THE STATUS OF AND OPPORTUNITIES FOR BUSINESS CLUSTERING WITHIN THE FOREST PRODUCTS SECTOR IN THE U.S. Executive Summary

2009

Prepared for the U.S. Endowment for Forestry and Communities, Inc.

Individual Contributors: Francisco X. Aguilar1, Stephen M. Bratkovich2, Kathryn Fernholz2, Amy Garrard3, Robert K. Grala3, Liam Leightley3, William Martin3, and Ian A. Munn3

1 Department of Forestry, University of Missouri 2 Dovetail Partners, Inc. 3 Forest and Wildlife Research Center, Mississippi State University EXECUTIVE SUMMARY

Contents Introduction ...... 3

Concept of an Industry Cluster ...... 3

Potential Benefi ts to Firms Located in Industry Clusters and Local Economies ...... 3

Types of Industry Clusters ...... 4

Successful Industry Cluster Development ...... 4

Targeting Successful Cluster Development ...... 4

Experience from Successful Forest Business Clusters ...... 4

What U.S. Forest Sector Stakeholders Th ink About Forest Business Clusters ...... 5

Factors Leading to the Successful Development of Forest Business Clusters

Perceived Advantages of Forest Business Clusters

Perceived Disadvantages of Forest Business Clusters

Should Additional Collaboration Within the Cluster be Encouraged?

Factors Aff ecting Clustering Within the Wood Products Industry in the U.S. South ...... 6

Recommendations ...... 6

Online Registry of Forest Business Clusters ...... 8

Literature Review on Business Clustering Within the U.S. Forest Sector ...... 8

References ...... 8

2 Introduction in the U.S. South; Experience from successful forest business Th is project examined the status of and opportunities for clusters; Recommendations; Online registry of forest business business clustering within U.S. forest products and closely- clusters; Literature review on business clustering within the related natural resource-based sectors. Th e project identifi ed U.S. forest sector; and References. business cluster models adopted in the forest sector, explored partnerships among cluster entities, and examined policies, Concept of an Industry Cluster strategies and support mechanisms that could facilitate An industry cluster is a group of fi rms and institutions successful business clustering. Information collected during located in close proximity whose businesses are interlinked the summer and fall of 2008 was also used to develop a through value and supply chains, labor, and use of similar template for a national registry of forest business clusters. Th e inputs, technology, and complementary products. Companies project constituted a comprehensive research eff ort comprised locate close to each other because they have similar of the following components: production interests and needs, and consequently depend on • A Literature Review: to examine adopted business each other in achieving success as a group. Industry clusters cluster models, determine benefi ts and challenges are attractive to related companies because they create new associated with business clustering, and identify business opportunities that would not be available if the forest business clusters within the U.S. forest sector companies operated in isolation. reported in the literature. Th e project reviewed over 100 scientifi c articles, industry reports, and assessment Potential Benefi ts to Firms Located reports (available at in Industry Clusters and Local www.fwrc.msstate.edu/cluster/bibliography.asww.fwrc.msstate.edu/cluster/bibliography.asp). Economies • A Nation-wide Online Survey: to seek opinion By locating their production and services in the cluster, from U.S. forest sector stakeholders on major drivers, companies gain ready access to trained workers, infrastructure advantages, and disadvantages of business clustering in and specialized suppliers. Th e result is that companies the forest sector, and determine needed support. Th e participating in a cluster can lower their costs compared to survey was also used to identify existing forest business non-clustered ones. Some of the specifi c benefi ts to industry clusters for inclusion in the cluster registry. and local and regional economies include: Easier and Less Costly Recruitment of Workers: • Geospatial and Econometric Analyses: to examine clusters create a pool of workers that often are trained and socio-economic conditions and resources aff ecting specialized to work for specifi c companies in the cluster. clustering among wood-using mills in the U.S. South. Consequently, this reduces the risk of not being able to Th is study analyzed the reasons behind clustering that recruit qualifi ed workers and reduces recruitment costs. It also can be used to guide regional economic development reduces the cost and time of training such workers. in the industry. Easier and Less Costly Access to Production Inputs: • Phone Interviews with Stakeholders by locating production in an industry cluster, companies Knowledgeable of Forest Business Clusters in the gain access to specialized inputs and their suppliers. Th is Public and Private Sectors: to develop case studies reduces costs associated with transportation, inventory, and illustrating clustering approaches in various regions of potential delays. Close proximity to suppliers improves both the U.S. Th is component helped identify conditions communication and access to support services provided by specifi c to a given cluster that could not be captured in these suppliers, and allows for faster product modifi cations. the econometric analysis. Better Understanding of Suppliers and Consumers: • A website featuring a registry of forest business companies participating in clusters acquire knowledge clusters in the U.S. was created and launched in 2009 and experience that is crucial to individual company (available at success. Interactions among companies facilitate exchange www.fwrc.msstate.edu/cluster/cluster_search.asww.fwrc.msstate.edu/cluster/cluster_search.asp). Th e of expertise and help solve production problems. Closer registry allows entry of new clusters. interaction with suppliers and consumers permits greater effi ciency in the production of goods and services that better In the following paragraphs we review some key fi ndings meet the needs of consumers. of this project. Complete details are presented in a full report Companies Provide Complementary Products and available at www.usendowment.org and Services: many companies produce products that are www.fwrc.msstate.edu/clusteww.fwrc.msstate.edu/cluster. Our fi ndings are summarized complementary and, thus, do not compete directly with as: Concept of an industry cluster; Potential benefi ts to fi rms each other. However, collective success of cluster companies located in industry clusters and local economies; Types of and their productivity depends on the performance of each industry clusters; Successful industry cluster development; individual fi rm. Targeting successful cluster development; What U.S. forest Improved Access to Public Institutions and Goods: sector stakeholders think about forest business clusters; collectively, cluster companies are better able to attract Factors aff ecting clustering within the wood products industry government investments in infrastructure and various 3 educational and training programs. Th ey also can compete parks developed by universities or state governments can more eff ectively for funding. serve as examples. Better Motivation for Continuous Improvement: by participating in clusters, companies continuously Successful Industry Cluster compare their achievements with others in the cluster, Development which stimulates positive competition, innovativeness, and Cluster success is based on advantages of location increased productivity. such as availability of raw materials and qualifi ed workers, Higher Wages: industry clusters decrease costs and positive business environment, research expertise, education, lead to increased productivity and employment. Cluster infrastructure, and innovativeness. Often, clusters develop employers, competing for skilled workers, are willing to pay as the result of local entrepreneurship. For example, higher wages than non-cluster employers. the Marine trade cluster in Washington and log home Improved Employment Opportunities: cluster manufacturing cluster in Montana started with several workers tend to specialize in specifi c jobs, improve their small fi rms established by local entrepreneurs. Over time, skills, and be more productive. Th ey are more likely to fi nd numerous spinoff businesses emerged and contributed to jobs matching their skills in the industry cluster than in cluster development. areas without a cluster. Some clusters were created by “chance events” such Improved Communication and Company Interaction: as establishment of a government institution. Such an clusters can enjoy improved communication and interaction institution typically needs appropriate infrastructure and among fi rms. Firms benefi t from closer cooperation, external services to function effi ciently. Th is creates the need improved logistics, innovation, and positive competition for suppliers, service providers, fi nancial institutions, and leading to increased productivity. other cooperating businesses. For example, the establishment Increased Economic Growth: successful industry of land-grant universities resulted in substantial economic clusters attract establishment of new businesses that development in surrounding areas. results in increased economic activity and employment in the region. Th is provides a larger tax base and generates Targeting Successful Cluster greater tax revenues. Development Targeting development of particular industry clusters Types of Industry Clusters requires a detailed knowledge of cluster characteristics, Industry clusters diff er in the way they develop and stage of development, competitiveness of the industry, and operate. Some industry clusters manufacture specifi c strengths of the region. Regions with well-established clusters products or provide unique services (automotive, fi nancial, should focus on strategies identifying companies’ overlapping and forest products). Others are characterized for locating interests, new market opportunities, and a shared vision for production in areas with some desired characteristics the cluster. Regions with small industry clusters may benefi t (abundant natural resources or proximity to markets). For from promoting clusters by off ering fi nancial incentives example, sawmills locate close to forests, whereas furniture for new fi rms, developing adequate infrastructure, and manufacturers often choose to locate near consumer developing cost-share training programs. markets. In other cases, clusters develop because of available Regions that intend to develop new clusters or trained workforce, suitable infrastructure, and favorable reinvigorate declining clusters need to be aware that business environment. their eff orts might have limited success. Declining More often clusters are defi ned by interactions among industries present additional challenges for developing cluster participants and their development. Cluster successful clusters. Such regions should focus on improved categories may include Marshallian, hub and spoke, recruitment eff orts, development of small companies, satellite platform, and state anchored clusters. Marshallian improved public infrastructure, and training programs. clusters typically consist of local small and medium-sized Federal, state, and local governments can provide a companies that trade their products and services with stimulus for successful cluster development. Th ey can cluster members. Secondary wood products manufacturers provide infrastructure (roads, buildings, power lines, are most likely to follow this type of business cluster. Hub etc.), organize development and training workshops, assist and spoke clusters include one or several large companies companies with collaborative innovation, conduct market serving as anchor companies interacting with numerous assessments, and promote the cluster. Governments should small suppliers. A combination of primary and secondary promote more than one cluster or industry to decrease a wood products manufacturers can make this type of region’s vulnerability to economy fl uctuations. business model successful. Satellite platform clusters consist of large companies with multiple branch plants Experience from Successful Forest that act independently. State-anchored industry clusters Business Clusters are based on an anchoring institution such as a university, Phone interviews and review of reports and scientifi c government agency, or military installation. Research papers were conducted to determine business models and 4 strategies adopted by forest clusters in six regions of the forestry stakeholders on the status of and opportunities for U.S. (Pacifi c Northwest, Southwest, Midwest, Lakes States, business clustering in the U.S. forest sector. A total of 158 Northeast, and South) and internationally (Finland and respondents across the U.S. evaluated the importance of Sweden). Each cluster was thoroughly examined with respect various factors driving the development of forest business to cluster history and development, business structure, clusters, indicated their advantages and disadvantages, and partnership with governmental and non-governmental provided information on existing forest business clusters. institutions, investment strategies, and policies that led to the Below are main fi ndings: cluster success. Adopted business models and strategies varied Factors Leading to the Successful Development of between clusters. Diff erences were infl uenced by available Forest Business Clusters input of capital resources, economic situation in the region, According to stakeholders, the most important and involvement of external institutions. However, several driving factors to the successful development of a forest factors appeared to be particularly important across clusters: business cluster included availability of raw materials, Feasibility analysis needs to serve as a starting point in access to product markets and transportation network, activities leading to the development of new or expansion labor availability, public non-fi nancial support, and private of existing forest business clusters. To capture market fi nancial and non-fi nancial support. Other factors, that potential, such analysis needs to examine a region’s economic can potentially lead to cluster development, included forest conditions, existing infrastructure and labor resources, and health concerns, public fi nancial support, university and identify development opportunities—including types of new college extension, training and research, environmental industries that would complement existing fi rms. certifi cation, stewardship contracts, and existence of Stakeholder cooperation and commitment are crucial industrial parks. for the success of forest business clusters. Stakeholders, Perceived Advantages of Forest Business Clusters representing industry, government, and supporting Stakeholders agreed that the most prominent advantages organizations need to work together to create a long-term of business clustering included better utilization of raw vision for the cluster and apply strategies and policies materials and/or manufacturing, improved cooperation supporting cluster development. among cluster members, and more eff ective product Leadership by a third party organization is often needed to marketing. Other advantages included cluster ability to coordinate activities of stakeholders involved in developing the attract more suppliers, greater opportunity to add value cluster. An ‘umbrella’ organization can help cluster businesses by vertical integration of cluster members, and improved identify market niches, assist with workforce training and manufacturing innovativeness and competitiveness. development, seek fi nancial resources, improve networking Perceived Disadvantages of Forest Business Clusters among cluster members, educate businesses about the benefi ts Stakeholders were concerned with increased competition of clustering, and gain political support for the cluster. for available labor, undesired competition between cluster Funding plays a major role in the development of many members, increased cost of raw materials, increased congestion business clusters. Local, state and federal governments can on roads, and increased labor cost. Increased energy costs was improve the economic climate for business clustering in not viewed as a potential disadvantage. However, statistical the forest sector. Important actions created by additional analysis indicated that none of the mentioned potential funding (such as grants, loans, and tax incentives) include disadvantages was statistically signifi cant. start up assistance to new businesses, incorporating new Should Additional Collaboration Within the Cluster technologies, providing workforce training and education, be Encouraged? and encouraging capital investment. Collaboration among cluster businesses and external Entrepreneurial thinking by the leadership of cluster institutions is important for development of successful businesses, governments and supporting organizations is business clusters. Forest sector stakeholders were asked to crucial to success. Stakeholders need to focus on educational indicate whether additional collaboration among cluster programs that help businesses develop entrepreneurial entities should be encouraged and what was needed to capacity in the cluster. support such collaboration. A majority believed that Access to inputs and markets is crucial to cluster collaboration should be encouraged; however, stakeholders development and long-term viability. A dependable fl ow of diff ered in what was needed to facilitate such collaboration. raw materials and stable markets for products and services are Many stakeholders indicated that such collaboration key to sustainable clusters. Stakeholders need to focus eff orts should be facilitated through improved communication on ensuring continued access to production inputs and between cluster members, engagement, and eff ective expanding the customer base. leadership (government or private). Ensuring fi nancial and non-fi nancial support, providing outreach, and educating What U.S. Forest Sector businesses on benefi ts of clustering were also needed to Stakeholders Think About Forest encourage collaboration. Business Clusters A few respondents believed collaboration should not An online survey was used to obtain feedback from be encouraged because it potentially can result in negative 5 impacts. For some, encouraging collaboration did not present cluster of sawmills. A $1 increase in the average price per ton any tangible benefi ts, whereas for others clusters divert of logs would reduce the probability of an additional sawmill needed resources and create confusion if it is unclear who is in a county by 4%. responsible for cluster development. Antitrust concerns were Other Factors Include: also mentioned for not encouraging additional collaboration. Land Values: Areas with high land costs are less likely to host a cluster of fi rms. Wood manufacturers require Factors Affecting Clustering Within land for the manufacturing process and storage of logs and the Wood Products Industry in the U.S. manufactured products. However, compared to other factors, South land value is not as important. A $1,000 increase in land Information on the location of 1,964 wood-using mills1 value would decrease a county’s probability of attracting an was used to study factors aff ecting clustering in the U.S. additional mill by 0.6%. South2. Th e number of sawmills per county was used as Access to Labor Pool: Th e development of a successful evidence of industry clustering. Examined clustering factors forest business cluster requires synchronizing location with included access to labor pool, cost of logs, linkage with existing knowledge on forest management, forest products supply chain industries, transportations infrastructure, energy manufacturing, sales, and marketing. Nevertheless, compared cost, complementarity with industries using similar inputs, to other manufacturing inputs, such as logs, labor is mobile and land value. A statistical model was developed to explore and is not as critical as fi xed conditions such as availability how the number of sawmills per county would change as of logs, infrastructure, and energy cost. If county labor a result of changes in aforementioned clustering factors. availability increased by 1,000 people, the probability of Findings suggest that the primary clustering factors are: attracting a sawmill would increase by less than 0.1%. Infrastructure Facilitating Low Transportation Linkage with Supply-chain Industries: Close Costs: Transportation is an important cost element in integration can add value to wood products and reduce all wood procurement systems in the forest industry. Th e transportation and transaction costs along the supply chain. model suggests that a county with access to an adequate It also can lead to better utilization of wood and residues and transportation infrastructure is more likely to attract a new improved quality of fi nal products. Th e existence of a well- mill. Th e probability of attracting an additional mill is integrated supply chain allows for development of new value- 38% higher for counties with access to such infrastructure added products and creates business opportunities such as than counties without such access. Infrastructure is one the development of integrated biorefi neries. Nevertheless, at of the most critical clustering factors in the primary wood the county level, this linkage is not as strong as other factors products industry. (the probability of attracting a sawmill would increase by less Complementarity with Other Industries Using than 0.1%). Similar Production Inputs: Th e model looked at the geographic concentration of sawmills and other mills Recommendations including pulp mills, composite manufacturing facilities, post A major fi nding of this project is the uniqueness of pole, plywood, and veneer mills. Results showed a strong development strategies adopted by successful forest business relationship in the coincidence of all mentioned wood-using clusters. Th e ultimate objective of a business cluster is mills. All these manufacturers share similar inputs, related to develop competitive advantages that make products technology, and human resources. Counties that already have manufactured by the cluster of special value to customers a core of established wood manufacturers can benefi t from based on price, quality, service or other attributes. Th e the presence of other related fi rms. Th e model suggests that business model adopted is dependent on the nature of counties with an already established industry can be 26% the cluster, access to input materials, types of products more successful in attracting other sawmills. manufactured, and proximity to markets. Certainly, there Energy Costs: Increases in electricity prices will have is no universal model that will fi t all business structures a negative eff ect on the ability of counties to develop forest and ensure their success. We determined that the clusters business clusters. A one cent increase in the cost of electricity shared several common features that seemed essential to their per kilowatt hour would reduce the probability of an success. Below, we summarize our recommendations related additional sawmill locating in that county by 22%. States to forest business clusters. and counties with lower electricity costs will be the most Collaboration Helps Gain Competitive Advantages likely to host a forest business cluster. and Builds Business Resilience: Cost of Logs: Logs are relatively immobile input factors • Th e forest sector has experienced signifi cant changes and their cost must be analyzed when examining viability of over the last few decades, and changes can only be forest business cluster. Th e model suggests that price increase expected to continue. A forest business cluster can would signifi cantly impact the ability of a county to attract a better adapt to such changes and create opportunities

1 Wood using mills included sawmills, pulp mills, composite manufacturing facilities, post pole, plywood, veneer and others. 2 Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and Virginia. 6 to overcome possible future challenges. Close supporting more than one viable cluster. Full circle collaboration between members allows for better clusters off ering diversifi ed products and services understanding of processes, cost structures, and increase customer base and may help to ease opportunities for effi ciency improvements. negative economic impacts. • One of the main objectives of business clusters is • Key stakeholders must be committed long-term the creation of competitive advantages. Competitive to the cluster. Although leadership styles diff er advantage is not static, but rather it has to change among clusters, it is necessary to have individuals continuously to adapt to evolving consumers’ who are committed to the success of the cluster. preferences, technologies, and prices. Th e close Commitment to the cluster among business collaboration between fi rms can provide resiliency community members and economic developers needed to address adverse market conditions and is fundamental. Cluster building must use the allow for adopting value added technologies. competitive advantages existent in a region (natural Competitiveness can be enhanced in a cluster by resources, technical know-how, transportation purchase of inputs from other members at lower systems, etc.). Some regions are endowed with costs, increased ability to improve processes and plentiful amounts of softwoods or hardwoods, products due to closer cooperation and innovation. enjoy a rich network of roads, have a long history • Coordination among cluster members is of managing and using their forest resources, or fundamental to success. Raw materials must fl ow possess a unique cultural background expressed from forest to factory in a reliable manner. Close through wood products manufactured locally. working relationships between logging contractors, To be successful, a cluster has to build on the wood manufacturers, and supply-chain companies foundation provided by the natural advantages should be exercised. Industry sub-sectors must be present in a region. linked to strengthen competitiveness of all cluster • Individuals, businesses and agencies outside the members to ensure supply and quality of raw cluster, particularly those in the public sector, are materials. Closer business collaboration also can also important in providing adequate support. facilitate development of viable markets for wood A combination of private and public eff orts to residues. Collaboration should be complemented develop a unifi ed strategy for promoting North with strong local support from the private and American forest products can be an interesting public sectors. Coordination of business interactions model to follow. North American manufacturers must work to ensure quality control and provision and related forest-based communities face price of products that meet customer expectations. Full pressures and competition from wood product circle (self-sustaining) clusters are not as dependent companies around the world. A national strategy on raw materials and include numerous supporting that facilitates the development of competitive businesses and organizations. Clusters relying solely advantages in forest business clusters could be on private ownership or partnership of private and used as a strategy to promote effi ciency in the public businesses and institutions were successful. sector and improve economic well-being of rural However, a third party leader institution was crucial communities. to the successful development of many clusters. • Th e public sector, at the federal, state and local • Forest business clusters should build upon levels, can also facilitate the development of existing communication networks to outreach clusters by investing in human resources. Funding to potential cluster participants and customers. for workforce training and development helps Building public awareness about the role of the promote effi ciency in the forest sector. Lack of forest industry in local, regional and national adequately trained labor can halt the development economies can be fundamental to promoting of clusters. locally manufactured products. External Support and Funding are Needed to Facilitate Cluster Development: Industry, Private and Public Sectors Stakeholders are • Cluster building benefi ts from a comprehensive Important for Successful Forest Business Clusters: economic development strategy supported by • Stakeholders need to be aware that economic government. Business can benefi t from easy to development based on only one business cluster access funding opportunities, continuous training, is vulnerable to changing economic conditions research, and the development of adequate and consumer preferences. Any negative changes infrastructure facilitating transportation of inputs may have an adverse impact on the cluster and and fi nal products. economic development in the region. Whenever • Successful business clusters enjoy the ability possible, eff orts should focus on identifying and to access information, technology, and external 7 funding. Capital investments and technology are closely integrated could have better access to from outside a cluster must be encouraged. Th ey programs promoting renewable energy production can come from other counties, states, regions or and be poised to diversify their processes and even countries. Access to information and funding outputs to add an energy component. for the continuous upgrading of technology and know-how is fundamental to maintain competitive Online Registry of Forest Business advantage. Clusters • Public and private investment in research and An online registry of existing forest sector clusters in the U.S. development of new technologies and products is available at www.fwrc.msstate.edu/cluster/cluster_search.asp. and acquisition of equipment is another factor Th e registry provides information about each cluster including fundamental to successful clustering. Suffi cient location, contact information, geographic area served, legal lines of credit to support training, upgrade status, size (number of fi rms and employees), duration, and equipment, and process improvement and specifi c strategies the cluster uses to meet its objectives. Th e development will be necessary to allow clusters to registry is not intended to represent all forest sector clusters create competitive advantages. in the U.S. Instead, it is the “fi rst step” in a process to begin • Colleges, universities, and public agencies are to categorize clusters nationwide and create a structure for important in developing clusters. Training in monitoring clustering activities in the U.S. forest sector. forest management, logging, manufacturing, Visitors to the website can submit information about add-value processes, business management, and additional clusters for listing in the online registry. A more transportation can contribute to the improved detailed description of the online cluster registry is included effi ciency of the wood products supply chain. in Appendix C. Collaboration between educational institutions and the private and public sectors can facilitate Literature Review on Business provision of necessary and continuous training. Clustering Within the U.S. Forest Sector Integration and Diversification are Important for An online database of over 100 scientifi c papers, Improved Competitiveness: assessment and industry reports is available at • Opportunities for clusters include embracing www.fwrc.msstate.edu/cluster/bibliography.asp. Each renewable energy production as part of the reviewed document is briefl y summarized with respect to its business cluster. An existing cluster of forest fi rms key fi ndings. Visitors to the website can view the entire list can utilize residues to generate energy for local of document summaries or search the database by keywords consumption and export. Pulp and paper plants and pre-defi ned terms. Examined papers and reports relate can consider the adoption of a biorefi nery model to the U.S. forest industry, adopted business cluster models, to maximize the use of wood materials for the benefi ts and challenges associated with business clustering, production of wood products, chemicals, and and identify forest business clusters within the U.S. forest energy. As federal and state governments prioritize sector. A more detailed description of the online database is locally produced renewable energy, companies that included in Appendix D. References Barkley D.L., Henry, M.S. 2001. Advantages and disadvantages of targeting industry clusters. Regional Economic Development Research Laboratory, Department of Applied Economics and Statistics, Clemson University. Research Report 09-2001-01. Available at http://cherokee.agecon.clemson.edu/redrl_rpt3.pdf.

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