Technology in Silicon Valley, arts and entertainment in Hollywood, finance on Wall Street and in the City of London, country music in Nashville, automobiles in Detroit, and wine in Marlborough are some of the most well-known examples of economic clusters globally.
As New Zealand combats climate change, and focuses on achieving a Just Transition, there are likely to be opportunities to create new clusters, grow existing clusters, and revitalise stagnating clusters, as eight industry transformation plans are implemented.
Clusters can provide cost advantages, driving productivity and growth.
Clusters, also called agglomeration economies, are local concentrations of similar or complementary industries that develop over years, and often decades. When businesses locate together to achieve economies of scale, the resulting cost advantages can have a multiplier effect that drives regional and national economies.
There is no single trigger for cluster development. They usually occur naturally around a common element. For example, a natural resource or physical feature, a knowledge centre, a specific local demand, a public sector anchor, or an external shock. A common element alone, however, is not enough to sustain a cluster. To grow and remain successful clusters need a strong enabling environment that supports the needs of businesses and workers.
These supportive environments intentionally nurture sustainable vitality and collaboration on a multitude of levels. Clusters reduce transaction costs, improve information transfer, and ensure a supply of appropriately skilled labour.
Specialist inputs can be provided to a group of businesses more efficiently when they are located together than when they are spread out. The presence of firms in the same place lowers the average cost to each market participant. These costs continue to decrease as more businesses join the cluster. The combined presence of a large group of customers, and a lower cost to provide goods and services, attracts suppliers to locate within the cluster thus attracting further inward investment and creating new local businesses.
When businesses locate together, they can more easily recruit employees from other local firms. This creates a specialised labour pool that allows firms to reduce their labour acquisition costs. If conditions improve quickly, a business may need to expand its labour force. This is when having access to a nearby labour pool can be helpful. The business can quickly hire the employees it needs without having to spend time and money on a national or international search.
Information sharing and knowledge transfer is also enhanced by the ease of face to face meetings and the tacit knowledge that is shared as employees mix in the local community. The sharing of ideas, technology, market trends, innovations, products, and personnel among businesses in a cluster provides a more complete picture of the overall market environment. This information advantage can help businesses make better decisions and compete more effectively.
In the industries targeted for transformation, specialist training and courses are often required for entry. Actual, and opportunity costs, of labour training and skill acquisition make it an expensive activity. Being located in an area that has a large pool of potential employees with the right skills makes clusters attractive locations. This is why it is common to see clusters develop around knowledge centres.
World-class clusters can also be observed in small, rural communities.
Clusters are not just urban or metropolitan phenomena. New Zealand has a number of successful examples. At the top of the South Island, across Nelson, Tasman, and Marlborough, is New Zealand’s blue economy cluster. Data from BERL’s economic insights database shows that Nelson has 1,100 full time equivalent employees (FTEs) employed in fish trawling, seining, and netting. This is a location quotient (LQ) of 52. Employment in the industry is 52 times more concentrated in Nelson than the national average. Marlborough is strong in offshore aquaculture with LQs of 52 for caged aquaculture, and 30 for longline and rack aquaculture. Fishing and aquaculture in the region supply a seafood processing industry that contributes $167 million to GDP, and employs 1,426 FTEs resulting in LQs of 13 in Tasman, 12 in Marlborough, and nine in Nelson. The cluster also includes a growing marine sector, and supporting legal profession. The cluster also has skills training that aligns with, and complements, the skill demands of cluster businesses.
Marlborough is known globally for the quality of its Sauvignon Blanc. Marlborough accounts for 21 percent of New Zealand’s vineyards, 73 percent of grape growers, 71 percent of vineyard area, and 81 percent of wine production (New Zealand Wine Growers Association, 2022). Marlborough’s grape growing industry contributed $449 million to GDP in 2022, and wine and other alcoholic beverage making in the district contributed an additional $468 million. Marlborough’s LQs for these two industries are 44 and 34 respectively.
Home to operational headquarters for Scion and Te Uru Rākau, Rotorua is the centre of New Zealand’s forestry and wood processing industry. Rotorua has strong employment concentrations in timber resawing and dressing (LQ 19), forestry support services (LQ 12), and prefabricated wooden building manufacturing (LQ nine). With forestry and wood processing central to New Zealand’s transition to a low-emissions economy this cluster is set for a boost.
Successful clusters are all likely to have a unified approach with businesses in the lead, public agencies providing support, and education and training that meets the clusters’ skill requirements. With climate change presenting an external shock, partnerships and alignment are central in realising the potential to create new clusters, and revitalise existing clusters, to achieve a Just Transition.