Research essential for an effective cluster policy

THE debate on the way forward for the Scottish economy needs to move on. We need to think further and more carefully about the drivers of future economic growth as well as the role for policy.

At the risk of over-simplification, the current debate, as reflected in the media and occasional official policy pronouncements, appears to centre on the need for business to recognise the imperatives of the ‘knowledge’ economy.

A sub-plot in this economic development morality tale is the stress placed on skills and the need to improve the output of appropriately qualified people.

In fact, what has been described here is more a consensus than a debate. There is little with which to disagree, largely because the content is essentially vacuous - like motherhood and apple pie, we can all sign up to it.

Views on the role of policy in Scotland’s economic development are inevitably conditioned by political beliefs and here understandably the consensus evaporates. The promised land ranges from rolling back the state, whether it be in education or business regulation, to calls for more state intervention to address a catalogue of perceived market failures.

But, without tested analysis and evidence, it is inevitable that commentators and institutions will fall back on what their values lead them to conclude should be done. Of course, the problem is more subtle than this because, as the great political scientist David Easton once commented, "facts" are merely orderings of reality in terms of a particular interest. In other words, values govern the selection and processing of evidence.

In seeking analytical explanations and evidential support for economic phenomena, it is usual to turn to the discipline of economics for guidance. Mainstream economics tells us that economic growth is largely a matter of the accumulation of resources: population growth and investment in physical and human capital realised through a willingness to save.

However, since returns to investment inevitably decline, sustained growth of income per head can only be achieved through technical progress, which serves to raise the productivity of all resources used in production.

Moreover, spillovers from innovation and the application of new technology can stimulate further investment and technical change within an economy. Empirical research also suggests that a competitive product market is helpful to economic growth and more recent work highlights the importance of the institutional and social infrastructure.

So, the principal conclusion of growth economics is that economies will produce a sustained rise in incomes per person if they exhibit high rates of investment in people and skills and in new products and processes that embody the latest technologies.

One useful insight provided by this body of theory and evidence is that it puts the hype surrounding the knowledge economy in context. In this view, the internet and communication technology (ICT) revolution that characterises the knowledge economy is simply the latest, albeit an important, example of technical change. For it to affect the growth of the economy it must have an impact on the growth of productivity. The evidence suggests that this might be occurring in the US but so far there is little to indicate such an outcome in Europe, the UK and Scotland.

Yet, overall, the contribution of mainstream economics provides few insights into the growth process and specifically how an economy can raise the rate of generation and application of new technologies. Exhortations to invest, to undertake R&D, to innovate, to become more competitive, to go global and to start new firms, which might be said to flow from this body of work, offer only limited help to business and cannot be said to constitute an effective development policy.

The research of Harvard’s Michael Porter on the importance of clusters to economic development has proved of value to policymakers, not least in Scotland, because it purports to offer more specific operational insights into the growth process.

This work suggests an industry, rather than an economy-wide, focus and asserts the importance to growth of co-location, local supply and purchaser linkages, a supportive supply infrastructure, and both competition and collaboration within industries. But there are still several missing ingredients.

First, what of the company or firm? The private sector firm is the essential building block in our economic structure and without dynamic, well-managed and successful firms, fast economic growth is impossible. We need more evidence and research to understand the structure and behaviour of individual firms in successful clusters if we are to reap the benefits in Scotland of an effective cluster policy.

Secondly, we require further knowledge and understanding to the extent to which Scotland’s particular institutional and social infrastructure hampers or facilitates growth. Other examples, embracing the need for more research on the economic development implications of education and training, transport infrastructure and many other areas of the economy, could be cited.

Without further development of the evidence base in Scotland we will continue to be subject to the tyranny of value and prejudice in recommendations for development policy.

Brian Ashcroft is Professor of Economics at the Fraser of Allander Institute, University of Strathclyde.