…the enduring competitive advantages in a global economy lie increasingly in local things – knowledge, relationships, motivation – that distant rivals cannot match.
When Michael Porter wrote this in 1998, clusters and cluster theory were the in vogue economic development theory of the day. Governments at all levels were looking for various levers, incentives, and inducements to spur cluster formation and development in their areas.
What is a cluster?
A cluster is a geographic concentration of interconnected, interrelated companies and infrastructure in a particular field. They can be easy to identify, such as filmmaking and wine in California, soccer players from Brazil, manufacturing in China, finance in New York, and so forth. In the US, we have the well known pharma/biotech clusters in Boston/Cambridge, New York/New Jersey, San Francisco, and San Diego.
As Porter notes, a cluster is more than just the companies that make the wine or the academies that produce the soccer players. Other companies which provide the necessary goods and services are also needed for a successful cluster to thrive. Examples may include wine barrel makers, wine bottle makers, and so forth. In our industry, it can be suppliers of specialized equipment or disposables, specialized legal and accounting services, and so on. Government also plays a critical role in these clusters by supporting infrastructure (roads, trains, tax benefits) and quality of life benefits (safe, attractive neighborhoods, affordable housing, etc.).
Why do clusters succeed?
Many places around the world have good transportation and infrastructure. But clusters succeed due to the concentration of expertise. Having a concentration of expertise makes the hiring of talent a competitive process, resulting in a high-quality talent pool from which to choose. Concentrated expertise extends to services which support the members of the cluster, such as specialized legal and financial expertise.
By extension, clusters succeed due to the concentration of specialized information, shared in formal and informal gatherings and settings. Thus, the presence and importance of nearby coffee shops, pubs, and restaurants cannot be underestimated. From a historical level, many modern clusters succeed due to the “jump start” enabled from specific geographic features (i.e., deep, busy harbors and ports), or unique institutions that trigger the development of clusters, such as research-centric universities and medical centers, or military bases.
Importantly, it is the aggregation of all of these variables that enables a cluster to succeed. Having one or two is insufficient, which is why it is incredibly challenging for a government to essentially force the development of a cluster. Many of these factors are either completely out of government control, or they may take decades to develop.
After all, anything that can be efficiently sourced from a distance through global markets and corporate networks is available to any company and therefore is essentially nullified as a source of competitive advantage.
Porter, M. Clusters and the New Economics of Competition, Harvard Business Review, November-December, 1998.
In 1998, the Internet was still in its infancy. Porter persuasively argued that digitization will not upend well-established clusters, especially when local companies maintain and grow local relationships (i.e., by insisting on local suppliers and experts for their needs). This mutually beneficial cycle of relationships helps the entire cluster grow and maintain its status. If anything, universal digital access would provide no additional competitive advantage to one cluster over another.
And then COVID came along…
It is highly probable that you are reading this article from your home, thanks to a high-speed internet connection available in your area for the past decade or more. Your actual office is likely an hour or less away, but you have not been physically in your office for nearly a year. You have not physically seen your co-workers in nearly a year.
Travel to meet customers, suppliers, and partners has come to a complete halt, and will continue to be problematic through the Second Quarter of 2021, at minimum.
COVID-induced work from home (WFH) has forced us to eschew geographic boundaries, and even time itself. Team meetings are now held across city, state, and even Federal boundaries. Partnering conferences are now virtual, and nearly as busy as ever, with meetings available 24 hours a day (depending on how willing you are to sacrifice some sleep).
Conference calls have been replaced by Zoom, Teams, GoToMeeting, and other video-based technologies which were rarely used pre-COVID (Remember Skype?).
Unfortunately, the losers in this upheaval are the supportive industries and markets which make clusters unique and thrive, such as the coffee shops, restaurants, and other community features. Informal exchanges of information are now more difficult. Attempts to promote and conduct virtual “networking” at partnering events are offset by fatigue from being on camera seemingly all the time.
These dynamics raise a few questions in our mind:
1. Will clusters suffer as a result of COVID, or will they bounce back to normal? And what does “normal” even mean?
2. How can governments stimulate cluster formation and growth in a post-COVID world?
3. How can companies, even those in vibrant clusters, exploit this change?
Will clusters suffer or rebound?
Eventually, most clusters will rebound, especially after major portions of the most susceptible population is vaccinated. In Northern Temperate climates, coronavirus will recirculate in the Fall. If rising cases in September-November of this year trigger “lockdowns,” then any rebound will be delayed by at least a year.
But it will not be a rapid rebound. It may take a few years to return to ca. 2020 levels of cluster vibrancy. Why? Because the aforementioned secondary benefits of clusters…the restaurants, the service providers, and others who have not survived will take time to be replaced.
Further, many WFH folks have abandoned (sometime permanently) their homes in the cluster for homes outside the cluster. This is a bold move, as it assumes endless employment with companies that have generous WFH policies in place. Will they return? Some will. Some won’t.
Hence, it is too early to say whether or not clusters who have been dramatically and negatively impacted will return to 2019 levels of vibrancy in 2021 or later.
Governments and Clusters
For decades, government have used their limited capabilities to force the creation and growth of clusters, with biotech being one industry that has gained significant government attention in this regard.
It is arguably impossible to force the creation of a cluster, just like it is impossible to force the creation of a flower. The fundamental seed conditions have to be right, with the base in place for decades, before a nascent cluster can emerge. And even when it does, it takes more than anything government can do to help a cluster thrive.
Post-COVID WFH may provide an opportunity to change this in a few ways. First, Governments currently compete against each other with tax credits and other inducements to attract businesses to their location. But if people can commute to work from one geography to another, then those two geographies should collaborate, not compete.
Does it matter to an employee living in New Jersey but working in New York if his/her company receives a tax benefit from being in New York? Probably not, unless that benefit applies to the employee (such as reimbursement of commutation expenses).
Thus, governments within a reasonable commutation region must collaborate on tax and other governmental levers to promote cluster growth in their region, and not necessarily their specific state or city.
Second, governments are overly focused on job creation. They instead should be focused on company creation. Is a particular region better off with one company with 50 employees, or 5 companies with 10 employees each? We argue that the latter is preferable because multiple companies is one of the hallmarks of a successful cluster. And, a menu of companies makes it more likely to attract investors from outside the region.
Governments should therefore focus on policies which promote company formation and growth. Infrastructure benefits must shift away from job creation, such as tax benefits for manufacturing projects. This means that government focus should be on broadband-based infrastructure improvements, “hot desk”-style work facilities, and the like.
Special tax benefits should be aimed at the secondary, supportive businesses, like the coffee shops and the restaurants. Even subsidies for companies to provide lower-cost temporary or even permanent apartment-style living should be considered. This could be done by government financing the acquisition of office buildings and parks, which are then repurposed for these kinds of companies. This level of financial risk can be borne by many state and federal governments, and securitized accordingly.
What about transportation? We do not want to dismiss the importance of highways and other transportation infrastructure, cluster or no cluster. But a greater emphasis should be placed on rapid transportation to key transportation hubs, such as airports and major train stations.
This is neither easy nor cheap. But WFH/remote workers will still have to travel, perhaps more than ever, to and from the “home office.” Having quick, dependable transportation and other services (such as flight check ins and baggage collection at the bus/train station instead of the airport) will become very important long-term of regions aim to attract new businesses driven by a WFH culture.
The Corporate Perspective
Imagine for a moment that your company needs to hire a VP-level executive. They can go the usual route of seeking local applicants and/or creating a relocation package, essentially “forcing” talent to come to the employer.
Now imagine the progressive employer who is willing to hire somebody solely on a WFH basis. That prospect can be both the most talented applicant and be based remotely, with occasional (Monthly? Quarterly?) visits to the “hot desk” back at corporate headquarters.
A few companies were already doing this pre-COVID, and some companies outside our industry are now permitting WFH on a permanent basis. Of course, under this scenario, having easy access to travel infrastructure becomes increasingly important.
.But the opportunity to hire the world’s best talent across large swaths of an organization is something that can and should be explored by progressive companies…and is absolutely something that can confer a Porterian competitive advantage.
This scenario will create challenges, especially with the development of strong cultural bonds and teamwork. Perhaps some hybrid approaches will be required, whereby remote workers go through an on-boarding process early in their tenure. Having remote team meetings in a central location convenient to everybody (and outside headquarters) may also help create corporate culture.
Will COVID trigger the decline and fall of the cluster?
It’s highly unlikely this will spell the end of the cluster, especially the large, established ones. Local politicians will do all they can to preserve their regional clusters, while continuing to pursue policies which improve local business environments at the expense of their neighbors.
Yet, early in the COVID crisis, politicians crossed state lines to work together to coordinate social distancing practices and lockdowns. Why not cross state lines again to grow a regional cluster…One built not on factories, but on a highly educated, mobile, digitally-connected workforce with relatively minimal infrastructure needs?
It would not be easy. It may take decades to create a cluster like this from scratch. But SARS-CoV-2 has triggered a major shift in the Porterian cluster concept from the 1990s.
Savvy politicians and corporate executives who partner on progressive ideas like these have a distinct opportunity to create something that can survive and thrive during the next pandemic.
Acknowledgement
We acknowledge Mr. Harry Wilby for providing us with the original idea to revisit this topic.