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Industry clustering: Canada is catching up

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WMCO by Mike Baker
Mike Baker is the Chief Executive Officer of the Wood Manufacturing Cluster of Ontario. He can be reached at: mbaker@wmco.ca
In my last column, we shared some exciting news about the WMCO Natural Resources Canada (NRCan) Investments in Forest Industry Transformation (IFIT) program.
This took three years working with partners at NRCan to understand the value of working with clusters, and who are now trying to play a leadership role supporting them. Instead of programs granted to one company at a time, they engaged the cluster to help multiple companies at once. More of these funded projects for companies are proposed to be coming up in the new year.
For more details about that project, please read my article from the fall edition: Industry clustering: Collaboration takes flight | Woodworking Canada.
Today, more information is coming to us from the EU on clusters, providing Canada with more insights on why and how the EU has been leveraging cluster ecosystems for over 30 years. Kudos go to Sepp Gmeiner, Blair Tullis, and the founding wood manufacturing companies of WMCO (formerly the Bluewater Wood Alliance - BWA) when it started in 2011. To review, Sepp attended the Cluster Academy in Austria for cluster training in January 2011, on behalf of the founding SMEs, for a fact-finding mission to learn about clusters and how to start them; and determine if they had the makings of an industry cluster in Ontario. Fast forward to today where WMCO now serves all of Ontario and all segments of the wood manufacturing industry, with close to 150 SMEs. Yet, much more needs to be done, and SMEs need to understand the reason why clusters work, and the importance of being part of one.
WMCO board member Mark Corker, who is the executive director of MTech Hub, and president of Seredex Inc, recently attended the international cluster conference in Prague, Czechoslovakia. From this conference, he learned much and has passed along more insights of why EU clustering is working and how Canada needs to catch-up to our global competitors. He has written a white paper that is now available, and credit is given to Mark for the remaining information in this article:
“Industrial Clusters are the 
primary tool used to drive EU industrial policy and funding 
programs. Extensive experimentation and real-world practice 
have proven clusters superior to other funding methods.
Clusters play an essential role in implementing EU industrial policy. The EU knows that not just any organization is capable of taking on this major responsibility. There are rigorous accreditation standards for industrial clusters. These evolved from extensive evidence-based research. The characteristics of successful cluster organizations have been methodically curated. Third-party accreditation organizations ensure a cluster complies with the arduous standards for bronze, silver, or gold. Meeting these requirements is a significant multi-year effort that encompasses governance, composition, member engagement, facilities, project management capabilities, strategy, kpi’s and financial sustainability.
Here are just a few illustrations of what it takes 
to become an accredited industrial cluster:
Must be incorporated as
a non-profit with a board 
of directors
Industrial members fund a minimum of 30%-50% of cluster operational funding
Has an innovation facility
Develops curriculum and work integrated learning programs for its members
Projects include a minimum of 10 SMEs
More than 50% of cluster members have participated in a funded project within the last three years
The cluster develops and owns IP that benefits 
all members

These characteristics clearly differentiate industrial clusters from other ecosystems such as industry associations or economic development organizations.
In the EU, funding is available for clusters to form, obtain accreditation and mature. The EU accepts that this is a necessary long-term investment and it is not unusual for a cluster to receive operational funding for ten years. Once a cluster is certified, the access to additional funding expands. However, industry must always contribute and pay to play.

EU Clusters – A Long History of Proven Performance
The compelling advantages of clusters was outlined by Michael Porter (The Competitive Advantage of Nations, 1990). He described clusters as “geographically proximate groups of interconnected companies and associated institutions in a particular field”.
When the EU was formed three years later, there were hundreds of industrial policy and funding programs of every shape and description. Spain was just breaking ground on the very first EU clusters. They launched two cluster programs to achieve the benefits identified by Porter. While Porter had identified existing clusters that had 
evolved organically the unanswered question was whether a cluster could be successfully fabricated from policy and support programs.
Spain’s early efforts with clusters involved identifying which ingredients and processes are required to generate a viable cluster. The early stages of cluster creation started out with some fuzzy concepts and incomplete theories. Spain worked through this ambiguity, defining and refining processes and addressing operational challenges one by one. To Spain’s credit this constant progression and evolution delivered remarkable economic outcomes.
Denmark got wind of these successes and launched their own cluster initiative. Over time, more and more EU countries joined in. The major point to make is that clusters did not attain widespread adoption because of luck, coincidence or serendipity. Clusters have been continually tested in real world conditions for over two decades and they blossomed because they produce better results in employment, productivity and exports compared to other alternative funding approaches.
It turns out that the EU proved to be the ultimate environment to A/B test industrial policy. It is currently comprised of 27 non-heterogenous countries, hundreds of dissimilar regions and 200 languages. The EU has made large investments in experiments, research and analysis to methodically evaluate industrial funding programs.
When the EU was initially formed it began with a mix of every conceivable type of policy and funding program. A major initiative was undertaken to evaluate, simplify and harmonize the programs. Conceptually it created something similar to a knockout tournament bracket:

Industrial Funding Programs: Conceptual Evaluation Tournament
In the decade between 1994 and 2004 the EU completed thousands of A/B tests as they continually evaluated all the programs. They spent billions of Euros on analysis. Hundreds of metrics were reviewed including program and administration costs, outcomes, scalability etc. They studied successes and failures closely.
While this analysis was underway, cluster management was evolving and maturing. It was continually refined and perfected. Best practices were identified and shared. Cluster standards were established and improved. SME adoption rates increased. Processes to align policy and funding were tightened up.
By 2004 this far-reaching benchmarking exercise had unequivocally proven that industrial clusters were the best instruments to improve SME competitiveness. The benefits provided by clusters were indisputable and had proven to be superior to other policy alternatives.
The major takeaway is that clusters did not just miraculously appear as a tool to implement industrial policy. The emergence of clusters occurred after a Darwinian process that abandoned the failures while cross breeding successes. This culminated in today’s thriving EU cluster ecosystem.
EU made the understandable choice to exclusively use clusters to deliver industrial policy and the accredited cluster community has grown to over 3,000.
Clusters in the EU have ready access to long term funding to form, build and sustain day-to-day operations. Canada’s approach to industrial funding is quite different. See Figure 1 for a comparison of the two.

Industrial policy outside the EU
All advanced nations utilize industrial policy to address political realities and achieve desired outcomes. However, many countries outside the EU aren’t aware of why the EU ended up using clusters so extensively. This was a result of using first principles and extensive experimentation. Countries outside the EU often invent their own one-off industrial policies. These are developed from a clean slate and without adequately benchmarking the program against best global practices. Most stakeholders in the EU would be astonished that a funding program would not be based around Industrial clusters.
Two plausible possibilities outcomes for funding programs not based around clusters would be:
The program is a brand-new innovation and it significantly outperforms the EU cluster methodology. (Bear in mind that the EU has spent billions and decades trying to achieve this in 27 countries without succeeding so far); or:
The new program delivers significantly worse outcomes when compared to equivalent spending on a cluster program. The program requires substantial effort to create, design, and award. It requires new tracking and reporting systems. The program benefits only a small fraction of SMEs in the sector. Each SME executes a one-off project that is not sustained after completion. There is minimal collaboration between SME’s. There is a high probability the program won’t be repeated if the minister changes or there is an election.

I will leave it to the reader to conclude which scenario is more likely.”
Canada is catching up. Change 
is coming. Attend WMCO events as a guest and learn about what 
we do and how WMCO can help your company.
If you are not part of the only industrial cluster ecosystem in Canada for the wood industry, you need to ask yourself why?

You can learn more here: www.wmco.ca, or contact us 
at mbaker@wmco.ca

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