Can Innovative Clusters Protect the Economy from Recession?

Recessions can be brutal and countries often suffer from the magnitude of global changes and shifts that can impact their economic well-being. While they search for solutions to strengthen their economic position among lower cost emerging nations they should consider the benefits of developing clusters. According to a study entitled Coping with Economic Crisis-The Role of Clusters published in European Planning Studies, clusters offer a ray of hope in fortifying an economy from recession.

When the global economy adjusts there will be winners and losers. Some nations will pick up additional manufacturing while others will lose manufacturing. When times are good more people will be employed, while when times are bad people will be unemployed.  Europe and the U.S. has lost jobs over the past few decades due to the cheaper cost of manufacturing in places like China, Asia and India.

The only true competitive position that Western countries can make is to be more innovative and development oriented than emerging nations. They must lead the market with new products and services in order to ensure their offers gain the most market attention and interest. Clusters offer an opportunity to capitalize on Western ingenuity in a way that keeps manufacturing and jobs at home; even when the global economy shifts.

The study looked at Norwegian clusters and used surveys and data from four cluster organizations to determine how they acted under economic pressure (Skalholt & Thune, 2014). The economic time-frame use for the study was a recession from 2009 to 2010. They looked for innovative strategies, roles and activities of the clusters during the crisis, and the differences in behaviors of mature clusters.

The study found that mature clusters adapted to economic recessions by putting forward new innovative strategies, increasing collaboration with other businesses, and engaging in developing their workforce. A big concern was that lenders slowed down available investment capital and this choked off innovation. The study highlights that when monies were available, clusters were able to overcome challenges by developing new innovative products/services even while the global market was slowing.

Collaborative Investing in Local Clusters Leads to Economic Development

Group investment is not a novel idea but can be significant in developing stronger local growth models. A “hot” market is one that draws substantial investment interest that encourages growth among market relevant businesses. Pack investing offers opportunities to create multiple points of capital infusion that lead to the growth of a battery of related companies.

Companies do not work in a vacuum and rely on different local stakeholders to feed the building of their business. They need resources, human capital, science, facilities, suppliers, partners, and customers to develop momentum. If they lack the right environment, their business is doomed to failure before it gets started.

Pack investing offers the opportunity to take a local core competency with a solid industry base and infuse large amounts of capital at various points to encourage mutual growth. Multiple investors may work together to invest in complementary businesses that have market relevance but are not operating at peak performance.

The potential for quick growth and higher market returns is greater for companies that work together. Network relationships and alliance capitalism can create higher growth records among businesses (Eng, 2007). Sharing resources and knowledge during the growth stages with peer companies seems to make a difference.

Pack investing, and allied companies develop a stronger competitive stance. Industry alliances, even when money is not transferring between them, earned abnormally high local returns (Wang & Der-Jin, 2005). Getting businesses to support each other’s growth trajectories with shared services lead to stronger intra-firm alliances.

Collaborating on an investment level and working on a firm level creates two forms of potential synergy. Infusion of cash allows individual companies to expand their operations. Sharing knowledge and resources with other businesses helps them learn and adapt. Together investment and development create clusters of competitive firms that lead to jobs and economic wealth.

Investing in a pack and encouraging mutual growth is different than standard competitive strategies and requires a new way of thinking. Competitiveness is in the American blood, but collaboration can sometimes supersede this instinct to create greater value. Persuading investing institutions and company CEO’s to work together is a challenging game.

Pack investing relies on transparent city data that allows investors to find underperforming clusters and explore them. Seeing the opportunities and sharing those opportunities with like-minded investors may be against culture but can be lucrative, in the long run, when investment returns rises. Greater revenue is followed by new investment, tax income and jobs that can raise living standards of residents.

Eng, T. (2007). Relationship value of firms in alliance capitalism and implications for FDI. International Journal of Business Studies, 15 (1).

Wang, Y. & Der-Jin, M. (2005). Using strategic alliances to make decisions about investing in technological innovations. International Journal of Management, 22 (4).

Streets of Gold or Pathways to Poverty: Reviving America's Cities

Streets of gold look a little more like pathways to poverty. American cities have been on the decline for decades as investments diverted from urban areas to emerging countries that rolled out the red carpet. The infrastructure that was built when American cities were at the height of their economic might is still mostly intact waiting for visionary investors. Getting investment interest and better city governance can lead to mutual growth for business and job-hungry residents if the two can come to a mutual understanding.

Pick any major city in the country and follow its historic rise and fall. You may notice that as people moved to the city, built homes, and invested their resources these collections of people grew in wealth and influence. The collective action of small and large investors created a synergy of growth that pushed profit margins to higher levels. Money, government, and people had a mutual self-interest in development.

As international competition rose, technology changed, and poor government policy stagnated these cities; they became ghost lands that are a pale comparison to their previous glory. Where opportunity flourished a few decades ago, some cities have grown dilapidated virtual prisons. The poorer a family was, the more likely they were stuck in a cycle of poverty. American men, women, and children were left behind.

Bleakness doesn’t need to be the norm. Cities that still retain their basic infrastructure are ripe for renewed development that not only produces higher returns on investment (ROI) but offers new opportunities for residents. When opportunity grows, hope also grows, and new economic life is born with it. The marriage of investors and government  into pro-growth policies can nurse new opportunities.

Consider the mass investment draws to places like Eastern Europe, India, China, and other emerging nations where red tape restrictions are little but returns are high. American cities offer many of these same opportunities as the low cost of buildings, motivated work force, and reliable infrastructure found in combinations will grow once the right capital levers are applied.

Stakeholders will need to look at the global market and existing local competencies to determine where the best investment growth potential can be realized. When capitalists engage in pack investments and create spawning clusters of business activities to capitalize on existing competencies and infrastructure, growth is not far over the horizon. Economic wastelands can become investment wonderlands with a little good old fashion spit shine.

Many proposals such as new recreation centers, additional funding, tax allocations, etc...have been tried at one time or another. They were short-lived because they were not profitable and often came with long-term commitments with difficult to measure results. Building investment hubs fixes the foundations of poverty that lead to better housing, additional tax bases, better education and more community support.

The problem isn’t so much that investors are not willing to invest in these cities but that awareness is lacking, and local government is often short-sighted in their policy development that inadvertently restricts future opportunities. Revamping the way we think about investments, government, and education/training helps to ensure that struggling cities look more like diamonds in the rough. Enlightened government starts where partisan politics ends.

Advanced Industries Power Exports

Advanced industries are those that develop innovative solutions to market problems. When matched with labor skills, education, business clusters and progressive policies spur exports and employment at a levels unseen in other industries. A report by the Brookings Institution finds that advanced industries only account for 9% of employment but accounts for 60% of exports and 17% of Gross Domestic Product.

The development of products requires a level of innovation where research, skill, investment, and industry come together to create an exportable product. Many of the county's strongest industries are clustered in metro areas which make it possible to rejuvenate these areas while still strengthening the nation. We can see this example in places like Detroit and San Jose California.

As to date national economic policy has not been focused on developing hubs and clusters that are better able to meet market needs and push the nation even further ahead of the competition. There have been some movement in that direction but not enough pro cluster policies have made their way into public debate and government policy. 

America's strength relies on its ability to lead the market with new products. Without offering a competitive advantage such as a highly innovative industries there is less reason to invest in the U.S. when production costs are cheaper in emerging nations. Market leaders are not as influenced by costs as copy cat market followers. 

It would be wise to consider other supporting literature that confirms Brookings Institution's findings and consider incorporating such ideas into policy making. Focusing on advanced clusters in cities that have appropriate core competencies and infrastructure can raise the U.S. from a net importer to a net export. Doing so across multiple hubs and clusters can create sustainable growth.

Brookings Institution (Februrary 3rd, 2015). Americas Advanced Industries. Retrieved from http://www.brookings.edu/research/reports2/2015/02/03-advanced-industries#/M10420

Wider Supply Chain Integration Leads to Performance Advantages

Supply chain management and integration has important functions for businesses that desire to create higher levels of financial performance. Since all companies work with related companies in either formal or informal linkages, such as suppliers and distributors, it is important to ensure information is transferred effectively between entities to enhance operations on both sides. Research by Kannan & Keah (2010) show how companies that integrate their supply chains to a wider extent develop a number of advantages. 

Supply chain management entails businesses associated with the development, building, distributing, and returning of products/services. It has been defined as the “cross functional integration within the firm and across the network of firms that comprise the supply chain” (Lambert, 2004). The management of supply chain has come to mean better integration with the supply chain elements to produce value. 

Integration is the creation of inter-firm linkages. Sharing information, building stronger ways to coordinate resources and collaborating on mutual goals creates efficiencies. These efficiencies may lead to cheaper processes, faster movement of products, or better attainment of resources. The functioning of the supply chain has a direct effect on the success of the organization.

There are reasons why some firms seek narrow integration versus wider integration. The factors leading to higher levels of performance can be difficult to understand and master. Significant research, resources and time are invested into the supply chain to create higher levels of efficiencies. Being too wide in orientation can lead to lack of focus and goal confusion. 

The researchers found that by moving beyond first tear suppliers offered significant savings and performance improvements that result in faster product development times, higher sales and strengthened quality. The second tier suppliers have a significant impact on how the whole system functions as an entity. Those companies that fail to consider information from second tier suppliers have a lack of context in which to understand supply chain information putting them at a disadvantage. 

Kannan, V. & Keah, C. (2010). Supply chain integration: cluster analysis of the impact of span of integration. Supply Chain Management, 15 (3). 

Lambert, D. (2004), Supply Chain Management: Processes, Partnerships, Performance. Supply Chain Management Institute, Sarasota, FL.

Enhancing Entrepreneurial Clusters with Global Supply Chain Networks

Global entrepreneurship is a concept that has made its way into recent economic literature. Small business has the opportunity to reach geographically dispersed customers that was not possible just a few decades ago. These entrepreneurs work within clusters and rely on effective supply chains to ensure that products are distributed to end users. Research by Wu, et. al. (2010) presents a framework for understanding global entrepreneurship where supply chain management serves as a platform for resource collection, market development, and risk mitigation. 

Before one can effective discuss the mechanisms of global entrepreneurship it is beneficial to understand what the term means. Fundamentally, entrepreneurs focus on value creation, development of new products/services, sparking ventures, and encourage market innovations (Brush, et. al., 2003). Entrepreneurs can exist within organizations or own small businesses. 

It is also possible to see entrepreneurs as the un-academic market researchers that seek to find opportunities. Entrepreneurs use their knowledge, skills, and abilities to find advantages in the market and seek methods of capitalizing on those advantages. They must first find an opportunity and then act upon that opportunity to realize capital growth. 

Drucker (1985) discusses entrepreneurial opportunities:

1. The creation of new and unique information

2. Exploitation of market inefficiencies as a result of information asymmetry

3. Acting upon the costs and benefits of alternative resource allocations

Entrepreneurs are highly effective within clusters of similar businesses that help raise knowledge and provide supply chain opportunities.  A cluster can be thought of as a proximal group of interconnected and field associated companies that may include end-product manufacturers, suppliers, and support businesses (Porter, 1998).  It is a grouping of like-minded and industry related businesses that enhance each other’s development.

Clusters develop opportunities to ship related products, draw interested investors, and enhance innovation. Entrepreneurs and investors can find value creation opportunities inside clusters because of the following:

-developed processes due to job specialization;

-high availability and lower prices for resources such as labor force and loan services;

-updated technology and a culture of development;

-lower cost of manufacturing and distribution of products/services due to risk pooling and economies of scale;

-stable demand for products and services;

-strong social networks around core competencies.

The authors conclude that clusters provide unique benefits for entrepreneurs due to the clustering of resources, knowledge, and distribution networks.  Clusters encourage greater innovation in industries as well as reduce the risks associated with conducting business. Both horizontal and vertical supply chain expansion becomes possible when entrepreneurs are used to innovation products and services to develop more opportunities. The mechanisms of distribution should be developed that can bundle smaller batch production to create efficiencies in intercontinental delivery from multiple businesses.

   

Brush, C. et. al. (2003), Doctoral education in the field of entrepreneurship, Journal of Management, 29 (3).

Drucker, P. (1985), Innovation and Entrepreneurship, Harper & Row, New York, NY.

Porter, M. (1998), Clusters and the new economics of competition, Harvard Business Review,

November-December, pp. 77-90.

Wu, et. al. (2010). Global entrepreneurship and supply chain management: a Chinese exemplar. Chinese Entrepreneurship, 2 (1).