Around the world, and specifically in emerging markets, Economic clusters (EC) are being used to jump-start industries and accelerate economic development.
They are called Free zones, Economic cities or Industrial zones and are developed to accelerate a nation’s economic development, yet too often they fail to fulfill their expected goals, such as qualified job creation, GDP growth, and FDI attraction, while remaining commercially viable.
A.T Kearney, a global management consulting firm, has recently published a study that takes a look at the competitiveness and keys to success of these clusters in the current economy.
In the last few decades countries around the world have been using ECs to catalyze the growth of industries and accelerate economic development. ECs provide a platform to leverage a region’s resources and in the process grow its GDP.
However, recent A.T. Kearney research of more than 50 special economic clusters across geographies and sectors finds that many ECs face a challenge meeting both commercial and economic development targets.
Dr. Omar Sawaya, principal, A.T. Kearney Middle East explained: “The focus needs to be on sectors of the value chain that are aligned with the long term local and regional economic development agenda, linking the EC to the host country’s economy.”
According to A.T. Kearney it is critical that ECs function like an ecosystem – a clear set of enablers must be put into play for companies in a certain sector to succeed.
Sector Ecosystem Enablers
These enablers include a focused strategy, sound facilities and infrastructure, favorable regulations and ease of doing business, talent and technology development, access to capital and financing, and promotion of small- and medium-sized enterprises (SMEs) and entrepreneurs. In mature markets, these enablers are often provided by numerous stakeholders—both public and private. In developing markets, the ECs fill a void by providing some or all of the enablers seeking to be a “one-stop-shop” for companies and investors.
The booming economy before the 2008-2009 crisis saw a mushrooming of ECs around the world, in particular in the CHIMEA (China, India, Middle East and Africa) region with over 300 EC being established, of which more than 100 are in China, 100 in India and another 85 in the Gulf Cooperation Countries (GCC) and the Levant by 2015.
“Post crisis, ECs have had mixed success, because owners – and to some degree operators – have often failed to have a clear sector strategy, right planning horizon, the right combination of enablers, and a viable business model for achieving economic development and commercial returns,” explained Dr. Sawaya.
Several ECs have completed their infrastructure development and are seeking tenants, but they are still unable to claim the impact on industry or knowledge sector development for which they were designed. Competing priorities might be the reason for this situation. Real estate is medium term and profit driven and akin to the private sector, while economic development is measured by GDP, FDI and employment, which have longer horizons.
In a best practice model, real estate is best left to real estate developers, under a clear mandate, with services and regulation that promotes industry development, according to A.T. Kearney. Notable examples of this separation are Aerospace Valley in France and the Michigan Economic Development Corporation in the United States.
In addition to the challenge of being large infrastructure and real estate projects supporting economic development, ECs rely on their ability to attract foreign or domestic direct investment. The vast array of ECs around the world face increased competition for attracting a fair share of investment due to a natural risk aversion post-crisis.
“Foreign and domestic investment is the principal engine to make industry clusters viable and to develop the necessary capabilities within the sectors of focus, in the form of human capital, technology transfer or R&D, and the efficient use of natural resources,” said Dr. Sawaya.
Examples of successful ECs across industry sectors and geographies are plentiful. They range from aerospace in Brazil’s Embraer Cluster and biomedical applications in Singapore’s Biopolis, to shared services in Ireland’s Shannon Free Zone and information and communication technology (ICT) in Egypt’s Smart Village, and high tech in Taiwan’s HsinChu Science Park.
“Successful Next Generation Economic Clusters will not only qualify with world-class infrastructure and real estate, one-stop-shops, and incentives that attract businesses in the short-term, but also truly differentiate themselves. They will focus on strategies for a specific sector and its value chain, driven by industry veterans who are experts in their fields; facilitate access to capital and financing for their citizens; partner with them to develop the talent and technology that will drive their competitiveness; and relentlessly incubate start-ups and promote the SME base,” concluded Dr. Sawaya.
About A.T. Kearney
A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading corporations across all major industries. A.T. Kearney’s offices are located in major business centers in 37 countries.
From our Middle East offices in Abu Dhabi, Bahrain, Dubai and Riyadh, A.T. Kearney supports both private and public sector clients as well as nations to excel and prosper by combining our regional expertise and global business perspective to achieve results.
For more information, please visit www.atkearney.ae.
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