For years, 10 companies that make laser optics instruments and
components in Bozeman, Mont., have gone about their business quietly,
attracting only a modicum of attention from lawmakers in Helena.
They were informally recognized as a "cluster," a group
of similar businesses, but didn't receive much research funding,
specialized services or other assistance.
That may change now that they've been singled out for special attention
in a new economic development plan. According to a state-sponsored cluster
report unveiled last May, the "high concentration of optics companies
in and around Bozeman indicates both an existing advantage and the potential
for future growth."
Whether such recognition gives those companies a leg up on competitors
remains to be seen; last summer the governor's office was still figuring
out its priorities and budget for implementing a full-fledged cluster
initiative also designed to aid concentrations of food processing, wood
products, outdoor recreation and life sciences companies in the state.
Ralph Hutcheson, president of Scientific Materials, a manufacturer of
crystalline opto-electronic components, isn't holding his breath. He says
the state has failed in the past to follow through on promises to aid
laser optics firms. "The recognition of the cluster ... does not
provide support," he said. "You have to get the governor, all
of the state offices, everything else behind it."
Similar publicly funded cluster initiatives have been launched in Wisconsin,
North Dakota and Michigan. In the Badger state eight "cluster councils"
representing medical instruments, transportation, printing and other key
industries have begun to analyze their strengths and shortcomings and
suggest ways in which state and local government can lend a hand. In North
Dakota a state-sponsored plan to leverage the power of clusters is moving
forward in parallel with the New Economy Initiative (NEI), a federally
funded program spearheaded by the private sector to encourage more high-tech,
The idea behind these embryonic programs and more established cluster
schemes across the country is to identify conglomerations of related businesses
and shape public policy in order to help them grow and prosper. But can
government do anything to rev up the economic engine of a cluster, and
if so, what are the best tools for the job? Should government try to pick
winners by heavily subsidizing certain industries or merely facilitate
a natural process by creating a business environment that encourages innovation
and collaboration among firms?
As the district takes baby steps into cluster policy, a look at the theory
and practice of cluster-based economic development can offer valuable
Much ado about clusters
Excitement over clusters began in the early 1990s with the publication
of Harvard professor Michael Porter's book The Competitive Advantage
of Nations. Porter argues that groups of similar, interrelated firms
concentrated in a small geographic area gain a competitive edge when they
have access to unique regional resources, feel the spur of intense demand
and operate in a business environment that fosters both keen competition
and cooperation on shared needs. Interlocking networks of buyers, sellers
and service providers encourage knowledge spillovera constant churning
of ideas that leads to new products and more efficient ways of producing
Common in manufacturing and high-tech industries that thrive on innovation,
clusters come into being over years and decades, a product of history,
natural affinities and distinctive entrepreneurial cultures. Most form
in metropolitan areasSilicon Valley and Seattle's aerospace industry
are classic clusters, and Minneapolis has a well-defined cluster in medical
devices. But they also coalesce around small cities and towns. Besides
Bozeman, bona fide clusters in the district include Winona, Minn. (composites),
Fargo, N.D. (software, windows), and Marquette, Mich. (furniture).
The localized craft industries of northern Italyceramic tiles in
Modena, knitwear in Carpiinspired Porter and other cluster theorists.
In this country, however, clusters aren't as neatly bound by geography
or logical industrial classifications. Driven by their sponsors' desire
to embrace as many constituencies as possible, cluster studies often define
clusters very broadly and spread them statewide.
"So often a state will pick a cluster that really isn't one,"
said Stuart Rosenfeld, president of Regional Technology Strategies (RTS),
an economic consulting firm in Carrboro, N.C.
North Dakota's NEI, for example, has tagged energy and the environment
as a cluster, finding links between gasification plants, wind farms and
biomass startups scattered over thousands of square miles. Montana's cluster
analysis, done by RTS, tries to have it both ways, defining clusters statewide
while identifying nuclei of activity such as Bozeman, Missoula and Kalispell.
The term cluster has become a buzzword, frequently used by public officials
to describe any industry sector or collection of similar businesses. In
general, say Rosenfeld and other cluster experts, the more generic and
geographically dispersed a cluster, the less likely it is to confer any
Politicians may be fuzzy on cluster morphology, but they're sure of one
thing: There's gold in them clusters. Economic development officials point
to well-known clusters such as the microelectronics industry in Austin,
Texas, and northern California's wine district as examples of economic
dynamos that generate billions of dollars annually in personal income
and taxes, elevating the fortunes of their host city, region and state.
In the 1990s a number of states launched cluster programs designed to
lift all boats by promoting the growth of key industries. Many of those
programs have since fallen victim to politics, industry inertia and post-new
economy budget crises. Other, ongoing programs in states such as Arizona,
Connecticut and Illinois have been adopted as models for government-supported
cluster development in the district.
Tinkering with evolution
But what evidence is there that public involvement in any cluster accelerates
its growth beyond what would have likely happened anyway? Given that clusters
develop naturally, a product of entrepreneurial drive and the unique characteristics
of a city or region, shouldn't government just get out of the way and
let market forces rule?
A glance at the history of some U.S. clusters suggests that explicit government
support probably isn't critical, as long as the basic infrastructure required
by all businessesgood workforce training, sound transportation and
communication networks, adequate law enforcementis in place. Minneapolis-St.
Paul's thriving medical device industry owes its existence not to government
programs but to the fact that Medtronic Inc. founder Earl Bakken grew
up in Minneapolis. Many Twin Cities medical device companies, including
St. Jude Medical and Cardiac Pacemakers Inc. (now part of Guidant Corp.),
trace their lineage to Bakken and his 1957 invention, the world's first
wearable external cardiac pacemaker.
Phil Ankeny, chief financial officer of SurModics, an Eden Prairie, Minn.,
firm that makes specialized coatings for medical devices, ascribes the
success of med tech in the Twin Cities largely to "the people and
the culture"that complex web of business and personal relationships
that Porter talks about. "We just happened to be lucky here in the
Twin Cities that there was a Medtronic, and there was a strong entrepreneurial
culture that emanated from that," Ankeny says.
The mega-clusters of high-techResearch Triangle Park in North Carolina,
Silicon Valley, Austinundeniably benefited from their proximity
to major research universities that received hundreds of million of dollars
in research and development funding from state and federal agencies. However,
government didn't dictate which technologies would make the leap from
lab to marketplace. The graduates (and sometimes professors) of those
institutions did, leveraging relationships with academia, venture capitalists
and other entrepreneurs to found companies such as Oracle, Netscape and
But the bootstrap evolution of many successful clusters doesn't mean that
government should butt out of the process, say leading experts on clusters
such as Rosenfeld and Joseph Cortright, vice president of Impresa Inc.,
an economic consulting firm based in Portland, Ore. Both see an active
role for the public sector in nurturing clusters, especially "knowledge"
clusters that convert new ideas into well-paying jobs for local citizens.
"Most of the clusters I've looked at were not started by government,"
Rosenfeld said. "But in almost every case there was a government
action that really strengthened the cluster and helped it to grow."
Added Cortright, who as an economic development staffer for the Oregon
Legislature helped implement that state's cluster initiative in the early
1990s: "Does government create clusters? No. Does government influence
the trajectory in which they grow? Absolutely."
However, measuring that trajectoryup, down or around in circlesis
more complicated than rocket science. Countless variables affect the life
cycle of a cluster, and any salutary governmental influence tends to get
swamped by larger economic currents.
Just as difficult is figuring out what works and what doesn't in applying
public policy to clusters. As Cortright and Rosenfeld indicate, one strategy
that is almost certainly doomed to failure is trying to build a cluster
from scratch. Clusters have been bought-in the 1950s the state of North
Carolina carved Research Triangle Park out of idled farmland and eventually
succeeded in attracting companies such as IBM and Glaxo Wellcome with
tax breaks and infrastructure concessions. But today the chances of success
aren't good without an existing, critical mass of interrelated companies.
In the mid-1990s the city of Chattanooga, Tenn., set out to develop an
environmental technology cluster by platting an "Eco-Industrial Park"
and aggressively recruiting companies to move in and clean up a rundown
manufacturing area. There were few takers. On Minnesota's Iron Range,
a plan unveiled in 1999 to lure IT employers to the region by spending
mining taxes on high-speed data lines and a network of technology centers
has succeeded only in attracting a few call centers and electronics assembly
Now that biotechnology is all the rage, the message still hasn't sunk
in; cities in the district and across the country are creating special
tax zones in a bid to become biotech hubs, ignoring in many cases the
fact that they have little to build upon.
"There's nothing about using a cluster approach that immunizes it
from stupidity, and biotech is a classic example," Cortright said.
Traditional top-down economic development strategies such as tax breaks
and state-backed venture funds are also likely to be of limited value
in strengthening genuine, naturally occurring clusters. Taxes are usually
a secondary factor in corporate decisions to expand in or relocate to
a particular state or city. North Dakota has one of the lowest corporate
income taxes in the Upper Midwest, but Fargo's well-educated, industrious
labor forcenot low taxesis the chief draw for window manufacturers
such as Marvin Windows and Doors and Cardinal Glass (both based in Minnesota).
Conversely, Minnesota's notoriously high taxes didn't compel Medtronic
and its progeny to move to North Dakota or Texas.
State venture funds, often touted as a solution to a lack of private
seed capital, are risky businessin the late 1980s Montana lost its
shirt on a $10 million tech venture fund underwritten by coal excise taxes.
And the significance of venture capital in growing clusters may be overplayed.
Fewer than one in 10,000 companies gets off the ground with institutional
venture capital, according to a 2002 global analysis of entrepreneurship
financing by the Kauffman Foundation of Kansas City. Family, friends and
neighbors are by far the biggest sources of informal capital for startups.
Ultimately, government has many avenues for cluster assistance. Government
has and will continue to influence the fortunes of industry clusters through
research and development funding, for both universities and private companies.
But the bulk of that money comes from federal agencies such as the National
Institutes of Health and the Department of Defense, which have little
interest in funneling money for the specific purpose of building a regional
cluster. Many states supply some research and development dollars as well,
along with tax credits and other financial perks.
Government also promotes clusters by modifying industry-specific regulations
and upgrading infrastructure (such as high-speed Internet service for
IT companies or highways for rural manufacturers) that clustered businesses
need to thrive. But such efforts would be useful for all businesses, clustered
Walking the talk
So what does work? Collaborate, collaborate, urge cluster pundits. Government
can't fathom how to help clusters without engaging in ongoing conversations
with the cluster businesses themselves. In the process, government comes
to understand that in most cases financial inducements aren't the key
to unlocking the potential of clusters. Cluster-savvy policies emphasize
"a set of issues that are more fundamental in terms of improving
the competitiveness of the state's economy," Cortright said.
Like workforce education: Numerous studies and surveys have shown that
businessesespecially high-tech businessesconsider access to
a well-trained workforce absolutely vital. Without it, cluster growth
can't be sustained. Customized, industry-targeted training by community
colleges gave North Carolinans the mid-level technical skills necessary
to work for expanding plants in the Research Triangle. In Alexandria,
Minn., home to a mini-cluster of automated packaging companies, the local
technical college's Center for Automation and Motion Control pumps out
a steady stream of job candidates trained in hydraulics and computer-based
Through cluster councils, regional trade associations and other forumseither
preexisting or set up under a public cluster initiativegovernment
officials learn what makes a particular cluster tick and where its greatest
needs lie. Still, implementation is where cluster strategy gets sticky;
across the country state and local governments are struggling to get academics,
bureaucrats and business people on the same page.
Research at major universities, for example, tends to ignore the priorities
of industries in their own backyards. "Right now the universities
and centers do invest in R&D, but often it's based on the interests
of the faculty, and what they produce may have no relevance to the local
economy," Rosenfeld said. Closer collaboration with business, the
thinking goes, could refocus university research on the cluster concerns
while preserving resources for general, serendipitous discoveries that
are at the heart of university research.
Government as catalyst
Elements of collaborative cluster strategies have been implemented in
some states. Connecticut has provided seed money for lean manufacturing
programs run by aerospace and metal manufacturing clusters, and lengthened
the term of an R&D tax credit for bioscience companies.
Minnesota's Department of Employment and Economic Development assigns
specialists to industries such as computers, health care, and printing
and publishing, helping businesses market themselves, apply for loans
and grants, find strategic partners and sign up for customized training.
But this industry help desk, in place since the mid-1980s, isn't part
of an overall cluster plan.
Arizona is the place where cluster collaboration has come closest to actual
application. Ten cluster councils set up under state auspices in 1991
encourage their members to market themselves collectively, jointly sponsor
workforce training and press the state for specific incentives, programs
and services geared to the needs of clusters. In 2000 the state earmarked
a portion of sales tax revenue for cluster-focused education and high-tech
R&D; three state universities will receive $50 million each year through
2020 to direct their teaching and research efforts to industries such
as optics, IT, environmental technology and biomedicine. Clustered firms
also receive tailored export assistance and enjoy priority access to industry
job training funds administered by the state Department of Commerce.
"It's not really about public policy," said Mary Jo Waits, associate
director of the Morrison Institute for Public Policy at Arizona State
University in Tempe and an early architect of the state's cluster initiative.
"Our whole philosophy has been, 'this is what industry can do working
together.'" By collaborating, business, academia and government learn
from each other what it takes for clusters to flourish, sustaining a feedback
loop of continuous improvement.
In theory, at least. Tucson's emerging clusters in software, envirotech
and optics ("Optics Valley") clusters have been more aggressive
in collaborating and forging links with government than established industries
such as agriculture and mining. But the state has no hard, statistical
evidence that these industries have prospered under the state's cluster
initiative. And if it did, was it collaboration with government that widened
Optics Valley in the '90s, or individual companies in pursuit of profit,
aided by state investments in optical sciences research and development
that date back to the 1960s?
Just down the road, Phoenix offers some caution. Despite a decade-long
cluster campaign by the state of Arizona, aerospace employment in the
Phoenix area actually fell more than 11 percent between 1990 and 2000,
thanks to downturns in military spending, according to a report by the
Greater Phoenix Economic Council. The city's national share of semiconductor
manufacturing jobs also declined.
Montana officials, pondering a $175,000 cluster study prepared by Rosenfeld's
firm, seem sold on the notion of government as convenor or catalyst. The
state has no intention of creating new, expensive programs to funnel money
to clusters, said David Gibson, chief business officer of the Montana
office of economic opportunity. Instead, the goal is to modify current
programs to give clustered companies an incentive to work together.
"One of the things we can do in state government is start focusing
all of our grant, loan and business support programs to encourage, if
not require, businesses to collaborate with each other before they apply
for grants," Gibson said. "That makes the industry stronger;
that makes it more competitive." For example, the wood products cluster,
which includes log home builders and furniture makers as well as loggers
and paper mills, could promote itself collectively, backed by state-sponsored
"made in Montana" marketing.
Gibson also sees the possibility of more state funding for existing, unofficial
cluster organizations such as the GDC Tech Alliance, an association of
50-odd software, laser optics and other high-tech companies in Bozeman
that fosters collaboration with Montana State University and helps member
companies apply for state revolving loans and federal research grants.
Hutcheson of Scientific Materials approves of that grassroots, bottom-up
approach: "It's much easier to sell a program to people in which
they collaborated in generating the idea, rather than somebody coming
in and saying, 'well, this is what we're going to do, we want you to support
it.' That doesn't work."
No magic bullet
The spectacular flameout of Silicon Valleypreviously the poster
child of clustersmight argue against such strategies, given that
130,000 people have lost jobs since 2000. In the 1980s diversification
was the magic word in economic development. Cluster consultants have an
answer: public investment in a "portfolio" of clusters, including
offshoots of established clusters-bioinformatics as well as IT and genomics,
for instance. If one cluster falters, other clusters in a region can pick
up the slack. Diversity saved Research Triangle Park from the 2001 telecom
implosion; the Triangle is really an agglomeration of several high-tech
clusters, including IT, pharmaceuticals and biotech.
The latest buzzword in cluster circles is convergencethe notion
that innovation results from the collision of ideas at the boundaries
of interrelated clusters. Waits believes that cities and regions must
cultivate multiple clusters in order to remain competitive in a knowledge
Is government smart enough to keep all this straightto pick the
right combination of clusters and support them without ignoring other
industries that may turn out to be economic powerhouses 20 years from
now? W. David Bayless, a Bozeman-based business consultant to rapidly
growing small companies, doesn't think so.
"What we see as a cluster is the result of innumerable transactions
and interactions over an extended period of time, including factors and
agents that we can't even see, much less understand. I think it's grossly
ambitious to think with any kind of precision we can manage clusters,"
Government should also resist the temptation to seize upon cluster promotion
as a magical antidote to hard times, said Lee Munnich, director of state
and local policy programs at the University of Minnesota's Humphrey Institute
of Public Affairs. At best, public policy has only an incremental role
in stimulating local economic growth; just because a region boasts a group
of similar businesses that are receptive to prodding from government and
academia doesn't mean that it can become a hive of industry within two
or three years.
"The cluster approach gives you a better understanding of the dynamics
of your economy and what the key drivers are," Munnich said. "But
for people to suddenly expect this to fundamentally change things ...
it's not something that you can turn on, and all of a sudden the jobs
start to flow."