Can Policy Makers Create an Ecosystem for Entrepreneurship?

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This piece is cross-posted and adapted slightly from The Economist, November 16, 2010. 

Zebras are beautiful. They are powerful. They exist in nature. But if someone told you that you could paint a white mule with black stripes and call it a zebra, you would send them packing. The necessary and sufficient conditions for breeding zebras are two mature adults of opposite gender, springtime, and some privacy.

Economic clusters are effective. They are powerful. They exist in nature. So why do most economic policy makers think they can take some real estate, paint it with an anchor tenant and a name, and call it a cluster? The necessary, and often sufficient, condition for clusters is successful entrepreneurship.
Like the 1980’s wag about an executive never being fired for buying IBM, the 2000's version is that a policy maker cannot be fired for promoting a “cluster strategy”. There are only three small questions: Do they work? Are they necessary? And, can they do damage?
Do cluster strategies work? I recently spent a few days with several dozen of the world’s leading cluster consultants advising a large government on implementing a national cluster strategy: “Show me the examples where government-initiated clusters have fulfilled their entrepreneurial promise?” I asked. After shoulders shrugged, Singapore’s Biopolis, the country’s ambitious development for biomedical research and business, emerged as the best answer. But evidence that the Singaporean government’s $500 million program, launched in 2001, actually created entrepreneurship remains scant. Biopolis did attract world-class scientists, a few interesting European biotechnology companies, a few multinational tenants, and some early stage biosciences companies, but nine years later the most we can say is, “the jury is still out”. What is missing is entrepreneurshipthe only aspect of Singapore’s economy that warranted significant criticism from the recent WEF competitiveness report.
Are cluster strategies necessary? Several of the most entrepreneurial regions in the world became so without, or despite, cluster strategies. Iceland’s most successful ventures include a leading pharmaceutical manufacturer of generics (Actavis), a leading multimedia game developer (CCP), and a leading prosthetics manufacturer (Ossur). None of these is related to Iceland’s “national competitive advantages” of natural beauty, geothermal energy and fish.
In the case of Iceland, the critical element was bottom-up entrepreneurship, which defied any top-down cluster logic.
Taiwan is an instructive example of a top-down sectoral strategy that did contribute to entrepreneurship. The county’s entrepreneurial transformation was significantly impacted due to the government’s investment in semiconductor technology in the 1980s, combined with related research and training institutes and the building of Hsinchu Science Park just outside of Taiwan. But the government was careful to “set the table” for the entrepreneurs, but not tell them when, what, or how to eat. In fact, research has consistently shown that successful clusters follow entrepreneurship, not the other way around.
Can cluster strategies be detrimental? “We are not so much a cluster as a grouping of competitors faced with an economic crisis, fierce competition, high labour costs, and a weak dollar,” commented the head of the Matera, Italy’s vaunted furniture cluster. In fact, most of Italy’s clusters were in serious difficulty as of a year ago precisely because clusters can agglomerate industry risk rather than mitigate it. If these clusters had been built bottom-up on entrepreneurial toughness rather than through cozy supplier-customer proximity, I believe they would have been better equipped to create opportunity out of crisis.
Cluster strategies actually go against the grain of entrepreneurship in at least one important respect: entrepreneurship has an intrinsically contrarian element. Often an actor latches onto an opportunity that others miss because conventional logic damns it as either worthless, impossible, or stupid. In fact, it is the “job” of the entrepreneur to look for the opportunities on the “left” if the cluster strategy says “look right”. It is possible that top-down cluster strategies may perversely dull the entrepreneurial spirit rather than sharpening it.
Cluster guru and Harvard Business School professor Mike Porter had it right 12 years ago: before intervening, governments wanting to foster clusters should first observe which entrepreneurial ventures have “passed the market test”, and help foster clusters around those successes. Unfortunately, economic policy makers have ignored this necessary condition, trying to start clusters from scratch. In fact, the bigger challenge is to foster the conditions that allow entrepreneurs to pass that "market test”. Government and other public leaders can indeed play a crucial role in fencing off and enriching the zebra’s breeding grounds, but they have to be clear about how the zebra really gets its stripes.

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