Regional Competitiveness:

The Role of Clusters

Professor Michael E. Porter

Harvard Business School

Toronto Region Economic Summit

Toronto, Canada
March 29, 2012
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),
“Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New
Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and
competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical,
photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy
and Competitiveness is available at www.isc.hbs.edu
20120329 – Toronto Region Economic Summit – FINAL 1 Copyright 2012 © Professor Michael E. Porter
 What is Competitiveness?

A nation or region is competitive to the extent that firms operating there are able
to compete successfully in the global economy while supporting high and
rising wages and living standards for the average citizen

• Competitiveness depends on the long term productivity with which a nation or region
uses its human, capital, and natural resources
− Productivity sets sustainable wages, job growth, and standard of living
− It is not what industries a nation or region competes in that matters for prosperity, but
how productively it competes in those industries
− Productivity in a national or regional economy benefits from a combination of
domestic and foreign firms

• Nations and regions compete to offer the most productive environment for business
• Competitiveness is not a zero sum game

20120329 – Toronto Region Economic Summit – FINAL 2 Copyright © 2012 Professor Michael E. Porter
 What Determines Competitiveness?
Microeconomic Competitiveness

Sophistication
Quality of the
State of Cluster of Company
Business
Development Operations and
Environment
Strategy

Macroeconomic Competitiveness

Human
Macroeconomic Development
Policies and Political
Institutions

Endowments

• Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication of local competition
• Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient
• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use
of endowments
20120329 – Toronto Region Economic Summit – FINAL 3 Copyright © 2012 Professor Michael E. Porter
 Quality of the Business Environment
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that

encourage investment and productivity
– e.g. incentives for capital investments, IP
Factor protection, corporate governance Demand
(Input) standards
Conditions
Conditions • Open and vigorous local competition
− Openness to foreign competition
− Strict competition laws
• Access to high quality business • Sophisticated and demanding local
inputs customers and needs
– Human resources Related and – e.g., Strict quality, safety, and
– Capital availability Supporting environmental standards
– Physical infrastructure Industries – Consumer protection laws
– Administrative information
infrastructure (e.g., business • Availability of suppliers and supporting
registration, permitting,
transparency)
industries
– Strength of suppliers and support services
– Scientific and technological
infrastructure – Quality of collaboration organizations
(e.g., trade associations)

• Many things matter for competitiveness

• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
20120329 – Toronto Region Economic Summit – FINAL 4 Copyright © 2012 Professor Michael E. Porter
 Cluster Strength
Tourism Cluster in Cairns, Australia

Public Relations & Local Retail,

Market Research Travel Agents Tour Operators Health Care, and
Services Other Services

Food Local
Suppliers Transportation
Attractions and
Hotels Activities
e.g., theme parks,
casinos, sports

Property Souvenirs,
Services Duty Free

Airlines,
Restaurants
Cruise Ships Banks,
Maintenance
Foreign
Services
Exchange

Government Agencies
Educational Institutions Industry Groups
e.g. Australian Tourism
e.g. James Cook University, e.g. Queensland Tourism
Commission,
Cairns College of TAFE Industry Council
Great Barrier Reef Authority

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
20120329 – Toronto Region Economic Summit – FINAL 5 Copyright 2012 © Professor Michael E. Porter
 Geographic Levels and Competitiveness

Nations

Provinces

Metropolitan Regions

Copyright © 2012 Professor Michael E. Porter

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 Regions and Competitiveness

• Economic performance varies significantly across sub-national

regions (e.g., provinces, states, metropolitan areas)

20120329 – Toronto Region Economic Summit – FINAL 7 Copyright © 2012 Professor Michael E. Porter
 Comparative Prosperity Performance of U.S. States
2000 - 2010
$65,000
High but High and rising
Alaska
declining versus Delaware prosperity
U.S. Wyoming versus U.S.
$60,000
Connecticut

$55,000
Gross Domestic Product per Capita, 2010

New York
Massachusetts

$50,000 New Jersey

California Virginia
Colorado North Dakota
Illinois Maryland
Washington Minnesota
$45,000 U.S. GDP per South Dakota
Texas Hawaii Nebraska
Capita: $42,346 Louisiana Oregon

Nevada New Hampshire Rhode Island Iowa

$40,000 North Carolina Wisconsin Kansas

Georgia Indiana Pennsylvania

Ohio Tennessee Utah Vermont
Missouri Florida Oklahoma
$35,000 Michigan
Arizona Maine New Mexico
Kentucky Alabama
Idaho Montana
South Carolina Arkansas
$30,000 West Virginia
Mississippi

Low and declining U.S. GDP per Capita Low but rising
versus U.S. Real Growth Rate: 0.63% versus U.S.
$25,000
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%
Real Growth in Gross Domestic Product per Capita, 2000 to 2010
Source: BEA. Notes: GDP in real 2005 dollars. Growth rate is calculated as compound annual growth rate.
20120329 – Toronto Region Economic Summit – FINAL Copyright 2012 Professor Michael E. Porter
8
 Regions and Competitiveness

• Economic performance varies significantly across sub-national

regions (e.g., provinces, states, metropolitan areas)

• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters

20120329 – Toronto Region Economic Summit – FINAL 9 Copyright © 2012 Professor Michael E. Porter
 Composition of Regional Economies

• Serve national and

global markets
• Exposed to competition
from other regions

• Serve almost
exclusively the Traded Clusters
local market
Local Clusters
• Limited exposure ``

to cross-regional
competition for
employment

Resource-based Clusters
• Location determined by
Note: Cluster data includes all private, non-agricultural employment. resource location
Source: Michael E. Porter, Economic Performance of Regions, Regional Studies (2003); Updated via Cluster
Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School (2008)
20120329 – Toronto Region Economic Summit – FINAL 10 Copyright © 2012 Professor Michael E. Porter
 Specialization of Regional Economies
Leading Clusters by U.S. Economic Area, 2008
Denver, CO Chicago, IL-IN-WI Pittsburgh, PA
Business Services Metal Manufacturing Education and Knowledge Creation
Medical Devices Lighting and Electrical Equipment Metal Manufacturing
Entertainment Production Technology Boston, MA-NH
Chemical Products
Oil and Gas Products and Services Plastics Analytical Instruments
Power Generation and Transmission
Education and Knowledge Creation
Medical Devices
Financial Services
Seattle, WA
Aerospace Vehicles and Defense
Information Technology
Entertainment
Fishing and Fishing Products

New York, NY-NJ-CT-PA

Financial Services
San Jose-San Francisco, CA
Biopharmaceuticals
Business Services
Jewelry and Precious Metals
Information Technology
Publishing and Printing
Agricultural Products
Communications Equipment
Biopharmaceuticals

Los Angeles, CA
Raleigh-Durham, NC
Entertainment
Education and Knowledge Creation
Apparel
Biopharmaceuticals
Distribution Services
Communications Equipment
Hospitality and Tourism
Textiles

San Diego, CA Dallas Houston, TX Atlanta, GA

Medical Devices Aerospace Vehicles and Defense Oil and Gas Products and Services Transportation and Logistics
Analytical Instruments Oil and Gas Products and Services Chemical Products Textiles
Hospitality and Tourism Information Technology Heavy Construction Services Motor Driven Products
Education and Knowledge Creation Transportation and Logistics Transportation and Logistics Construction Materials

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
11 Copyright © 2012 Professor Michael E. Porter
20120329 – Toronto Region Economic Summit – FINAL
 Regions and Competitiveness

• Economic performance varies significantly across sub-national

regions (e.g., provinces, states, metropolitan areas)

• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters

• Cluster strength directly impacts regional performance

• Each region needs its own distinctive competitiveness strategy and

action agenda

• Improving competitiveness requires effective policy collaboration

between regions and the national government

20120329 – Toronto Region Economic Summit – FINAL 12 Copyright © 2012 Professor Michael E. Porter
 Cluster Strength: Massachusetts Biopharmaceuticals

Cluster Organizations
Health and Beauty MassMedic, MassBio, others
Teaching and Specialized Hospitals
Products

Specialized Business
Diagnostic
Services
Substances Biopharma- Banking, Accounting, Legal
Biological
ceutical
Products
Products
Specialized Risk Capital
VC Firms, Angel Networks

Containers
Specialized Research
Service Providers
Research Organizations Laboratory, Clinical Testing

Medical Devices
Educational Institutions
Harvard, MIT, Tufts,
Boston University, UMass

20120329 – Toronto Region Economic Summit – FINAL 13 Copyright 2012 © Professor Michael E. Porte
 Institutions for Collaboration
Selected Massachusetts Organizations, Life Sciences

Life Sciences Industry Associations University Initiatives

 Massachusetts Biotechnology Council  Harvard Biomedical Community

 Massachusetts Medical Device Industry  MIT Enterprise Forum
Council  Biotech Club at Harvard Medical School
 Massachusetts Hospital Association  Technology Transfer offices

General Industry Associations Informal networks

 Associated Industries of Massachusetts  Company alumni groups

 Greater Boston Chamber of Commerce  Venture capital community
 High Tech Council of Massachusetts  University alumni groups

Economic Development Initiatives Joint Research Initiatives

 Massachusetts Technology Collaborative  New England Healthcare Institute

 Mass Biomedical Initiatives  Whitehead Institute For Biomedical
 Mass Development Research
 Massachusetts Alliance for Economic  Center for Integration of Medicine and
Development Innovative Technology (CIMIT)

Copyright © 2012 Professor Michael E. Porter

20120329 – Toronto Region Economic Summit – FINAL
 Strong Clusters Drive Regional Performace
Research Findings

• Presence of strong clusters • Job growth

• Breadth of industries within each • Higher wages

cluster
• Strength in related clusters • Higher patenting rates

• Presence of a region‘s clusters in • Greater new business formation,

neighboring regions growth and survival

• Build on the region’s existing and emerging clusters rather than chase hot fields
• Economic diversification usually occurs within clusters and across related clusters

Source: “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)
20120329 – Toronto Region Economic Summit – FINAL 15 Copyright 2012 © Professor Michael E. Porter
 How Clusters Emerge and Develop
The Australian Wine Cluster

1930 1965 1980 1991 to 1998

First oenology Australian Wine Australian Wine New organizations
course at Bureau and Brandy created for education,
Roseworthy established Corporation research, market
Agricultural established 1990 information, and
College 1955 1970 export promotions
Winemaker’s
Australian Wine Winemaking Federation of
Research school at Charles Australia
Institute founded Sturt University established
founded

1950s 1960s 1970s 1980s 1990s and 2000s

Import of Recruiting of Continued inflow Creation of Surge in exports
European winery experienced of foreign capital large number of and international
technology foreign investors, and new wineries acquisitions
e.g. Wolf Bass management

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
20120329 – Toronto Region Economic Summit – FINAL 16 Copyright 2012 © Professor Michael E. Porter
 Related Clusters and Competitiveness
Fishing &
Fishing
Products Textiles
Entertainment
Prefabricated
Hospitality
Agricultural Enclosures
& Tourism
Products
Processed
Food Transportation Furniture
& Logistics Building
Aerospace Fixtures, Construction
Vehicles & Equipment & Materials
Distribution Information Defense Services
Jewelry & Tech.
Precious Services Heavy
Lightning &
Metals Electrical Construction
Business Analytical
Equipment Services
Services Education & Instruments
Knowledge Power Forest
Medical Products
Creation Generation
Devices Communi-
Publishing cations
Financial & Printing Biopharma- Equipment
Services Heavy
ceuticals Machinery
Motor Driven Production
Chemical Products Technology
Products Tobacco
Oil &
Apparel Gas Mining & Metal
Automotive
Plastics Aerospace Manufacturing
Engines
Footwear Leather &
Related Sporting
Products & Recreation
Goods
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
20120329 – Toronto Region Economic Summit – FINAL 17 Copyright 2012 © Professor Michael E. Porter
 The Evolution of Regional Economies
San Diego

Hospitality and Tourism

Sporting and
Climate and Leather Goods
Geography Transportation
and Logistics

Power Generation
Aerospace Vehicles Communications
and Defense Equipment
U.S. Military Information Technology
Analytical Instruments

Education and
Knowledge Creation
Medical Devices

Bioscience Biotech / Pharmaceuticals

Research
Centers

1910 1930 1950 1970 1990

20120329 – Toronto Region Economic Summit – FINAL 18 Copyright 2012 © Professor Michael E. Porter
 Cluster Composition of the Toronto Economy
40%
Change in the Toronto Overall Share of
Biopharmaceuticals Canada Employment: -0.01%

Financial Services
35%
Jewelry and Precious Metals
Distribution Services
Publishing Lighting and Electrical
Toronto national employment share, 2010

and Printing Equipment

30% Business Information
Services Technology Transportation
Automotive
Plastics and Logistics
25% Medical Processed Food
Devices
Analytical Instruments
Building Fixtures, Production Power Generation
20% Equipment & Services Technology Metal and Transmission
Leather and Manufacturing Toronto Overall Share of
Communications Equipment
Related Products Canada Employment: 17.6%
Chemical Apparel Tobacco Hospitality and Tourism
Products Entertainment
15%
(-9.0%, 18.5%) Aerospace Engines Furniture
Aerospace Vehicles and Defense Education and Knowledge Creation
Prefabricated Enclosures Textiles
Construction Materials Heavy
10% Agricultural Motor Driven Products
Products Construction
Services
Forest Products Employment
Sporting, Recreational Heavy Machinery
2002-2010
5%
and Children's Goods Added Jobs

Oil and Gas Products Lost Jobs

and Services Fishing and Fishing Products
0%
-6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7%
Change in Toronto share of National Employment, 2002 to 2010 Employees 30,000 =
Source: Institute for Competitiveness & Prosperity, Toronto. Based on the research of Prof. Michael E. Porter and the Cluster Mapping Project, Harvard Business School.
20120329 – Toronto Region Economic Summit – FINAL Copyright 2012 © Professor Michael E. Porter
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 Toronto Cluster Portfolio, 2010
Fishing &
Fishing
Products Textiles
Entertainment
Prefabricated
Hospitality
Agricultural Enclosures
& Tourism
Products
Processed
Food
Transportation Furniture
& Logistics Building
Jewelry & Distribution Aerospace Fixtures, Construction
Precious Services Vehicles & Equipment & Materials
Metals Information Defense Services
Tech. Lighting & Heavy
Electrical Construction
Business Analytical Services
Education & Instruments Equipment
Services Forest
Financial Knowledge Power
Services Creation Medical Generation & Products
Devices Transmission
Publishing
& Printing Biopharma- Heavy
ceuticals Machinery
Motor Driven Production
Apparel Chemical Products Technology
Products Communi
Tobacco
cations
Leather & Oil & Equipment
Related Gas
Automotive
Products Plastics LQ > 1.5 Aerospace Metal
Engines Manufacturing
LQ > 1.2
Footwear
LQ > 0.9 Sporting &
Recreation
Goods
LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of U.S. employment.
An LQ > 1 indicates an above average employment share in a cluster.
Source:
20120329 Institute
– Toronto forEconomic
Region Competitiveness & Prosperity,
Summit – FINAL Toronto. Based on the research of Prof. Michael E. Porter and the Cluster Mapping Project, Harvard Business School.
Copyright 2012 © Professor Michael E. Porter
20
 Clusters as a Tool For Competitiveness Policy

• A forum for collaboration between the private sector, trade associations,

government, educational, and research institutions

• Brings together firms of all sizes, including SME’s

• Creates a mechanism for constructive business-government dialog

• A tool to identify problems and action recommendations

• A vehicle for investments that strengthen multiple firms/institutions

simultaneously

• Fosters greater competition rather than distorting the market

• Enhances the efficiency and effectiveness of traditional economic

policy areas, such as training, R&D, export promotion, FDI attraction, etc.

20120329 – Toronto Region Economic Summit – FINAL 21 Copyright 2012 © Professor Michael E. Porter
 Organize Public Policy around Clusters

Business Attraction Education and Workforce Training

Science and Technology

Infrastructure
Export Promotion (e.g., centers, university
departments, technology
transfer)
Clusters
Market Information Setting standards
and Disclosure

Specialized Physical Environmental Stewardship

Infrastructure
Natural Resource Protection

• Clusters provide a framework for organizing the implementation of many

public policies and public investments directed at economic development
20120329 – Toronto Region Economic Summit – FINAL 22 Copyright 2012 © Professor Michael E. Porter
 The Role of Business in Cluster Development
Company Attitudes Towards Clusters

• Create more competition • Create more opportunities

• Lose employees to spin-offs • Expand the supply of skilled

people and technology

• Bid up costs • Expand the local supplier base

AND

• Increase efficiency, flexibility,

and productivity

• Foster innovation

• Most cluster participants are

not direct competitors
20120329 – Toronto Region Economic Summit – FINAL 23 Copyright 2012 © Professor Michael E. Porter
 The Role of Business in Competitiveness
Action Agenda

Improving Skills
• Create or expand an apprentice program to train workers to be employable
by company and others
• Create or expand a training program to upgrade the skills and productivity of
current or prospective employees
• Partner with a community college, technical school, or university to align
its curriculum with the needs of business, and commit to hire a number of its
graduates

Upgrading Supporting Industries

• Identify and increase sourcing from capable local suppliers
• Mentor local suppliers to upgrade their capabilities and make them more
attractive partners
• Join consortia that help small companies access procurement contracts

24 Copyright © 2012 Professor Michael E. Porter

20120329 – Toronto Region Economic Summit – FINAL
 The Role of Business in Competitiveness
Action Agenda

Supporting Innovation and Entrepreneurship

• Participate in research collaboratives in company’s field that build businesses
of the future
• Invest in or incubate promising startups related to company’s business
• Support social entrepreneurship efforts that improve the local business
environment

Shifting the Business-Government Relationship

• Advocate business-wide improvements rather than lobby for special interests

Increasing Cluster Strength

• Participate in a cluster competitiveness initiative in your field

25 Copyright © 2012 Professor Michael E. Porter

20120329 – Toronto Region Economic Summit – FINAL
 Creating a Regional Economic Strategy

Regional Value Proposition

• What is the distinctive competitive position of a geographic area

given its location, legacy, existing strengths, and potential strengths?
– What unique advantage as a business location?
– For what types of activities and clusters?
– And what roles with the surrounding regions, nation, and the broader
world?

Achieving and Maintaining Parity

Developing Unique Strengths
with Peers

• What elements of the business • What weaknesses must be addressed to

environment can be unique strengths remove key constraints and achieve parity
relative to peers/neighbors? with peer locations?
• What existing and emerging clusters
can be built upon?

• Priorities and sequencing are necessity in economic development

20120329 – Toronto Region Economic Summit – FINAL 26 Copyright 2012 © Professor Michael E. Porter