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Moving from Talk to Action
Some industry groups see progress as legislative measures achieve traction
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Business New Haven
7/13/1998
By: Susan Banfield
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Two years ago the state legislature called on the state's Department of Economic & Community Development to move toward a new approach to economic development, one based upon something known as “industry clusters.” There has been considerable talk about the concept, but it is legitimate to ask, “What has actually happened?”
While “industry clusters” might sound like little more than the latest empty buzzword, it is worth noting that one of this country's most phenomenal examples of economic growth is Silicon Valley. Silicon Valley is a model “industry cluster.” Industry clusters originally were defined by Michael Porter, the Harvard Business School professor who helped develop cluster theory, as “a critical mass of interconnected companies and institutions in a particular field and particular location, and...concentrations of companies, specialized suppliers, service providers, firms in related fields, and associated institutions (universities, trade associations, and standard-setting agencies) that are present in particular regions.”
Porter maintains that helping clusters of industries to grow has distinct advantages over the more traditional approach to economic development, which tends to target individual companies. “Whole groups of industries become mutually supporting,” he writes. “Aggressive rivalry in one industry tends to spread to others in the cluster, through the exercise of bargaining power, spin-offs and related diversification by established firms.”
Moreover, “Entry from other industries within the cluster spurs upgrading by stimulating diversity in R&D approaches and providing a means for introducing new strategies and skills,” according to Porter. “Information flows freely and innovations diffuse rapidly through the conduits of suppliers or customers who have contact with multiple competitors.”
The challenge facing Connecticut was: How could government successfully activate industry clusters and achieve these kinds of benefits? In 1997 Gov. John G. Rowland named executives from large and small companies from around the state to the advisory boards for five industry clusters: financial services, telecommunications and information, health-care services, manufacturing and high technology. (A sixth, tourism, had already been established as a “cluster” operating under the direction of the Connecticut Tourism Council.)
After months of meetings and study, in February the cluster advisory boards published a lengthy report. It included recommendations for a number of action steps to be taken in the legislative, administrative and private sectors in order effectively to launch an industry cluster initiative in Connecticut.
These were more far-reaching than proposals in traditional economic development schemes, which tend to be limited to tax law proposals and to rely on modest, ad hoc government-private sector collaboration.
“You're going beyond just what tax changes do you want,” says Kenneth O. Decko, president and CEO of the Connecticut Business & Industry Association (CBIA) and a member of the Cluster Initiative Advisory Board. “It's what kind of environment do you need for the industry to flourish, what kind of workforce, what kind of education, what kind of transportation.”
Since February, under the new DECD leadership of James F. Abromaitis, there have been a significant number of concrete accomplishments. Foremost among these has been the passage, in the 1998 general assembly, of legislation designed to implement, first, what the cluster advisory boards had designated as important across-the-board measures needed to create a proper economic foundation for the formation and growth of clusters. These included an increase in the non-incremental tax credit available for R&D from one to six percent for small and mid-sized companies, making their tax credit the same as that previously allowed only to firms with very large research operations.
Also enacted was a proposal that gave the 20-percent incremental R&D tax credit a new 15-year carry-forward period. Previously there had been no carry-forward on this credit, placing small companies that take a long time to show profitability at a significant disadvantage relative to larger brethren
While these measures may seem to have little to do with Porter's original notions, David Keiser, CEO of Alexion Pharmaceuticals, doubts they would have been passed had it not been for the cluster initiative.
“These things require involvement and support from as many different places as possible,” Keiser says. The cluster initiative helped to bring people from many different industries and agencies together.
Paul Pescatello, special counsel to the governor, who worked on the legislative proposals for the DECD, is enthusiastic about getting even more of these “economic foundation” measures passed in the 1999 session.
Those he is especially hopeful about are an increase in the net operating loss carry-forward period to the federal level of 20 years (Connecticut currently has the lowest period in the country), and making a number of different tax credits salable, especially the 25-percent investment tax credit. The latter would go far toward encouraging investment in Connecticut firms by out-of-state investors.
Another measure passed by the 1998 legislature as part of the cluster package will directly advance the growth of one industry cluster. That is the provision of $20 million in bond funds to Connecticut Innovations Inc. (CII) to help high tech and biotech companies acquire laboratory space. This will help the newly formed biotechnology cluster to meet one of its primary objectives: more lab space for R&D.
(Another cluster, health services, had also attempted to win passage of legislation that would help achieve one of its principal objectives. Health-care executives had pushed for some easing of the capital regulation part of existing Certificate of Need law, by increasing the threshold for CON approval on capital improvements from $1 million to $2.5 million. While this proposal was blocked by the 1998 legislature, Robert Patricelli, chairman and CEO of Women's Health USA Inc. and member of the Health Services Cluster Advisory Board, says he has hopes for its passage next year.)
The final piece of the cluster initiative package that won approval was that allocating $3 million to DECD to help it continue its work at cluster formation.
That work has been continuing. It was acknowledged from the beginning that some of the larger clusters - e.g., high technology and manufacturing - would need to be divided into sub-clusters in order for members to focus and function effectively. The biotech cluster was the first of these to form. Over the summer software, photonics and medical-instruments clusters will be forming.
Decko believes that a certain mass of pre-existing energy and cohesion is needed for a cluster to succeed.
“Those [clusters] that will be most successful will be those where there is already momentum,” Decko says, pointing to biotech as a good example of a cluster whose pre-existing momentum made its formation and obvious dynamism almost inevitable.
Still, says Pescatello, DECD can help. It can help get industries “to know each other, realize what their common interests are. The interaction of agencies and industries will try to build the momentum.”
To date the cluster initiative's concrete results have generated growing confidence that there is more still to come. “I'm very keen on this long term,” says Decko.
“Expect to see things by late fall,” says Pescatello.
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