The Role of Clusters in the Chemical Industry Dr. Christian Ketels, Harvard Business School This document has been printed and made available by the courtesy of EPCA st at the occasion of its 41 Annual Meeting THE EUROPEAN PETROCHEMICAL ASSOCIATION The Role of Clusters in the Chemical Industry Photos cover : Top : Large platform, Antwerp, Katoen Natie, © Katoen Natie Middle : Pipe rack connection, Marl Chemical Park, ChemSite, © ChemSite Bottom : Mid-Europoort cluster, Port of Rotterdam, © Port of Rotterdam The financial support for this research by EPCA, the European Petrochemical Association, is gratefully acknowledged Page 2 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry Content 1. INTRODUCTION 5 2. THE ROLE OF CLUSTERS IN GLOBAL COMPETITION 7 2.1. Clusters and the microeconomic foundations of competitiveness 8 2.2. Globalization 11 2.3. Cluster initiatives 13 2.4. The emerging agenda for business leaders 16 3. CLUSTERS IN THE CHEMICAL INDUSTRY 19 3.1. The context for regional clusters in the chemical industry 20 General factors 20 Europe-specific factors 21 3.2. Mapping chemical clusters 22 Cluster Mapping 22 The chemical cluster category 24 Employment 26 Exports 37 3.3. Cluster initiatives 45 The chemical industry as a basis for cluster initiatives 45 Chemical cluster initiatives in Europe and Asia 47 4. CONCLUSIONS 53 Page 3 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry Page 4 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry 1. Introduction The European petrochemical industry is in transition. Traditionally, the industry has been one of the hallmarks of European business, important for economic prosperity at home and successful in global competition abroad. This position is now under threat. Many of the traditional strengths of the European petrochemical industry remain in place – a stock of skills, knowledge and experience; well integrated facilities with a rich set of specialized suppliers, services providers, and producers; highly developed infrastructure; demanding consumers. But new locations with different sets of advantages – preferential access to foodstocks; large and growing markets; new facilities able to better exploit economies of scale; aggressive government support – are challenging these strengths. The European petrochemical industry needs to develop new sources of competitive advantage, not because the old ones have failed but because on their own they are no longer sufficient to succeed in global competition. There is a clear realization in the industry, that business-as-usual is not an option. The ever increasing pressure from competing locations has been one factor. The bruising debates with European policy makers about environmental regulations have been another. EPCA and others have been platforms for the industry to discuss where the industry stands, what challenges it is facing, and how it can react. This report aims to make a contribution to this debate. First, it discusses theroleofclustersinglobalcompetitionmore generally. The chemical industry has, for reasons to be discussed, a tradition of strong cluster-like linkages between companies. As the comparison with clusters in other parts of the economy shows, however, this legacy has not only been a blessing; it has in ways also limited the way in which clusters and cluster initiatives are being discussed in the chemical industry. Second, it presents empirical facts on chemical clusters, focusing on Europe. The analysis draws on proprietary data from the Institute for Strategy and Competitiveness at Harvard Business School, the European Cluster Observatory, the Global Cluster Initiative Survey, and a number of other sources. This data has its limitations – in particular, it covers mostly Europe and North America – but it provides an important perspective on clusters and cluster initiatives in this industry; the first broad quantitative study of this sort that we are aware of. Based on this analysis, it offers a number of observations and conclusions that are based on the data, on a review of the documents prepared by industry working groups in collaboration with EPCA, and on the experience of working with cluster initiatives and cluster policies across a broad range of countries and economic sectors. Page 5 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry Overall, this report suggests that there is a clear opportunity for the European petrochemical industry to leverage clusters as a tool for making the transition to a new stage of successful development. The following statements describe some of the key characteristics of this new phase. For some locations and companies, they will read like a description of their current state or at least ambition. For others, they can hopefully be an encouragement to review the direction they are taking: Competitiveness upgrading in the European petrochemical industry has moved from a model of internal optimization within companies to a model of cluster-based optimization across networks of co-located activities Cluster efforts in the European petrochemical industry have moved from a focus on supply-chain improvements to a broad-based agenda of improving competitiveness at the level of companies, the cluster, and the cluster-specific business environment Cooperation in the European petrochemical industry has moved from an industry-based model to a new framework of cooperation that includes different levels of government, educational and research institutions, as well as industrial partners Page 6 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry 2. The Role of Clusters in Global Competition Successful companies in many industries are concentrated in a moderate number of locations, rather than being distributed evenly across geography. This empirical observation has long been neglected in the debate about the driver’s of company performance. Understanding the role of clusters and the wider conceptual framework of microeconomic competitiveness provides the tools to better understand the role of location in company success. In the traditional analysis, company success is a function of industry structure and of the company’s relative position within that industry. The way to superior performance relative to your peers within the industry is through better strategies and higher operational effectiveness. Both of these are the result of management choices within the company. While intuitive, this approach makes it hard to understand why the core activities of most successful companies in many industries tend to concentrate geographically. Why are so many of the key management decisions in the pharmaceutical industry made in New Jersey/New York and a limited number of other locations? Why in the automotive industry in Southern Germany and in a few places in Japan? Why in the financial services industry in New York and London? The geographic concentration of successful companies in a few places – different by industry – suggests that more factors than internal management and other firm capabilities play a role. In the cluster- or, more broadly, microeconomic competitiveness-based analysis, geographic concentration of strong companies appears naturally. Location-specific factors including the presence of a cluster shape the opportunities that a management team is facing and raise the likelihood as well as the returns to making smart decisions on strategy and operations. Management choices within the company are important but location-specific factors external to the company need to be understood as well. Successful companies combine internal excellence with a presence in strong locations and clusters that leverage their strengths. What are the location-specific factors that matter? How does globalization change the relevance of these factors? In what ways can cluster initiatives influence them? And what does this mean for the agenda that business leaders face? Page 7 of 55 (c) Christian Ketels, 2007 The Role of Clusters in the Chemical Industry 2.1. Clusters and the microeconomic foundations of competitiveness Clusters are defined by Porter (1998) as “geographic agglomerations of companies, suppliers, service providers, and associated institutions in a particular field.” Their two key characteristics are thus the proximity of individual activities in terms of (1) geography and (2) value creation. In the Boston Life Sciences cluster (see figure below) most of the activities occur in Cambridge, a relatively small geographic area within the Boston metropolitan region. Value creation is based in a core of pharmaceutical and biotech companies that draw on the presence of world-class teaching and specialized hospitals, specialized equipment and material suppliers, and providers of specialized research and business services focused on this cluster. In addition, the cluster benefits from educational institutions with many relevant research and training programs and strong cluster organizations covering different segments of the cluster. Finally, the life science cluster can utilize the assets and capabilities of the related cluster in analytical instruments, another area in which the Boston region has particular strengths. The Boston Life Sciences Cluster Cluster Organizations Health and Beauty Cluster Organizations Health and Beauty MassMedic , MassBio ,others Products MassMedic , MassBio ,others Products TeachingTeaching and and Specialized Specialized Hospitals