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Why we need more clusters to help deliver on innovation, growth and wealth creation in the economy

By Esmond Birnie

Published 04/08/2015

Aerospace, life sciences and agri-food are all cluster areas
Aerospace, life sciences and agri-food are all cluster areas

Just 12 months ago, a major report from the Centre for Cities and McKinsey, identified the 31 most significant UK business clusters. These clusters are home to fewer than 10% of the nation's businesses but employ one in seven UK workers and generate 20% of national economic output. Not one was in Northern Ireland, the report said.

Yet clustering is a vital component of successful economies and you don't have to travel too far for a world-class example.

The Republic of Ireland is the top European location for international pharmaceutical investment, with over 30 Food and Drug Administration (FDA) approved pharma/biopharma plants. Eight of the top 10 global pharmaceutical and biopharmaceutical companies are in the Republic, with exports of over €20bn (£14bn) - all from the Irish pharma cluster.

But clustering is not restricted to manufacturing, with the American business strategist Michael Porter defining clusters as including suppliers of specialised inputs such as components machinery, and services, and providers of specialised infrastructure. Porter says clusters extend downstream to channels and customers, and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies or common inputs. Finally, many clusters include government institutions, standards-setting agencies, think-tanks, vocational training providers and trade associations. Support for clustering came from economist Paul Krugman's New Economic Geography, which said it can give businesses cost advantages - what economists call external economies.

So, if, clusters are good, can deliver innovation, growth, enhanced gross value added (GVA) and superior wealth creation… why don't we have any?

Well, not everyone agrees with the Centre for Cities. An earlier study, by the Department of Trade and Industry in 2001, identified eight major clusters in Northern Ireland. The MATRIX Northern Ireland Science Industry Panel in 2008, which analysed likely trends in demand and indications of competitive strength in Northern Ireland, indicated five clusters in the region.

These were: advanced engineering (including aerospace and other vehicles), agri-food, ICT, life and health sciences and advanced materials. Total estimated employment in those clusters in 2008 was 63,000 with a combined turnover of about £7.3bn.

We believe there is considerable potential to develop further clusters in Northern Ireland. For example, in tourism, where the Centre for Cities identified tourism as a cluster in both Scotland and Wales.

Another potential cluster is business services, where employment has grown substantially in the last decade, much of it driven by inward investment, and where there is evidence that Northern Ireland has locational advantages.

The genesis of a cluster can owe a lot to contingency, so-called random events - eg, a certain region/city lands a major defence contract from government or two ICT graduates launch a start-up firm from their garage. Success may lead to success and 'cumulative causation', causing a cluster to grow. Government's role is still important, ensuring the environment is right for clustering.

As a response to the MATRIX report, in 2009 the Department of Enterprise, Trade and Industry (DETI) outlined a policy of promoting industry-led innovation communities (IICs). These were to be fostered in sectors such as renewables, smart grid, composite technologies and connected health. This was a good start but so far it is unclear what substantial difference the IICs have made to the behaviour or performance of firms.

Finally, Centre for Cities and McKinsey identified five main challenges and areas needing policy responses relating to the clusters in Great Britain (see above), all of which apply very well to Northern Ireland.

Dr Esmond Birnie, chief economist at PwC NI

Belfast Telegraph

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