Tuesday, September 9, 2014

EACP: A Positive Example of an Innovative Cluster

EACP: A Positive Example of an Innovative Cluster

by Zoltán Szigeti

There has been widespread disagreement among economists about the success of clusters. However, many researchers are very optimistic about the recently formed European Aerospace Cluster Partnership (EACP). So why is it that the Basque Aerospace cluster may be more successful on the medium-run than most other cluster initiatives?

An issue addressed in earlier posts here is that there is no single definition of clusters that everyone uses. A good definition is provided by German economist Alf Lublinski, who defines a cluster as a group of proximate firms interlinked by input/output, knowledge and other flows that may give rise to agglomerative advantages. Clustering of economic activity holds the potential for stimulating growth of an industry as a whole because of a reduction in transaction costs between cluster members and the easier spread of ideas. Furthermore, in a recent study, Wennberg and Lindqvist find that science-based clusters have grown faster than those in other fields. In this way, a policy that creates such a cluster in the Basque country as opposed to Madrid could reduce inequality between the two regions while boosting Spanish GDP.

A set of industrial innovation clusters was sponsored by the local government in the Basque country starting in 2000 in response to a report by economist Michael Porter which identified weakness in competitiveness of Basque industry. Annual funding is limited at 180-220,000 euro per sector. The focus, instead, is on the government devoting time and energy on engaging members to communicate and interact. The selection of targeted sectors involved public/private debate. The EACP  is one of 12 clusters that was formed in 2000 and now has 38 companies, 12,000 workers, 14 research institutes and 5 universities. Its focus is on aeronautics rather than astronautics.

In one of the most influential books in regional economics, The Competitive Advantage of Nations, Michael Porter outlines his so-called diamond model which provides a description of the key factors influencing why particular industries become competitive in particular locations. These factors can be seen in the figure below and I discuss them in turn.

Competitive rivalry is enhanced by physical proximity of firms. The goal of the EACP program is stated as promoting active cooperation and increasing focus on competitive strategic challenges. Project participants across fields are encouraged to compare their practices by exchanging and analyzing case studies. This form of cooperation would ideally lead to the establishment of a knowledge base of best practices to improve business performance. This could be crucial as worldwide competitive pressure mounts with new countries such as India, Russia and China entering the market.

Factor conditions are more relevant to production clusters where proximity to raw materials is important. In the case of a scientific innovation cluster like the EACP the relevant factor conditions are mainly those of skilled labor and infrastructure. Due to the high concentration of aerospace firms in the region, better matches between employers and highly specialized individuals are formed.

Diverse participants include smaller enterprises alongside larger firms like Aernova and Sener. The cluster is located fairly close to Toulouse which is where Airbus is based. Also, several of the other clusters present in the Basque region have related projects including the automotive, telecommunications and energy clusters. There is strong cooperation of firms with the public sector to engage actors not only within a particular cluster but across clusters on key themes. Due to the complexity of the aerospace industry, there is even more need for cooperation among highly specialized individuals than in other industries. Universities provide firms with the ability to reach researchers in their fields more easily. They also provide access to high-tech laboratories and supercomputers.

Demand for air transport of passengers has risen dramatically in recent years, especially in Europe with the expansion of low-cost airlines. One of the reasons that airlines like Ryanair are able to offer very low fares is that new aircraft they use are far more cost efficient than older ones. This shows the importance of innovation in aeronautics. Rising demand is the key argument for supporting innovation in aeronautics in the EU.

Before the crisis hit there had also been a trend of increasing car ownership while in many parts great difficulties are faced when trying to expand capacity of existing roads. The increased use of cars creates an externality-problem meaning the more people use the highway the slower they will travel. Hence people’s decision to drive rather than take a plane increase time costs for others who drive on the same route. Externalities are unfortunately usually left unsolved by free market mechanisms so that government intervention is required. One of the ways the government can intervene in this case is by supporting the airplane industry to provide a better alternative to car travel.

Lastly, as oil becomes a scarcer resource its price is expected to rise. This would reduce congestion on roads unless an alternative energy source to fuel cars was to be found but it would also make the relative cost of taking a plane cheaper compared to that of driving. This is yet another probable scenario through which demand for air travel as well as transport of goods by air would surge.  



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