The added value of a group
By Paul Tyrrell
Published: July 5 2010 21:42 | Last updated: July 5 2010 21:42
Babel Media is a company that could, in theory, be based anywhere. It provides the video games industry with outsourced services such as localisation and quality assurance. Most of its 1,000 staff need only computers and reliable internet connections to do their jobs. Yet they are concentrated in just a handful of places worldwide to take advantage of specific local conditions.
The company was founded in 1999 in Brighton, on the south coast of England, partly because the city has one of the highest concentrations of young foreign workers and students in the UK. Its latest production office was opened in 2005 in Montreal, Canada – again a source of young, multilingual talent but also, critically, home to one of the world’s fastest-growing “business clusters” for video games production.
The concept of the business cluster has become an increasingly important part of regional development and corporate strategies since 1990, when Michael Porter of Harvard Business School published The Competitive Advantage of Nations. In the book and subsequent research, Prof Porter found that as more companies of the same type cluster together in the same place, so they derive more benefits from their “colocation”.
Companies have long recognised that siting themselves near to rivals could make life easier for customers, cut supply chain costs, and – most important – make it easier to recruit specialists. However, Prof Porter identified other benefits such as increased productivity, innovation and start-up activity.
In his latest paper on the subject, written with Mercedes Delgado and Scott Stern and due to be published this month, he finds that strong clusters produce “higher growth in new business formation and start-up employment” and “contribute to start-up firm survival”.
The decision to open an office in Montreal, however, was largely influenced by generous incentives from the Quebec government. Software producers in Montreal can, for example, claim tax relief on up to 30 per cent of the salaries of their production staff, or up to 37.5 per cent if their work is published in French.
Other governments are employing similar tactics to help create jobs and lure businesses. “There is a growing realisation that just working on the framework conditions for growth (say, good infrastructure and education) is insufficient,” explains Prof Porter. In the past, he argues, national governments have either tended to think too broadly, focusing only on general business environment conditions, or too narrowly, cherry-picking “winners” in specific sectors by giving them special treatment.
For companies, a cluster can offer a raft of benefits, provided its members start talking to each other. Prof Porter learnt this in Massachusetts in the mid-1990s, he says, while chairman of the state’s Governor’s Council on Economic Growth and Technology. “We discovered that we had about 400 medical device companies in the state, but these firms didn’t see themselves as part of a cluster,” he recalls. All were benefiting in various ways from their colocation – for example, the cluster had drawn a high number of parts suppliers to the region – but there was no co-ordination.
Well-known clusters and how they were formed
Some of the most common success factors in the formation of clusters are as follows:
●Transformation of established markets into clusters of expertise. London’s financial services cluster began to form in the 16th century, when traders met at the same coffee shops to do business.
●Proximity to universities. Silicon Valley coalesced around San Jose, California, in the 1970s largely because that was a good place for graduates from Palo Alto-based Stanford University – at the forefront of the nascent electronics industry – to set up businesses.
●Government intervention. China established “special economic zones” in the late 1980s to attract foreign direct investment in all industries with tax incentives and highly flexible labour laws. Now Chinese regional authorities are focusing their investments increasingly on clusters. For example, the government of Changshu city in Jiangsu province has been investing in transport and IT infrastructure, and facilitating research and development, specifically to help its cluster of high-end apparel manufacturers.
●Co-ordinated efforts in the private sector. Some of Japan’s top high-technology companies worked together between 1987 and 1997 to build shared facilities at the Yokosuka Research Park near Tokyo. About 70 public and private bodies now share the site.
Prof Porter organised a networking event for the chief executives of the top 25 companies in the cluster, at the headquarters of a leading defibrillator manufacturer. “All these CEOs – some of whom were rivals – came only because the governor invited them,” he says. “For the first hour, they were all looking at their watches and dying to leave. But then we asked them to identify the most important challenges they were facing.” All were concerned about how to plug certain skills gaps and about the inefficiency of the regulator, the Food and Drug Administration. “Suddenly, they began to see how they could help each other.”
The meeting led to the establishment of the Massachusetts Medical Device Industry Council, an organisation that now collaborates with local colleges on curriculum and skills development, and provides cluster companies with export assistance – all with minimal government intervention. “The less the companies feel responsible [for cluster development], the more these things tend to peter out,” says Prof Porter.
Michel Guay agrees. He is the CEO of Group Techna, a developer of software for the law enforcement sector, and the chairman of TechnoMontréal, the official steering group for Montreal’s information and communications technology cluster.
The board of his cluster includes representatives from municipal, provincial and federal governments, “but only as observers”. Official cluster activities are financed by 15 corporate members, which represent a cross-section of the sector and a variety of company sizes. Their combined contributions are then matched by each of the three levels of government, quadrupling the amount of money available.
Each year, the government members of the board approve the cluster’s three-year strategy, based on success criteria such as job creation, but that is as far as their intervention goes. “The government observers actually appreciate it when we ask for, say, better high-speed internet infrastructure, because they know they will get a good return on their investment. We are speaking on behalf of about 3,000 job-creators,” says Mr Guay.
Other cities and regions – notably in the US and elsewhere in Canada – have adopted or are adopting similar financial incentives in order to attract video gaming talent.
However, research by Richard Florida, an urban studies theorist based at the Rotman School of Management in Toronto, suggests their success will depend on other factors.
Montreal is “a key centre for emerging musical acts”, he points out. It is a great place to live, with a healthy stock of affordable housing. Overall, the city helps its clusters by “being open to creativity, mixing it with history and facilitating what we called ‘spill-acrosses’ from technology to art and entertainment”.
Governments can help clusters become the “go to” destinations for particular industries, he concludes. “But it takes time. And it takes sustained investment in great universities and in people and, of course, in the physical fabric of the place.”
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