Business 21C - Published by UTS Business

Although the global financial crisis and a savage property bubble have wrought havoc in Dubai, its clustering provides it with unique competitive advantage for the future, reports Associate Professor Julia Connell.

The ‘cluster’ model has been the basis for economic growth in the small United Arab Emirate state of Dubai since the first free zone, Jebel Ali Free Zone, was established in 1985. The free zone model – which includes tax advantages and other business incentives, as well as a cluster environment, has been so successful in attracting businesses and international investment, that in little over twenty years Dubai has grown from a fishing village to a global business capital. The global financial crisis and a savage property bubble have wrought havoc, but the city state still has immense advantages that will return it to prosperity sooner rather than later.

Dubai makes no attempt to hide its clustering strategy. Driving through Dubai, the visitor is confronted by Internet City – where internet businesses operate – Media City – for media companies – and the Knowledge Village – where universities sit. Dubai’s clusters are both sizeable and obvious.

However, as my recent study of Dubai Free Zone clusters with Dr Michael  Thorpe shows, although businesses still seek competitive advantage from locating in cluster environments, it is not enough simply to be located near to similar businesses for a company to benefit from knowledge sharing and knowledge spillover opportunities to increase innovation.

In 1990, Harvard academic Michael Porter defined clusters as geographic concentrations of interconnected companies, specialised suppliers, service providers and associated institutions in a particular field. According to Porter’s analysis, the potential benefits of doing business from a cluster are to:

• increase productivity;
• drive innovation, and;
• stimulate new businesses.

Clusters drive innovation because innovation is an outcome of knowledge interaction, and interaction is a social process involving people getting together and sharing ideas.

When firms are located close to similar or complementary businesses, they have more immediate access to knowledge sharing through formal business networks (industry associations, public presentations, conferences). There are also less formal knowledge spillover opportunities such as the potential to cooperate with the other companies, and to benefit from the movement of labour between companies, subcontracting and outsourcing.

But as the Dubai experience suggests, it is not merely a factor of location that increases knowledge sharing and innovation potential. Mechanisms need to be in place to assist the sharing of information and ideas between individuals and organisations. Inter-firm learning networks, communication strategies, benchmarking and inter-firm working groups are the kind of support initiatives that create an environment where knowledge sharing enhances learning opportunities for businesses within the cluster.

Cluster failure can occur when there are weak frameworks, facilitators lack strong networks, have insufficient budgets and neglect brand building – which is crucial to continue to attract firms to the cluster.

In order to manage innovation, businesses must learn to connect. Nabil Sakkab, a former Senior Vice-President of Research and Development at Proctor and Gamble, expresses this succinctly: ‘The future of R&D is C&D (connect with and develop) – collaborative networks that are in touch with the 99 percent of research that we don’t do ourselves.’

Companies cannot hope to do all their innovation in-house – and it is only by tapping into broader networks that a business like Proctor and Gamble can retain its position as an innovative leader in product development. Similar stories can be heard at other companies, including IBM, Cisco and Intel, where links and connections are becoming as important as the actual production and ownership of knowledge.

The ability of a business to connect effectively with other organisations will be a key innovation management strategy. Clusters like the Dubai free zones can increase the attractiveness and the effectiveness of their environments if they implement the right communication strategies for businesses, provide robust knowledge sharing networks and invest appropriately in brand building.

Think more…

• What are you doing to collaborate/network?
• What does the Australian business community need to support the sharing of knowledge?
• How would networking events you attend be better managed to support knowledge sharing and innovation?

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Video:

JULIA CONNELL | HOW DO ECONOMIC CLUSTERS WORK?

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