryde, Cannon Hill in Brisbane, and Werribee and eastern Melbourne - to address problems which may arise at any stage of the food processing business. It has 300 staff, who specialise in taking products to new national and international markets, enhancing quality and safety of food products, improving the efficiency of production processes etc. Our discussion was prompted by ongoing concern that many SMEs are unaware of technology support and reluctant to become involved because of lack of scale. Follow-up discussions are underway regarding the improved linking of FSA to food clusters across Australia. Their website is worth a visit - www.foodscience.afisc.csiro.au

Mad Cow Disease

While on the subject of food, the problems facing EC beef and dairy farmers must be heart-breaking. As part of regional strategy work we are doing in the Bega Valley, East Gippsland, Eurobodalla and Bombala shires (the south east corner of Australia), the possibility of win-win joint ventures has been raised viz.

• Australian beef producers face low prices, the viability of abbatoirs is often reduced by lack of long-term contracts, export accreditation to the EC is commonplace and inwards investment in value-adding is required.
• EC beef producers, and their downstream manufacturers, are looking for alternative sources.

We would be pleased to hear of any overseas groups with an interest in discussing the issue.

Innovation Statement

On 29 January, the Prime Minister announced the Backing Australia’s Ability program – aka the Innovation Statement, involving $2.9 million funding. The agenda is built around three themes. There are numerous references to clustering-related themes, which I have highlighted in bold.

1. Strengthening our ability to generate ideas and undertake research

A key aim of the strategy is to strengthen Australia’s research capability, to ensure the flow of new ideas which underpin innovation, to create critical mass in leading research fields, and to build competitive advantage in ICT and biotechnology.

Specific initiatives include -

• To support internationally competitive research, the Government will double funding over the next 5 years for the national competitive research grants administered by the Australian Research Council. The extra $736 million will improve the competitiveness of researchers’ salaries and increase the support available under the Discovery and Linkage elements of the grants program. Emphasis will be on areas in which Australia enjoys, or wants to build, a competitive advantage.
• To provide the infrastructure needed to support project-funded research, the Government will provide more than $337 million towards increased project-specific infrastructure over the next five years. This will support ARC and National Health and Medical Research Council grants.
• To upgrade the basic infrastructure of universities, such as scientific and research equipment, libraries and laboratory facilities, $246 million over the next five years will be provided to fund the best infrastructure proposals from universities.
• To ensure Australia participates in key emerging technologies, a total of $176 million will be provided (with approximately half contributed from the ARC) over the next five years to establish Centres of Excellence in ICT and biotechnology. With strong industry participation, these centres will undertake world-class R&D, focussing on commercialisation and encouraging spin-off companies.
• To provide researchers with the most up-to-date equipment and facilities the Government will provide $155 million towards establishing collaborative Major National Research Facilities.
• To provide a significant incentive for business to increase their R&D investment, the Government has enhanced the R&D tax concession arrangements. In addition to the existing 125 per cent R&D tax concession, companies that undertake additional R&D will be able to access a premium rate of 175 per cent on the additional investment. This premium targets the labour-related components of R&D expenditure.
• To help the cash flow of small companies, the Government will introduce a tax rebate for the R&D tax concession. Over five years, up to 1300 small companies that are in tax loss will get early access to $30 million at a net cost of $13 million.
• To support the hundreds of companies where grant assistance is most appropriate, $535 million over five years to continue the START program.

2. Accelerating the commercial application of ideas

The Government aims to improve the flow of finance into business innovation and to stimulate growth of innovative firms by improving Australia’s capacity to commercialise research and new technologies.

This will also be achieved through initiatives to enhance Australia’s capacity to build and manage innovative enterprises, encourage the spin-off opportunities from industry research collaboration, strengthen our intellectual property, management processes and increase access to global research and technologies.

Specific initiatives include -

• Boost to the Cooperative Research Centres (CRC) Program by 80 per cent over the next five years at a cost of $227 million. More flexibility will also be incorporated so larger CRCs can be established and small and medium enterprises are provided with greater access to the program.
• To provide early assistance to firms by improving their commercialisation skills, the highly successful Commercialising Emerging Technologies (COMET) Program will be more than doubled in value, with an extra $40 million over four years.
• To ensure access to the best overseas technology and science, the Government will provide $100 million over the next five years for an Innovation Access Program. The new program will enhance Australian firms’ access to new technologies, and accelerate the use of e-commerce business solutions, especially for small and medium enterprises. It will also showcase Australian science and technology overseas and develop international bilateral agreements that support strategic science and technology.
• To help commercialise public sector research the Government will provide $78.7 million over the next five years as pre-seed funding. Assistance through the fund will be available to universities and public sector research agencies to take proposals to a venture capital ready stage.
• To encourage the development of new biotechnology firms, the Government will double the Biotechnology Innovation Fund, with an additional $20 million.
• To accelerate efforts to improve Australia’s performance in the development and commercialisation of new agribusiness products, services and technologies, an additional $21.7 million over five years will be committed to the New Industries Development Program.

3. Developing and retaining Australian skills

• $151 million over five years for an additional 2 000 university places each year, with priority given to ICT, mathematics and science.
• Income-contingent loan scheme for postgraduate fee-paying students. It is expected that the loans provided under this scheme will amount to some $995 million over the next five years.
• To attract and retain leading researchers in key positions, national competitive research grants will be used to introduce 25 new Federation Fellowships worth $225,000 a year for five years. In addition, the number of Australian Postdoctoral Fellowships will be doubled from 55 to 110 and remuneration of these positions will be improved.
• To help meet the demand for ICT skills, the Government will adjust immigration arrangements to attract more migrants with skills in ICT.
• $35 million will be provided over five years to implement a National Innovation Awareness Strategy, including the development of new ways to measure our national innovation performance.

Comment

It is significant that a high-level committee is to be established - the PM, the Minister for Industry, Science and Resources, the Minister for Communications, Information Technology and the Arts, the Minister for Education, Training and Youth Affairs and the Minister for Finance and Administration - to oversee implementation. An annual progress report would be provided in the Science & Technology Budget Statement. The Chief Scientist and Government departments will provide advice/input.

The Government will also examine:

• barriers to commercialisation,
• where stronger incentives are needed e.g. to increase the development of patents from scientific research by publicly funded institutions.
• employee share ownership arrangements.

Readers are reminded that the back-drop to this Statement is the low level of private sector spending on R&D and the low awareness of government R&D programs. The commitments made in this Statement are substantial – and SMEs, universities, farmers, manufacturers, budding innovators etc. could do worse than memorising 3-4 of the above elements, and to follow up with some of the contacts. A large part of the problem seems to the lack of connection between the key players. Some intelligent collaboration between local and overseas agencies, local public and private interests, MNEs and SMEs etc. would seem to be the way to go. While the package has been criticised for only returning the innovation funding to the status quo, and that much of the funding is in the out-years of the 5 year program, the consensus seems to be to now move on.

The key website is www.isr.gov.au

Good advice from Scotland and the U.S.A

As advised in last month’s newsletter, a major report has been prepared by my company – ‘Clusters, Innovation & Investment’ that, inter alia, provides an overview of the key issues raised at TCI Conference in Glasgow last October. Here are excerpts from two of the key speakers.

Mr. Bob Downes, Director of Economic Development, British Telecom Scotland

Mr. Downes has been an active participant in TCI since its inception.

Regional development and telecommunications are intertwined, and telecommunications is a major driver of change. ‘Part of my job is to see how communities of interest via clusters can benefit BT’.

Networks are an endemic part of clusters, and are greatly assisted by the Internet. The number of Internet users in Asia will exceed that in the US by 2003. Also, as bandwidth increases, there will be a huge demand for all kinds of information. Mobiles and satellites also allow countries and regions to better connect. In terms of E commerce, mobile technology is expected to overtake PCs as the main vehicle in the near future. E commerce currently accounts for 5% of the GDP in USA, by virtue of the major inroads it has made in financial brokerage, computer hardware sales, books etc.

Supply chains are moving on-line. The computer and electronics industries are strengthening their supply chains via on-line technology. Industries to follow are utilities, shipping and pharmaceuticals. ‘It’s the job of clusters to move these industries into e-commerce’.

Business in a networked economy is characterised by

• Traditional processes being automated first.
• Value chains then being redefined.
• New intermediaries entering the game.
• Industry convergence.

BT considers that the links between the players are critical. BT wants to better understand how to build economies and help regional players to connect via clustering techniques and online/electronic networks. Although BT is becoming increasingly global, it needs to extract revenues from local markets, and this can be done via cluster-led regional development.

Professor Charles Sabel, Columbia University, USA

Professor Sabel is a well-regarded academic who has written extensively on the subject of industry clusters. He explained at the outset that while clustering is an intellectually useful concept, which also has integrity, there are limitations.

The attraction of a cluster is the flexibility it provides to firms in certain circumstances. Individual units with craft skills can adjust because they are within earshot – they can easily re-combine and are inherently more flexible than vertically-integrated, bureaucratic organisations or the isolated firm. In these circumstances, clusters can also assist firms to shift from a price to quality focus. Clusters of this sort are quasi-natural entities – they do not have internal governance problems. Firms are actually complementary – if they do compete, they do so in narrow circumstances. There is a natural solidarity and alignment. The only thing missing is that companies may not fully understand that they are a cluster, and therefore do not optimise their potential.

However there are aspects of cluster theory that do not fit the current real world.

The first relates to the increasing formalisation of knowledge. The world has become more complex, with standards being commonplace (e.g. ISO 9000 standards). These standards apply to firms and industries, and cross regional and international boundaries. This can lead to coordination problems, and the organisation of firms and governance can become an explosive issue.

The second aspect relates to poverty and social exclusion, where cluster-based development strategies may not be that effective. The EU has a large program ‘Integrated Regions’ which is targeted to regions with serious economic and social dislocation – cluster-based strategies tend to focus on wealth creation rather than income redistribution.

The third aspect is the changing nature of government. The orthodox line is that government should operate above the level of the firm, and not become key players in the development of clusters. However the governments we are getting today (e.g. The Scottish Government) are a different entity in that they are relatively more involved.

In terms of do’s and don’ts:

• Don’t try to build trust – get people to solve a problem (trust is an outcome of problem solving).
• Don’t look to build networks for their own sake.
• Worry about governance – some governance structures work, but some don’t.
• Worry about the role of government.
• Worry about social justice.
• Don’t fool yourself – once you have moved to a point where people are being given the opportunity to transform their operations and relationships, you cannot avoid disturbing things and people. They will want to know whether it is an extension of democracy or its antithesis!

There is a lot of economic growth at present – this is a fact. If clustering is so good, may be it doesn’t matter if there is not a massive amount of analysis – clusters force people to ask questions which induces action.

Lastly, what seems to be missing with cluster practitioners is self-criticism – some cluster benchmarking is needed.

ALGA Conference - highlight

One of the highlights of the Australian Local Government Association conference held in Canberra last December was the tabling of The ‘State of the Regions 2000’ report, prepared on the ALGA’s behalf by National Economics. The report makes no bones about aspects of our industrial performance. While critics might argue that looking at the performance of particular industries provides only a partial analysis (i.e. need to understand that there are growth industries too), the NE import penetration data is worthy of quiet reflection.¹

Import Share of Domestic Market, in Selected Key Industries, Australia compared with OECD Average, 1996

	OECD (%)	Australia (%)
Aerospace	33	80
Computer/office equipment	61	71
Drugs & medicine	20	48
Communications equipment	34	70
Professional equipment	42	79
Automotive	30	43
Electrical machinery	25	57
Chemicals	34	42
Non-electrical machinery	26	67
Rubber & plastics	16	25

Source: National Economics (2000)

National Economics argues that Australia made a large scale strategic error in the 1970s and 1980s when it decided that manufacturing was no longer important, and that it was easier and better value to exploit the value-added of emerging technologies rather than the hard task of producing them in Australia. It also claims that Australia is now locked out of the fastest growing areas of world trade, because our value-added potential is being eroded by the impact of e-commerce and alliances of companies are forming supply chains around globally-competitive clusters.

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Regards
Rod Brown.

This newsletter is produced by
Australian Project Developments Pty Ltd, Canberra A.C.T.
Phone/fax 02 - 6231 7261 apd@orac.net.au

¹ Released at the Annual Conference of the Australian Local Government Association (December 2000)