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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
at the occasion of its 41st 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

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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

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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 the role of clusters in global competition more 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.

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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

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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?

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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
ClusterOrganizations
Organizations
Health
Health
Healthand
and
andBeauty
Beauty
Beauty MassMedic
MassMedic,,MassBio
MassBio,,others
others
Products
Products Teaching
Teachingand
andSpecialized
SpecializedHospitals
Hospitals

Surgical
SurgicalInstruments
Instruments
and
andSuppliers
Suppliers

Medical
MedicalEquipment
Equipment Specialized
SpecializedBusiness
Business
Services
Services
Biopharma
Biopharma-- Banking,
Biological
Biological Banking,Accounting,
Accounting,Legal
Legal
Dental
DentalInstruments
Instruments
ceutical
ceutical
Products
Products
and
andSuppliers
Suppliers Products
Products
Specialized
Specialized Risk
Risk Capital
Capital
Ophthalmic
OphthalmicGoods
Goods VC
VCFirms,
Firms,Angel
AngelNetworks
Networks

Diagnostic
DiagnosticSubstances
Substances Specialized
Specialized Research
Research
Service
ServiceProviders
Providers
Research
ResearchOrganizations
Organizations Laboratory,
Containers Laboratory,Clinical
ClinicalTesting
Testing
Containers

Educational
EducationalInstitutions
Institutions
Analytical
AnalyticalInstruments
Instruments Harvard
HarvardUniversity,
University,MIT,
MIT,Tufts
TuftsUniversity,
University,
Boston
BostonUniversity,
University, UMass
UMass

Source: Michael Porter, 2006

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Clusters are an empirical reality – employment in many industries is concentrated in a limited number
of regions. As a corollary, many regions are specialized in a limited number of industries. Importantly,
different industries have their regional concentrations in different locations and different regions
specialize in different industries. There is not one road to success, but many different models where
excellence depends on a set of characteristics that is truly specific by industry.

Clusters reflect the existence of spill-overs and linkages between companies. These externalities
create real economic value: Companies can achieve higher levels of productivity, because they have
close access to specialized suppliers and service providers and can rapidly learn from the best
practices of close competitors. Companies can be more innovative, because they can turn ideas
more efficiently into prototype products and services and get more quickly feedback on their market
potential. And companies in the start-up phase can find the many external services and assets that
they can not provide internally but need to tap into to launch their operations.

Emergence of Clusters
POLICY

Location Existing Clusters

Business Environment

Natural Resources Entrepreneurs

Context for competition across regions

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Clusters emerge where the business environment provides opportunities for individual companies to
conduct profitable operations. The nucleus for a new cluster can come from a wide range of factors
related to the business environment, existing clusters, or individual entrepreneurship (see figure
above). But then it almost always requires a strong general business environment to move from
individual companies to a sustained agglomeration process in which more and more companies are
attracted. The combination of factor conditions, the context for strategy and rivalry, demand
conditions, and the presence of related and supporting industries are all dimensions that matter. The
successful growth of a cluster is far from an automatic process. The initial conditions might provide an
opportunity but then it depends on many individual decisions and the relationship between them
whether a location can succeed in the competition with others.

Developed clusters come in many different shapes and forms. Some are organized around large
anchor companies that have over time attracted a network of suppliers and service providers. Others
are groups of small- and medium-sized companies that have been able to overcome the
disadvantages of small individual size through active collaboration. Yet another category is
characterized by small start-up companies that have developed around a university or a research
institution. There is no one model that guarantees success. But success demands that the unique
profile and conditions within a particular cluster are understood.

Background publications on competitiveness, clusters, and cluster initiatives

Michael E. Porter with Christian Ketels and Mercedes Delgado, Building the Microeconomic
Foundations of Prosperity: Findings from the Business Competitiveness Index, in: The Global
Competitiveness Report 2006-2007. New York: Palgrave.
Michael E. Porter, Clusters and the New Economics of Competition, in: On Competition.
Boston: Harvard Business School Press, 1998.
Örjan Sölvell, Göran Lindqvist, and Christian Ketels, The Cluster Initiative Greenbook.
Stockholm: Ivory Tower, 2003

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2.2. Globalization
Globalization was initially perceived as the death knell to clusters. The technological revolution in
communication and transport would make the advantages of physical proximity obsolete. And the
emerging economies would have such a huge labor cost advantage that the (falling) differences in
productivity due to proximity would be marginalized. The experience of the last few years has,
however, been very different. Globalization has increased the role of clusters, has spurred the
development of clusters in many new locations, and changed the demands that clusters need to meet
to succeed in global competition.

Globalization has increased the role of clusters in two ways. First, competitive advantages that reside
in the intensive local interaction within a cluster have become relatively more important as other
sources of competitive advantage related to unequal access to technology or other inputs have dried
out. While a competitor can use the same supplier independent of his location, he can not get access
to the full flow of linkages and externalities without being present in the cluster. Second, knowledge
has become a more important driver of value creation and this has strengthened the role of clusters,
a key factor in “open systems” of innovation that rely on ideas flowing between companies and
research institutions in often unplanned and unstructured ways. While technology has become more
widely available everywhere, the unstructured knowledge that provides superior value remains tied to
specific people and locations.

Globalization has enabled many new locations to attract and grow clusters. First, the upgrading of
business environment conditions in many emerging economies has made them attractive markets to
serve. While some of these sales could be captured by growing existing clusters, the larger market
also enabled many new clusters to emerge. And naturally these new clusters were located in or close
to the growing markets. Second, the same business environment reforms have also increased the
attractiveness of the emerging economies as export platforms. With a favorable combination of low
wages and improving productivity they were able to attract labor-intensive and technologically mature
activities from existing clusters. These “off-shored activities” turned out to follow the cluster logic in
the new locations as well, concentrating geographically in a few locations rather than spreading
widely throughout emerging economies.

Globalization has not only increased the relative role of location and clusters, it has raised the bar in
terms of the demands that successful clusters have to meet:

 First, the competition between clusters has clearly increased. More locations are vying for
business activity and the pressure to meet rivals’ best practices has increased.

 Second, higher levels of competition drive clusters to become more specialized and develop a
clear strategic position. While in the past the important clusters in a given field tended to have a

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similar profile, there is now a much stronger differentiation by activity (R&D hub, production,
service, etc.) and market segment (geographic, needs-based, etc.).

 Third, the increasing level of specialization has increased the level of linkages between clusters
and made the presence of such linkages a key element of a cluster’s strength. While in the past
clusters were like different islands competing with each other, they are now part of global value
chains that often compete and cooperate simultaneously.

As a result of these changes in the global economy, many industries have developed global value
chains, where groups of specialized clusters develop complementary activities to serve markets in
many nations.

Clusters in Global Value Chains: Footwear

Romania
Portugal
• Production subsidiaries
• Production
of Italian companies
• Focus on short -
• Focus on lower to
production runs in the
medium price range
medium price range

China
• OEM Production
Italy • Focus on low cost
• Design, marketing, segment mainly for the
and production of US market
United States premium shoes
• Design and marketing • Export widely to the
• Focus on specific market world market
segments like sport and Vietnam/Indonesia
recreational shoes and • OEM Production
boots Brazil
• Focus on the low cost
• Manufacturing only in • Low to medium quality finished
segment mainly for the
selected lines such as shoes, inputs, leather tanning
European market
hand-sewn casual shoes • Shift toward higher quality
and boots products in response to Chinese
price competition

Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann

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2.3. Cluster initiatives


Many of the advantages associated with the presence in a cluster occur whether or not any type of
organized cooperation exists between the co-located activities and companies. But cooperation can
enhance these advantages and enable companies to increase the benefits they can derive from them.
And with the pressure for clusters increasing to develop their own strategic positioning rather than
following a generic blueprint that is the same for all locations in a given economic sector, the need for
joint decision making and coordination within a cluster has even increased.

Cluster initiatives are defined as organized efforts by coalitions of companies and/or public institutions
to improve the competitiveness of a cluster. Most of the activities that cluster initiatives pursue fall into
one of three categories:

 Upgrade company sophistication; especially if clusters consist of many small- and medium sized
companies, cooperation can help them to improve operational practices by sharing best
practices and making joint investments in market intelligence and other functions.

 Improve the business environment; the more co-located companies and institutions exchange
their views on the most pressing barriers for performance improvement in the business
environment, the easier it is to define and address the key bottlenecks a cluster is facing.

 Strengthen networks; the more co-located companies and institutions are aware of each other,
the higher the level of linkages between them will be and the more likely it is that companies
take decisions that are mutually reinforcing.

Cluster initiatives have been around long enough that a more systematic understanding of their key
success drivers is emerging. The Global Cluster Initiative Survey, a survey of more than 1400 cluster
initiatives has identified three different dimensions that appear to have the strongest impact on the
performance of cluster initiatives: The economic context in terms of the cluster, the business
environment, and the economic policy pursued which the cluster initiative operates, the activities that
a cluster initiative is engaged in, and the governance structure through which the cluster initiative is
organized.

Cluster initiatives are more likely to succeed, if they can leverage a strong cluster, a strong general
business environment, and a regional culture of strong trust between companies and towards the
public sector. While this observation might sound trivial, it does have important practical implications
that are often overlooked:

 Cluster initiatives can not compensate for a weak cluster or a disadvantageous business
environment at a location. Cluster initiatives can support better decisions on upgrading the
cluster and its environment. But without a basic set of strengths in place, such initiatives face an

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uphill battle. Too many cluster initiatives are launched to pursue the dreams of the next Silicon
Valley while basic conditions within and around the future cluster are not in place.

 Cluster initiatives need to take a role in improving the overall competitiveness of a region, even
beyond the boundaries of their cluster. Cluster initiatives that follow a narrow agenda focused on
their cluster alone miss out on the positive repercussions that a strong overall regional economy
can provide. And they face the challenge of addressing weaknesses that are often rooted in the
overall nature of the region as the interests of a narrow group, not as the interests of the wider
regional economy.

Typical Activities of Cluster Initiatives

Bus. environment
• Regulations and policy
• Infrastructure investment

Value chain Process/HR


• Joint purchasing • Technical training
• Joint logistics • Management training
• Joint production Firm formation • Technical standards
• Supply -chain development • Incubator services • Education system
• Spin -off promotion • Production processes
• Business services

Joint R&D Intelligence


• Joint R&D projects • Market intelligence
Joint marketing • Technical trends
• Joint product branding
• Joint region branding
• Joint foreign market
promotion

Source: Global Cluster Initiative Survey, 2006

Cluster initiatives are more likely to succeed, if they pursue an action agenda that is targeted at the
specific needs of their cluster. In general, this will require mounting concerted efforts in a number of
interlinked areas. Clusters that perceive their activities narrowly as networking or another single role
fail to reach their potential. Again, these results have very practical implications.

 Custer initiatives need to ground their activity plans in a deep understanding of its cluster’s
current profile and strategic positioning. Cluster initiatives have in the last few years been very
concerned with the notion of best practices and established operational standards. While useful,

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these efforts often fail to start with an understanding of where the cluster stands and which role it
can reasonably aspire to play in relation to its peers. Cluster initiatives are significantly more
effective, if their activities are based on a clear understanding of the cluster’s unique strategy.

 Cluster initiatives need to pursue parallel activities in an integrated set of areas. Cluster success
is the result of mutually reinforcing strengths in the cluster structure and the cluster-specific
business environment. Upgrading the cluster further is almost never the result of improving
performance in only one dimension – broad based, integrated efforts are more effective.

 Cluster initiatives can learn from the experience of peers but need to overcome the focus on
benchmarking and copying of activities. Benchmarking and networking across cluster initiatives
have over the last few years been popular activities. They can provide useful insights into how
other cluster initiatives are organized, how they set strategy, and how they approach specific
operational challenges. But they can also fuel a dangerous obsession of copying of activity plans
that worked elsewhere but have little connection to local needs and conditions.

Cluster initiatives are more likely to succeed, if they have sufficient resources that are committed over
the medium-term and a governance structure that engages the full breadth of cluster participants. In
the past, dedicated individuals with long years of experience in different parts of the respective
clusters were often the critical success factor for cluster initiatives. The research points towards key
factors to move towards a model where the dependence on finding the right cluster initiative manager
is decreased, and the initiative becomes institutionally more stable.

 Cluster initiatives need to be open to all companies or institutions that are part of the cluster or
have a strong influence on the cluster-specific business environment. Traditional industry
associations tend to be formed by a relatively homogenous group of companies with similar
structures and interests. Cluster initiatives need to instead bring together very different
participants that share a common interest in strengthening the cluster but otherwise have many
divergent and sometimes competing interests.

 Cluster initiatives need to create a governance structure in which companies drive decisions
about action priorities and work with government and others to implement them. Companies
have critical insights because they alone understand what creates and destroys value on the
market. The challenge for cluster initiatives is to find an organizational structure in which the
dispersed knowledge from many individual companies can come together to form the basis for
an effective action agenda targeted at the key barriers for higher performance.

Cluster initiatives are not a panacea. But they are a reflection of the increasing complexity of modern
business, where success depends on individual performance but also a myriad of decisions taken by
many independent business and government leaders. Cluster initiatives provide a unique platform to
coordinate actions in the face of these multiple interdependencies without limiting the strength of
competition.

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2.4. The emerging agenda for business


leaders
Changes in the nature of global competition have made clusters an increasingly relevant item on the
agenda for business leaders. Companies not only compete with their rivals’ internal qualities, they
also compete with the full breadth of assets and capabilities that these rivals can access through the
clusters in which they are present.

Changes in the way companies are run have accelerated this process. The trend to outsource
activities that do not provide a competitive advantage within a company’s overall activity system has
increased the dependence on competent suppliers and service providers. While some of them may
be located far away (i.e., often in clusters like the Bangalore business services clusters that are
specializing in these type of services) many are more efficiently provided in close proximity to the
company. Clusters emerge naturally as companies’ spin-off activities into independent units or attract
suppliers to locate nearby.

Location as Strategic Management


Traditional roles of locational analysis

Picking
Picking aa location:
location:
Where
Where do
do we
we locate
locate which
which activity
activity in
in sync
sync
with our strategic position?

Location Strategy

Leveraging
Leveraging aa location:
location: Improving
Improving aa location:
location:
How do we derive strategic benefits from How
How can
can improve
improve the
the value
value of
of our
our location
location
the
the characteristics
characteristics of
of our
our location?
location? in
in supporting
supporting our
our strategic
strategic position?
position?

New roles of locational analysis

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For business leaders, these trends have propelled a company’s locational footprint from an
(important) issue of operational efficiency, i.e. where can this activity be conducted at the lowest costs,
to one of strategic positioning, i.e. where can this activity be conducted to become a source of
competitive advantage. Company executives face a number of opportunities to make their locations a
winning factor in competition:

 The first task is to leverage the clusters in which a company is currently present in order to
create sustainable competitive advantages. The location(s) a company is active in provide it with
a unique set of external conditions. The challenge is to choose a strategic position on the market
that leverages the advantages that the existing environment in these locations confers and
minimizes the weaknesses that they might impose.

 The second task is the choice of locations that provide the highest value to their business. But
while in the past this choice was a large but ultimately operational question, it now achieves a
truly strategic dimension: The set of locations that a company can tap into through the
geographic placement of its activities becomes an important source of competitive advantages,
not just a determinant of its cost level. Companies strategic opportunities are shaped by the
assets and capabilities they can leverage in these locations.

 The third task is to decide whether they can make investments in the business environment of
their locations to improve their value for the company. The microeconomic business environment
is the result of choices in which companies do play an important role. They can work with local
universities in shaping education programs that provide critical skills, work with other companies
to raise the profile of the region, or participate in activities of local investment attraction agencies
to attract companies that strengthen the local cluster. Such investments of time and money can
be as or more effective in improving the economic performance of the company than investment
in internal capabilities.

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3. Clusters in the chemical industry


In this section, we apply the general framework of clusters to the chemical industry. Our aim is to
provide the basic empirical data to further the understanding of the geographical distribution of
economic activity in this large sector.

The section starts with a discussion of the specific conditions that affect geographic agglomeration in
the chemical industry, both generally and in Europe. It then turns to the empirical analysis. First, it
discusses the definition of chemical cluster that emerges from the analysis of actual co-location
patterns in the U.S. economy. Second, it applies this definition to the available employment and trade
data. The employment data covers sub-national regions in North America, Europe, and Russia. While
there is no comparable employment data available on other countries, we include a short discussion
of the findings of other research on clusters and the chemical industry in that part of the world. The
trade data covers exports from all countries. Third, the section presents a discussion of cluster
initiatives in the chemical industry, comparing their particular features to the profile of cluster
initiatives in other parts of the economy.

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3.1. The context for regional clusters in the


chemical industry
The shape that clusters take in a particular sector of the economy depends on a number of key
factors related to technology, government policies, and market conditions that characterize the sector
across all locations. In addition, there will be a number of additional factors related to the
development path that have shaped clusters in a specific geographic area that will have left a legacy
in their current profile relative to other regions.

General factors

The chemical industry is based on capital-intensive processes. Investment decisions represent a


significant and generally long-term financial commitment of a company to a specific location.
Companies will tend to have an interest in the long-term strengths and potential of a location, not just
in short-term factors like one-time financial subsidies. This creates an environment that is conducive
for cluster development and cooperation.

The chemical industry uses many input factors and produces many outputs that are bulky and costly
to transport. In addition, the geographical location of key feedstock inputs, predominantly oil and
natural gas, do not match with the location of key markets for chemical products. Transportation costs
are a significant part of overall costs along the value chain. This creates an environment where
companies across different stages of the respective production process naturally co-locate to
minimize on transportation costs throughout the industry value chain. It creates an environment,
where clusters emerge naturally at locations with good transportation infrastructure. And it creates an
environment where the presence of specialized logistical companies and proximity to related
transportation and logistics clusters provide clear benefits.

The chemical industry covers segments with different economics that have given rise to a
heterogeneous mix of companies. In basic chemicals, the commodity nature of products has led to
the emergence of large multinational companies that compete in a global market based on
economies of scale, learning economies, and the ability to manage highly optimized production
structures. In specialty chemicals, the existence of many individual markets has driven a structure of
companies of different sizes focused on serving particular customer needs or geographic areas with
some markets global and others more national or regional in nature.

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Europe-specific factors

Europe continues to be a large market for chemical products. While other markets, particularly in Asia,
register strong growth, the absolute size of the European market continues to provide a strong basis
for European clusters serving customers in this region.

Europe’s main strength is the highly developed business environment that enables chemical
companies to reach levels of productivity that largely compensate for the high factor costs in Europe.
A first key strength is the availability of efficient transportation infrastructure and services, sometimes
building on long traditions of individual locations as logistical hubs. A second asset is the access to a
highly qualified labor force, often in regions where a long legacy of employment in the chemical
industry has fostered the emergence of specialized educational institutions. A third advantage is the
presence of many related and supporting industries, especially in the industrial heartlands of Europe,
that provide the Chemical industry with access to productive general inputs and services.

Europe also has developed an advanced regulatory environment in which the production and use of
chemical products have to meet high environmental and safety standards. Some of these regulations
constitute a significant cost burden for the European chemical industry, threatening to undermine the
viability of European clusters. But as far as these standards foreshadow global trends and enable
companies to come up with different solutions to meet them, they can also establish the role of
European clusters as the innovation leaders in the global industry.

Based on these business environment conditions, Europe has developed a cadre of strong chemical
companies, often with strong historical roots. Many of these companies have developed multinational
reach and play an important role in the activities of clusters elsewhere in the world. This global reach
is a key advantage for European clusters; it provides them with strong linkages to other markets. And
it exposes European clusters to constant competition; European companies always have to consider
which of the many regions they are present in provides the best location for a particular activity.

The European chemical industry is older than many of its peers in other parts of the world, especially
in Asia. And it remains to be shaped by a legacy of fragmented markets, while competitors in other
regions have (North America) or are (China) growing in an environment of larger, more integrated
markets. While its long history has allowed European clusters to develop deeper and more complex
structures, it also creates challenges. The capital stock in Europe is on average older, with production
facilities not reaching the same economies of scale that new investments in Asia can reach. For
European clusters, this creates challenges in terms of productivity levels. And markets in Europe are
less consolidated, with more companies of sub-optimal size operating in some market segments. For
European clusters, this creates challenges in terms of the coordination of activities across larger
groups of actors, some of whom have low levels of competitive potential.

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The Role of Clusters in the Chemical Industry

3.2. Mapping chemical clusters


The analysis of clusters has for many years suffered from ad-hoc definitions of which industries and
activities should be considered when describing a specific cluster. Professor Michael Porter has at his
Institute for Strategy and Competitiveness, Harvard Business School developed an empirical
approach for cluster mapping to overcome these weaknesses and create a set of cluster definitions
driven by the statistical analysis of actual employment patterns.

Cluster Mapping

Cluster mapping starts from the notion that if linkages and spill-overs really do have an economically
meaningful impact on companies, they should reveal themselves in the locational decisions that
companies make. Other approaches that aim to measure linkages (for example input-output relations)
or spill-overs (for example patent citations) directly inevitably exclude other cluster effects and face
the challenge of measuring the absolute impact relative to other factors.

Cluster Mapping proceeds in two main steps:

 In the first step, industries are differentiated by their distribution of economic activity across
space: some industries will exhibit clear concentration of employment in a few locations, while
others will be present relatively equally everywhere. The first group of industries, called traded
sector, is characterized by competition and mobility across regional boundaries; access to
different clusters and business environments becomes a factor in competition. The second
group, called local sector, is serving only local markets and competes with local competitors; all
rivals operate within the same cluster and business environment context.

In most economies, the majority of employment is found in the local sector. The U.S. with its
high service share has gone furthest in this direction, while Russia with its legacy of heavy
industries has the largest traded sector. European economies are found somewhere between
these two extremes. The traded sector registers much higher productivity and innovation than
the local sector. Both sectors have to be productive for an economy to be prosperous.
Understanding the structural differences between them is an important step towards policies that
can achieve this goal.

 In the second step, industries in the traded sector are further analyzed in terms of the co-location
of industries. If employment in industry x and industry y tend to occur in the same locations,
linkages between them might influence locational decisions. The statistical correlation of
employment provides the initial indication that industries might belong to the same cluster. Other
factors, such as input-output linkages, are then taken into consideration as well. Based on this

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analysis, industries in the traded sector of the economy are then organized into cluster and
subcluster categories, i.e. groups of industries that have revealed economic connections. The
figure below provides a list of the cluster categories identified and gives examples of individual
industries within these categories.

Source: ISC Cluster Mapping Project, 2007

The allocation of industries to individual clusters is a complex task. As one would expect, there are
many industries that have linkages to different clusters. While, for example, in most regions the
production of measuring and controlling devices (SIC 3829) is associated with other industries in the
cluster category “Analytical instruments”, in some regions it is associated with industries from the
cluster category “Chemical Products”. The cluster mapping explicitly allows for such overlaps and
registers for each industry both a primary and any secondary clusters that might be relevant. These
overlaps between clusters turn out to be important for the evolution of clusters and for the strength of
a regional cluster portfolio. New regional clusters often emerge out of existing positions in established
related clusters. Portfolios of related clusters generate higher economic results than groups of
isolated clusters.

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The Role of Clusters in the Chemical Industry

The cluster mapping approach provides statistical categories that allow for the consistent comparison
of different regional clusters. It is, however, subject to the limitations of the statistical data that is
available, in particular the definition of regions and of industries. In reality, most cluster categories
include both manufacturing and service activities. In the statistical data, service employment is
captured only in very broad categories that do not allow the identification of, for example, venture
capital companies exclusively focused on biopharmaceuticals. Despite these weaknesses, the cluster
mapping data has provided to be an invaluable tool for cluster analysis and policy design in an
increasing number of countries around the world.

The chemical cluster category

The chemical cluster category consists of more than 20 industries in seven subclusters at its core. A
further 20 industries in seven subclusters from four other clusters (oil and gas, biopharmaceuticals,
plastics, and analytical instruments) also register significant relations to the chemical cluster even
though their primary association is with other clusters. One linkage that might become more
important in the future is agriculture: if the chemical industry starts to use more agricultural-based
feedstocks that might have an impact on locational patterns.

Chemical Cluster Category

Hydro - Pharma -
carbons ceuticals
Refractories Ammunition

Petro - Diagnostics
chemicals and related

Oil & Gas Biopharma -


Basic Processing
ceuticals
Chemicals Chemicals

Analytical
Plastics Instruments

Special Treated
Plastics Packaging Garments

Instruments
Other Leather
Packaging Tanning

Source: ISC Cluster Mapping Project, 2007

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The Role of Clusters in the Chemical Industry

Unfortunately, only the United States provides data that is detailed enough and covers indicators
beyond regional employment to provide a benchmark view on the relative importance of the
subclusters in the overall chemical cluster category. In Europe, comparable data across all countries
is available only for employment and covers broader industry categories that do not easily translate
into subclusters.

Among the 14 subclusters that are related to the chemicals cluster, basic chemicals (for example
alkalies and chlorine) account for close to 19% of all U.S. employment and wages that are 10%
above the average level of the cluster. Processing chemicals (for example soap and lubricants) follow
with 16% of employment but less than average wages. The subclusters belonging primarily to the oil
& gas cluster register the highest wages (20% of the cluster average) and 15% of employment. The
subclusters belonging primarily to the biopharmaceutical clusters register wages close to the cluster
average and account for 28% of employment. Among the other subclusters, only instruments
accounts with 3% accounts for more than 1% of total cluster employment; all register below cluster
average wages.

The chemical cluster category accounts for 5% of patents, 1.45% of wages paid, 1.3% of employment,
and 0.5% of establishments in the overall traded sector of the U.S. economy. The cluster category is
relatively innovation intensive, productive, large, and home to moderately large companies. The figure
below ranks the chemical cluster category relative to other cluster categories along the four
categories discussed.

The role of the chemical clusters in the U.S. economy

Source: ISC Cluster Mapping Project, 2007

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The Role of Clusters in the Chemical Industry

Employment

Employment is an important indicator to measure the pattern of economic activity across regions. It is
not the only indicator that matters; productivity, wages, patents, and other measures of performance
need to be taken into consideration as well. For the capital-intensive industries allocated to the
chemical cluster category the focus on jobs can be particularly problematic. Despite these challenges,
employment data is often the only comparable information available. And it does provide a number of
interesting insights, especially for comparisons within the cluster category that keep the distortions in
terms of different levels of capital-intensity at a lower level.

For Europe (defined as the EU-27 plus four associated countries: Turkey, Norway, Israel, and
Iceland) we only have employment data available. In the European cluster sector, the chemical
cluster category accounts for 1.36% of employment, only marginally more than in the United States.
th
In both regions chemical clusters rank 18 among all cluster categories in terms of total employment.
In terms of the related clusters, the U.S. registers relatively more employment in plastics and oil & gas,
while Europe registers relatively more employment in biopharmaceuticals.

Sources of cluster data based on the ISC Cluster Definitions

United States – Institute for Strategy and Competitiveness, www.isc.hbs.edu

Europe – European Cluster Observatory, www.clusterobservatory.eu

Canada – Institute for Prosperity and Competitiveness, www.competeprosper.ca

Geographic concentration of employment Among all cluster categories, the geographic


concentration of employment in chemical products is at an average level. Many clusters with small
overall size, for example footwear, register a much higher share of their total employment in the
largest clusters. But also some large cluster categories, like automotive and business services, are
more concentrated than chemical products. Among the clusters related to chemicals, oil & gas and
biopharmaceuticals – two cluster categories of moderate overall employment – are more
concentrated while plastic – with more employment than chemical products – is less concentrated.

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Concentration of Cluster Employment across Regions


EU-27 plus 4
Share of largest ten clusters in total
European employment by cluster category

60%

Strong Weak
50% concentration concentration

40%

30%

20% Traded
sector

10%

0%
Instr

Lght
Lthr
Tob

Text

Phar
Auto
Bus

IT

Publ

Ent
Plast

HvyM

Edu
Furn
Build

Trpt
Foot
Sprt
Jewl
Oil

Aero
Fish

Aprl

Powr

Chem

Medi

Fin

Prod

Metl

Hosp

Cnst
Forst
Food
CMtr

Com

Agri

Distr

Source: European Cluster Observatory, 2007

Interestingly, in only one cluster category – food products - is employment less concentrated than in
the aggregate traded sector. The food products cluster is significant in many regions, often in regions
that are relatively small in overall size.

Leading chemical clusters in Europe The strength of regional clusters can measured
along three dimensions that track different indicators of potential cluster effects. We define cut-off
values for each of the three dimensions and assign “stars” to regional clusters that reach these limits.

 The size of the regional cluster – measured by the total number of employees in the cluster -
gives an indication of the amount of inter-cluster linkages and spill-overs that the cluster could
be able to achieve. We give a star to the 25 largest chemical clusters in Europe; the leading
10%-tile among the 259 regions for which we have data.

 The relative level of specialization – measured by the location quotient, the share of the regional
cluster in the total employment in the cluster category across all regions divided by the share of
the region in the total employment across all regions and cluster categories – gives an indication
of the relative market share that a region has been able to gain in this cluster category. We give
a star to regional clusters that reach an LQ higher than 2, i.e. regions have twice as much
employment in this cluster category than the size of the region would suggest.

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 The weight of a cluster in the regional economy – measured share of the cluster in the total
regional employment across all cluster categories gives an indication to whether interactions
within the cluster might be or more less likely given the “noise” from other economic transactions
in the region. We give a star to the leading 100 clusters in Europe across all cluster categories
on this dimension.

Map of leading chemical clusters in Europe

The leading European chemical cluster is located in Rheinhessen-Pfalz and meets all three of our
criteria. This region – home to BASF, the world’s largest chemical company - has more than 13 times
as many employees in the chemical cluster than an average region of its size. With close to 7% of all
employment in the traded sector of the economy, the chemical cluster is a critical element of the
region’s economy.

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Ten European regions meet two of our criteria; for all of them these are the size and the
specialization cut-offs. Düsseldorf, the region covering the Ruhr area, registers the highest
employment, followed by the regions of Antwerp, Lyon, and Istanbul. Three more German, one
Turkish, one British, and one Swiss region complete the list.

Leading chemical clusters in Europe

Source: European Cluster Observatory, 2007

Looking at two of the dimensions - size and specialization - alone, adds a number of other regions to
the list of significant chemical clusters in Europe. Lombardia, Catalonia, and Southern Netherlands
are among the top ten locations for chemical employment in Europe but are also large economic
agglomerations overall. Among the three, Catalonia - which includes the region around Tarragona –
registers the highest level of specialization in chemicals with more than 80% more employees than an
average region of this size would have.

Top chemical cluster locations in Europe by size and specialization

Source: European Cluster Observatory, 2007

The list of the top ten European regions by specialization on chemical products adds four regions in
Eastern Germany and the new EU member countries to the list of significant European chemical

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clusters. Dessau is part of the East German chemical triangle, an area with a long tradition in these
industries that stretches into two additional NUTS-2 regions. The three other regions are the leading
chemical industry locations in the Czech Republic, Hungary, and Poland.

The data also provides some perspectives on changes that have occurred over the last few years.
Unfortunately, however, sufficiently detailed data is only available for 139 of the 259 regions. The
sample covers 52% of total European employment in chemical products.

The data suggests that chemical production has suffered significant jobs losses since 1999, with
many of the leading chemical clusters taking the brunt of the deterioration. The regions reporting data
for both 1999 and 2006 register a total loss of 78,998 jobs in the chemical cluster category. This puts
chemical products into the bottom third of all cluster categories in terms of job creation. The 19
regions with significant chemical clusters in 2006 that are part of this group account for 66% of these
losses. The three regions with the highest losses alone account for 50% of the losses.

Changes in Chemical Products Employment


Change in Employment, 1999 - 2006
5,000

-5,000

-10,000
Chemical cluster
Other

-15,000

-20,000

-25,000
Lüneburg, DE

Haute-Normandie, FR
Rhône-Alpes, FR

Hannover, DE

E Riding/N Lincs, UK
Tees Valley, UK
Münster, DE

Vlaams Gewest
Koblenz, DE

Karlsruhe, DE

Chester, UK
Halle, DE

Hamburg, DE

DE
DE
DE
DE
Picardie, FR

Basel, CH

Mainz,
Darmstadt,
Düsseldorf,
Köln,

Source: European Cluster Observatory, 2007

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The Role of Clusters in the Chemical Industry

Strong chemical clusters in Europe are located in regions that differ in their profile from the typical
European region. We select the 28 regions in Europe that have featured in the analysis as locations
of chemical clusters and compare them to the 231 remaining regions. The data shows, that European
chemical clusters tend to be located in large regions with a strong manufacturing base. In particular,
we find that the typical home region of a strong chemical clusters is

 About 17% larger in terms of overall employment than other regions

 Has a share of about 41% of regional employment in the traded sector, compared to 36% in
other regions

 Has a share of 25% of traded sector jobs in cluster with strong levels of specialization, compared
to 20% in other regions

While the potential for dynamics among the core industries within the chemical cluster category is
important, it is only one dimension driving performance. The linkages to related clusters can be
another critical influence. And the presence of strengths in such clusters in the same region can give
insights into the particular profile of the chemical cluster within a region.

For all European regions with at least 50% more employment in chemical products than expected
given their size, we track the position of these regions in the three cluster categories most related to
chemical products, i.e. oil and gas, biopharmaceuticals, and plastics. These regions are then grouped
by the combination of other clusters in which they have significant strengths, measured by the same
indicator of specialization. Interestingly, Izmir (Turkey) is the only region with a significant chemicals
cluster that has no specialization in any one of the three clusters related to chemicals.

The analysis reveals a clear differentiation of regional clusters.

 Eleven European regions, with Cheshire in the UK (home of ICI chemicals) and Düsseldorf
(covering the Ruhr-area) the most significant, have a significant position in chemicals and
plastics but not in biopharmaceuticals.

 Eight regions, including most of the leading European chemical clusters, combine positions in
chemicals with positions in plastics and in biopharmaceuticals.

 Four regions, all in Germany, combine positions in chemicals with positions in plastics and in oil
& gas.

 Three regions register strengths in chemicals and oil & gas but not in the other related clusters.

 One region, Haute Normandie in France with relatively small overall employment, has a
significant position in all three cluster categories related to chemical products.

 There are no regions with positions only in chemicals and biopharmaceuticals or in chemicals,
biopharmaceuticals, and oil & gas but none of the other two related clusters

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Linkages of Chemical Clusters


To Plastics To Oil & Gas
Clusters Clusters

Cheshire, UK
Münster, DE
Düsseldorf, DE
Köln, DE
Eszak -Magyarorszag, HU
Halle, DE
Kujawsko -Pomorskie, PL
Lüneburg , DE
Dogu Marmara, TR
Tees Valley and Durham, UK Severozapad, CZ
E Riding and N Lincs , UK Guneydogu Anadolu, TR
Opolskie , PL Hamburg, DE
Kozep -Dunantul , HU
Koblenz, DE
Hannover, DE Haute -Normandie, FR

Rheinhessen -Pfalz, DE
Nordwestschweiz, CH
Darmstadt, DE
Vlaams Gewest, BE
Rhône -Alpes, FR
Picardie, FR
Istanbul, TR
Catalu ña, ES
To Biopharmaceuticals
Clusters
Source: European Cluster Observatory, 2007

The strongest chemical clusters tend to have positions in at least one, more often two related cluster
categories. There is evidence of super-cluster effects; linkages between related clusters that add to
their inherent benefits. Chemical clusters lower down the rankings are focusing on specific steps in
the value chain from feedstock inputs (oil & gas) to final outputs that require moderate (plastics) to
final outputs that require advanced (biopharmaceuticals) additional capabilities. Making the link
between inputs to the most advanced outputs directly or focusing on the most advanced outputs
alone seems to be too challenging; the required capabilities are different and might be attracted by
different set of regional characteristics.

Leading Chemical Clusters in the United States The U.S. chemical clusters register a
total of 457,500 jobs in 2004; roughly half of the employment registered by their European peers.
Following the same methodology as for Europe, the table below identifies the leading U.S. chemical
clusters by size, specialization, and weight. We add the additional condition that the cluster needs to
register at leas 2,500 employees. Houston (Texas) and Augusta (Georgia) are the two only clusters
that register three stars, i.e. meet the cut-off values on all three dimensions.

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The Role of Clusters in the Chemical Industry

Leading chemical clusters in the United States

Source: ISC Cluster Mapping Project, 2007

Looking at two of the dimensions - size and specialization - alone reveals a number of other regions
significant for the chemical cluster category in the U.S. Many of the large metropolitan regions come
close to Houston in terms of absolute employment levels in chemical products. But given the overall
size of these economies, the role of the chemical cluster in these regions tends to be small. Only
Cleveland has a significant level of specialization in chemicals, registering 60% more employees in
this clusters than would be expected for a region its size. Some very small regions like Lewiston (ID)
and Casper (WY) register high levels of specialization in the chemical cluster. With an absolute size
of less than 2,500 employees their potential for cluster effects nevertheless seems modest.

Top chemical cluster locations in the United States by size and specialization

Source: ISC Cluster Mapping Project, 2007

Many of the leading chemical clusters in the United States are located in relatively small,
manufacturing intensive regions.

 The average total employment across all U.S. regions is 650,000; the average total employment
in the home regions of the leading U.S. chemical clusters only 450,000.

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 Both types of regions have a similar share of total employment in the traded sector: 29% in
regions with strong chemical clusters versus 28% in regions without.

 But regions with chemical clusters have a significantly higher share of their traded sector
employment in strong clusters, i.e. clusters with at least twice as much employment as in an
average region of its size. In regions with strong chemical clusters, strong clusters account for
35% of traded sector employment versus a share of 28% in other regions.

Comparing chemical clusters in Europe and the United States While direct comparisons of
U.S. and European clusters are problematic – U.S. metropolitan regions are more heterogeneous in
size and capture more economic transactions while European NUTS-2 regions are more
homogeneous in size and follow administrative boundaries – that available data indicates that:

 Chemical products account for roughly twice as many jobs in Europe than in the United States.
While the share of the category within the traded sector of the economy is virtually identical, the
European economy has 60% more jobs overall and higher share of its employment in the traded
sector (36% versus 30%)

 Strong chemical clusters in Europe tend to be in relatively large regions while they tend to be in
relatively small regions in the United States. In both Europe and the U.S. chemical clusters tend
to locate in regions with relatively strong portfolios of manufacturing-driven clusters.

These differences have a visible impact on the overall economic geography of activities in the
chemical clusters category. As in many other cluster categories, the top locations in the United States
account for a significantly higher share of total cluster employment than in Europe. The 10% U.S.
regions with the highest absolute employment in chemical products account for 48% of total U.S.
chemical employment. The comparable figure for Europe is 34%. This lower level of geographic
concentration in Europe can translate into fewer possibilities to reap the benefits of strong regional
clusters

It turns out, that the differences in employment concentration between the U.S. and Europe in the
chemical cluster are driven entirely by differences in the size distribution of regions. U.S. regions are
much more unequal in size than European regions. The 10% U.S. regions with the highest total
employment in the traded sector account for 50% of total U.S. traded sector employment. The
comparable figure for Europe is 24%. Relative to the size distribution of regions, chemical cluster
employment in the U.S. is slightly less concentrated than traded sector employment overall, while in
Europe it is significantly more concentrated. The European chemical industries have to a significant
degree been able to overcome the challenge of a generally more dispersed economy.

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The Role of Clusters in the Chemical Industry

Concentration of Chemical Employment Across Regions


Europe versus the United States
Share of total
Chemical Cluster Employment
100%

80%

60%
Europe
U.S.
40%

20%

0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Share of Regions
(sorted by decreasing Chemical Cluster Employment)
Source: European Cluster Observatory, ISC Cluster Mapping Projec t, 2007

Chemical clusters in other countries In Canada, the Institute for Prosperity and
Competitiveness has applied the cluster definitions developed at Harvard University to create a
cluster mapping database for Canadian provinces, metropolitan areas, and Ontario census
metropolitan areas. Most comparable to the U.S. metropolitan areas are their Canadian counterparts.

Canada registers four regions that register either a significant absolute number of employees in
chemical products or a high level of specialization. None of these regions would make it into the ranks
of the leading U.S. chemical clusters.

Leading chemical clusters in Canada

Source: Institute for Prosperity and Competitiveness, 2007

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In Russia and Kazakhstan, the cluster definitions were translated into the national industrial codes
and used in the context of research projects on behalf of government-affiliated institutions.

Russia registers a significant list of strong chemical clusters. While these clusters might not be
competitive with European or North American peers in their current form, the proximity to feedstocks
and the legacy of agglomeration and skills signal the opportunities that exists. Whether these
opportunities can be leveraged, however, will depend on the economic policies that the Russian
government will pursue in the future.

Kazakhstan has, despite the emergence of a strong oil and gas cluster, so far not developed any
significant positions in chemical products. The one existing chemical cluster would barely enter the
list of leading Russian chemical clusters.

Leading chemical clusters in Russia and Kazakhstan

Source: ISC analysis, 2007

In Asia, systematic analysis of cluster structures using the cluster definitions developed at Harvard
University have so far unfortunately not been conducted. In China the available analysis points out
different patterns of agglomeration depending on the degree of an industry’s openness to
international competition. The more open industries are, the more concentrated their locational
profiles become. Different parts of chemical industry fall into different categories; i.e. chemical fibers
are open to competition and increasingly concentrate in the coastal areas while pharmaceuticals are
protected and remain geographically dispersed.

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The Role of Clusters in the Chemical Industry

Exports

Trade flows are another important indicator of cluster presence that is widely available. The cluster
definitions originally created on the basis of industrial classification codes have been translated into
definitions based on product categories used to capture international trade. The Institute for Strategy
and Competitiveness has used these definitions to create a dataset of trade flows by cluster
categories.

The trade data has a key advantage: it is available for almost every country in the world. But it also
suffers from a number of weaknesses that need to be understood when interpreting the data. The unit
of analysis for the data is the country, not the region. For large countries like the United States, the
export performance in chemical products will thus be driven by many regional clusters, not just one.
And since the product codes used to track international trade were used to set tariffs, they are far
more granular for goods than for services. This is not so critical for chemicals, but does affect many
other cluster categories in which the service component is rising.

Share of Cluster Categories in World Trade


Share of total
world trade
15%

Oil and Gas


10% Automotive
Information Technology
Metals, M Manufacturing
Agricultural Products
Chemical Products
Production Technology
Communications Equip.
Plastics
5%
Biopharmaceuticals

0%
1988 1990 1992 1994 1996 1998 2000 2002 2004

Source: Global Cluster Competitiveness Project, 2007

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Since 1998, the global trade in chemical products has grown at a compound annual growth rate of
9.1%. While impressive on an absolute level, this rate has been below the 10.1% growth rate of total
world trade. While the rise of oil and gas exports, more a phenomena of price increases than of actual
volume growth, has been an important factor behind this development, other clusters have grown
world exports at a rapid pace as well. Among all 39 export cluster categories, chemical products rank
th
only 20 in terms of trade growth since 1988.

th
Despite the relatively modest level of growth, chemical products remain the 6 most important cluster
category for world trade. While its share of world trade dropped from 5.36% in 1988 to 4.34% in 2000,
it has since stabilized around a level of close to 4.6%. Among the clusters related to chemical
products, oil and gas has seen the most impressive growth at annual rate of 17.7% since 1988. Oil
and gas exports are since 2005 the most important cluster category in world trade, accounting for
11.6% of all exports. Biopharmaceutical trade has also grown at a brisk rate of 15.2% per annum and
is now almost as important as trade in plastics.

Within chemical products, trade occurs in eleven separate subclusters. Organic chemicals are the
most important one, accounting for more than 50% of total trade value.

Share of Subclusters in Total Chemical Products Trade

Other, 6.0%
Pesticide and Other
Agricultural Chemicals,
3.9%

Dyeing, Tanning and


Coloring Materials,
5.4%
Packaged Chemicals,
7.2%

Organic Chemicals,
51.5%
Inorganic Chemicals,
13.0%

Chemically Based
Ingredients, 13.0%

Source: Global Cluster Competitiveness Project, 2007

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The Role of Clusters in the Chemical Industry

Leading countries Exports in chemical products are dominated by a few countries. The
top ten countries account for close to 70% of world chemical trade. The leading exporters are
Germany, the United States, Belgium, Ireland, Japan, and China.

In addition to total export volume, a country’s specialization on chemical products and the importance
of chemical products in its total exports are important indicators to evaluate the strength of export
clusters.

 Specialization in trade is measured by revealed comparative advantages (RCA), a concept


closely similar to the location quotient used in the analysis of employment patterns across
regions. RCA is defined as the world market share of a country in a specific product category –
here chemical products – divided by the country’s total world market share across all exports.

 The importance of chemical products in a country’s trade is measured by the share of chemical
products in its total exports.

Leading global exporters in the chemical clusters category

Source: ISC International Cluster Competitiveness Project, 2007

Fourteen countries register high values across the combination of the three performance indicators
applied and total chemical product exports of at least $100m. Belgium, Ireland, and Switzerland
register significant strengths in all three, while the other eleven countries are strong in two of the
dimensions.

The largest exports of chemical products, Germany and the United States, are, in fact, not particularly
specialized in this cluster category. Both countries are strong exporters generally and chemical
products are only around 30% higher than expected given their respective total export volume.

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The ranking of top global exports by size and by specialization individually adds a number of other
countries to the list of significant exporters of chemical products.

 Among the largest exporters, a number of European (France, Italy, and Spain) and Asian (Japan,
China, and Korea) are among the top 15, even though their specialization level in chemical
product exports is relatively modest. In fact, China exports about 20% less chemical products
than would be expected given the country’s overall export volume

 Among the most specialized exporters, only Dominica, a small island nation in the Caribbean
with chemical exports of less than $100m, enters the list.

Top global exporters in the chemical clusters category by size and specialization

Source: ISC International Cluster Competitiveness Project, 2007

The analysis of export profiles by subcluster within chemical products reveals the significant
heterogeneity in terms of countries’ specialization within this cluster category.

 The leading exporters are focused on organic chemicals, the largest subcluster by trade value,
and chemically based ingredients. In all other subclusters, the leading exporters have a smaller
export market position than on average in chemical products.

 Among the leading exports, there are significant differences in terms of the breadth of positions
across subclusters. Six countries have relatively strong positions in five or more subclusters,
while eight countries have more narrow positions.

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The Role of Clusters in the Chemical Industry

Share of Leading Chemical Exporters


Market share of leading in World Trade by Subcluster
exporters, 2005
70%

60% Total Cluster Products

50%

40%

30%

20%

10%

0%
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Source: Global Cluster Competitiveness Project, 2007

Among the leading chemical product exporters, Ireland is most clearly specialized on organic
chemicals with insignificant positions in all other subclusters with the exception of chemically based
ingredients. Belgium and Singapore exhibit similar patterns, but are both relatively more balanced
with activity in all subcluster categories.

Germany and the United Kingdom show an opposite profile, with strong positions in seven of the
eleven subcluster categories. The United States and India follow with relatively strong positions in
four subclusters.

The smaller exporters in this group are all relatively strong in exports of inorganic chemicals. Trinidad
and Tobago, a country with significant natural gas resources as feedstocks, has little presence in
other subcluster categories. Morocco also has a significant presence in miscellaneous crude
materials, Jordan in packaged chemicals and pesticides, and Namibia in miscellaneous crude
materials.

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The Role of Clusters in the Chemical Industry

Market share by Chemical Products Subcluster, Leading global exporters

Source: ISC International Cluster Competitiveness Project, 2007

In most subclusters, the top positions in terms of market share are occupied by countries that are
leading chemical products exporters overall. Only in pesticides (France) and miscellaneous crude
materials (Canada) are other countries on top.

Further down the list of leading exporters by market shares are countries with significant positions in
two or more subclusters that are overall not very specialized in chemical exports:

 The Czech Republic in packaged chemicals, explosives, and refractories.

 Mexico in packaged chemicals, explosives, and synthetic fibers.

 Russia in inorganic chemicals, miscellaneous crude materials, and explosives

 Poland in packaged chemicals and miscellaneous mineral materials

 Brazil in pesticides and refractories

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The Role of Clusters in the Chemical Industry

A number of further countries have a position in a single subcluster. Among them, Saudi Arabia is on
the list of top exporters in organic chemicals, the largest product group in chemical exports overall.

Leading Exporters by Chemical Products Subcluster

Source: ISC International Cluster Competitiveness Project, 2007

Market shares in the global chemical export market have shifted significantly over the last few years.
Germany has lost position, dropping from 20% to 12% of the world market between 1990 and 2005,
with most of the losses happening through the 1990s. The United States has dropped from 16% to

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The Role of Clusters in the Chemical Industry

12% in the same period, with more of the losses happing recently. Other countries that have lost
significantly are France, Japan, and the United Kingdom.

China and Singapore have at the same time gained position. China’s gains have even accelerated
while Singapore has lost some ground since 2003. Belgium and the Netherlands, too, have been able
to significantly improve their export market shares. Rather than simply moving market shares among
world regions, the relocation of export ability has happened within them.

Market Share Changes in Chemical Products

Market share, 2005

15%

Germany

10% Belgium
United States
Ireland
Japan
France Netherlands
UK
5%
Switzerland China
S Korea

Italy Singapore
Europe
Rest of the world
0%
-3% -2% -1% 0% 1% 2% 3%
Change in Market Share, 2005 - 1999
= 10bn US -$
exports in 2005
Source: Global Cluster Competitiveness Project, 2007

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The Role of Clusters in the Chemical Industry

3.3. Cluster initiatives


The chemical industry as a basis for cluster initiatives

Cluster initiatives do not emerge automatically; it always takes a specific decision by a company, a
government agency, or some other institution like a trade association or university to launch them.
Especially if the initiative originally comes from companies, it is often an individual person that is
instrumental in starting the cooperation.

There is still little systematic evidence on the specific conditions that trigger the emergence of cluster
initiatives. The experience from individual cases suggests, however, that many cluster initiatives fall
into one out of two large groups:

 Growth ambitions; if a new set of industries emerges as the result of technological innovation or
if a region aims for higher growth, all too often upgrading the general business environment is
either not enough or in its full breadth infeasible given the available resources. Cluster initiatives
are then a way to develop a concrete growth path and to focus the existing resources on those
activities that have the highest impact for a given set of businesses.

In German biotech, the ambition to find an efficient way for the government to support faster
growth in this science-driven industry led to the launch of the BioRegio competition, a program to
finance the best cluster initiatives in the field. In many developing and emerging economies like
Thailand and Indonesia, governments have identified specific clusters as part of national
economic development plans.

 Crisis; if a group of industries or a regional economy faces a threat to its established position, be
it through a sudden shock or a long-term decline, policies that only soften the blow or aim to
isolate the cluster or region from market realities are ultimately insufficient. Cluster initiatives
enable an active response that leverage the existing assets and capabilities, either by
strengthening them enough to regain competitiveness or by migration them into a new market
where they can become the foundation of a new competitive cluster.

In the U.S. state of Connecticut it was the cut-down in military spending and the general
downturn in the early 1990s that led to the development of cluster efforts as part of an overall
regional competitiveness initiative. In the UK Midlands automotive cluster, the demise of Rover
initially led companies to flock together to look for government support but then became the
starting-point for a much broader effort to increase the cluster’s competitiveness on the basis of
collective action.

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In the chemical cluster category, the available data suggests that the propensity for cluster initiatives
has been lower than in parts of the traded sector. Only six chemical cluster initiatives were among the
1400 cluster initiatives that participated in the Global Cluster Initiative Survey. Emerging economies
report a more substantial share of their overall cluster initiatives in capital-intensive manufacturing, a
broad category that also includes chemicals.

Note that the level of cluster initiatives does not imply that there was no active government policy
directed at the chemical cluster. Where such industrial policies existed, however, they tended to lack
a specific regional focus or where purely government policies and programs without the active
involvement of other parts of the cluster in their design and execution.

Dominant Focus of Cluster Initiatives


100%
Developing Economies
Emerging Economies
Share of respondents

80%
Advanced Economies

60%

40%

20%

0%
Argriculture, Capital "High tech", Tourism
food, basic intensive advanced
manuf. manuf. services

Automotive ; Chemicals; Forest products/paper; Metal


manufacturing; Oil & petrochemicals; Plastics; Power equipment

Source: Global Cluster Initiative Survey, 2006

Growth opportunities in chemicals can and have been present in economies at all stages of
development. In advanced economies, chemicals are a relatively mature group of industries where
growth is the result of individual companies that gain market share or moderately expand the market
through new products and services. Such growth can and often needs to be pursued individually.

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In emerging economies, however, chemicals can be a critical element in the move from the factor-
driven to the capital-intensive stage of development. Chemical clusters can emerge if there is a
concerted effort, often led by the government, to upgrade the business environment and reduce the
risks of such a substantial financial commitment.

Crises have affected the established chemical clusters in the leading advanced economies. But these
crises have traditionally been dealt with at the level of individual companies, not the cluster. Crises
were also evident in the emerging economies, especially during the Asian crisis of 1997. But the
chemical industries in these countries were generally less well developed and the crisis so deep that
the chemical cluster was no specific priority.

In advanced economies, in particular the leading chemical clusters in Europe, this perspective is now
changing. There is a clear sense that the strong traditional position of these clusters can not be taken
for granted. A combination of rising competition from Asia and increasing regulatory pressure in
Europe has led many companies to the conclusion that joint action is now necessary.

Chemical cluster initiatives in Europe and Asia

In the remainder of this section, we will compare the cluster initiatives emerging in the European
chemical sector with efforts in Asia. This comparison gives a wider perspective on the context in
which European initiatives operate, the organizational structures that they use, and the operational
choices they face. The data to make this comparison is drawn from individual research and the
documents generated by some of the cluster initiatives; a more systematic analysis is unfortunately
not possible given the existing data.

Context The most important factors that shape the context for cluster initiatives – and
ultimately their chances of success – are the nature of government institutions and policies, the
general business environment conditions, and the strength and profile of the underlying cluster that
the initiative aims to mobilize.

The European chemical industry faces a context that is overall quite favorable to strong cluster
initiatives. But there are specific challenges that cluster initiatives need to react to, either through
appropriate organizational choices or through launching targeted activities.

 Regional governments tend to be well developed, widely engaged in economic


development activities, and in most cases open to collaboration with companies. National

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The Role of Clusters in the Chemical Industry

governments and European institutions share the overall interest in economic development
but in the past there has also often been, especially at the EU level, a tension between
cluster mobilization and other policy goals

o Environmental regulations have been a strong focus of EU policies. The regulation of


chemical substances through REACH has been a major effort with significant impact
on chemical companies operating in Europe. The dialogue between industry and
government agencies has been problematic, undermining the mutual trust necessary
for cluster initiatives to work.

o Competition law is another key pillar of EU policies. Limitations to state aid and the
risks of joint activities between companies being found in violations of competition law
have been perceived as a barrier for launching cluster initiatives.

 The general business environment tends to be strong in most European regions, especially
in the locations of the leading chemical clusters. However, these traditional strengths are
under pressure.

o The physical infrastructure is well developed but economic growth puts increasing
strains on existing assets, especially the transport infrastructure. The leading chemical
clusters in Europe are located in major economic centers affected strongly from the
overall growth in transportation.

o The skill base is strong but the demographic development and the mismatch between
the supply and demand of skills have created increasing concerns about skill
shortages.

 The leading chemical clusters in Europe have strong market positions and a rich set of
supporting and related industries.

o While the maturity of the European clusters provides clear advantages, it can make
the launch of a cluster initiative more complex. The legacy of relations can turn out to
be a barrier for effective collaboration. The presence of many competing companies
can make it less likely for any individual company to take the initiative and contribute
to a common goal. Clusters with a dominating anchor firm, like BASF in Ludwigshafen,
seem to work well but might also have less potential for cluster effects.

o The lower rate of market growth in Europe has a dampening effect on investment,
leaving European clusters with an aging capital stock. Only 16% of all investment
projects in the chemical industry occur in Europe, compared to 35% in South East
Asia and 27% in the Middle East.

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The chemical industry in Singapore faces a context that is also strong, notwithstanding the clear
structural differences between Singapore and Europe. The context for the chemical industry in China
is not quite as strong but improving.

 Governments play a strong active role in economic development in Singapore as well as in


China. In China both the national and the regional governments are important partners for
cluster initiatives.

o The Singaporean government has developed a global reputation for extreme


efficiency and professionalism. The country views economic development in
partnership between government and companies as a national priority.

o Government agencies in China can suffer from low efficiency and corruption, despite
their clear focus on economic growth. There can also be inconsistencies between the
decisions of different government agencies.

 The general business environment is very strong in Singapore while the situation in China
is more mixed.

o Singapore benefits from a very efficient infrastructure, high openness to foreign


companies, availability if skilled local and expatriate labor, and the presence of many
world-class companies in supporting and related industries.

o China has invested tremendously in physical infrastructure, boasts large numbers of


graduates in many technical disciplines, and has been interested to attract foreign
companies. Many industrial parks have been created, some - like Changzhou Park in
the Ningbo Chemical Industry Zone south of Shanghai - with a particular focus on
chemical products. But many weaknesses persist and China still ranks low on
aggregate measures of competitiveness such as the Global Competitiveness Report.

 Singapore has developed a strong chemical cluster as the result of a determined strategy
that has persisted over many years. China has attracted a number of major investments but
many clusters are still in an early stage.

o The Singaporean chemical cluster continues to receive major investment


commitments from foreign companies. Supporting logistical and financial services are
widely available, and the growing investments into biopharmaceuticals could present
an interesting future opportunity.

o The Chinese chemical clusters are emerging around the sites of major new
investments, like the joint venture between SINOPEC and BASF in Nanjing. Many
clusters in China are focused on a relatively narrow set of activities, even if they reach
large scale in those areas.

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The Role of Clusters in the Chemical Industry

Participants Cluster initiatives develop very different dynamics depending on who initiates
them and who decides about which activities to pursue. Cluster initiatives that fail to mobilize all
relevant participants from the private and public sector are often less effective, because they miss out
on important information or lack the ability to address all aspects of the business environment.

 In Europe, in the chemical industry the private sector tends to play a larger role in initiating
and running significant cluster initiatives than in other industries. Government is involved in
some of them, mainly as a partner in addressing challenges in the physical infrastructure.

o A few private-sector led cluster initiatives, like the Cluster Initiative Mitteldeutschland,
have added activities to develop a broader strategy for the overall region on top of
cluster-specific efforts

Cluster Initiative Mitteldeutschland


Context
• Heart of the East German chemical triangle
• Significant foreign investments after 1990
• Presence of strong chemical parks

Motivation
• Concerns about the low attractiveness of the region as a threat to the long -term
competitiveness of the chemical cluster
• Concerns about the inability of the public sector to mount effec tive
competitiveness initiatives across three German states

Action
• Initiative taken by Bart Groot, head of Dow Chemicals operations in the region
• Initial focus on regional marketing
• Increasing focus on clusters –
including chemicals – as engines
and ambassadors of the regional
economy

Source: HBS Case study Mitteldeutschland, 2006

o Government agencies have also launched a number of initiatives in which they play a
more central role

 Broader national and regional competitiveness efforts like the French Poles
de Competitivite, the Regional Development Agencies in the UK, and the
Bavarian Cluster Offensive have included chemical clusters as part of their
overall activities, increasing the role of government engagement

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The Role of Clusters in the Chemical Industry

 The European Commission is supporting the collaboration among regions


and clusters; in that context, a network of European Chemical Regions
(ECRN) has been created under INTERREG in 2003, largely to facilitate
policy learning and information exchange

 In Singapore and China, government plays a much more central and directive role.
Companies are engaged but tend to note take the initiative or set the strategic direction

o In Singapore, the government has identified key clusters to be developed. Their efforts
are then very market-oriented, targeted at the attraction of companies by providing
attractive business conditions

o In China, the government has a more broad-based focus on overall development.


Designated zones or regions are developed to attract foreign investors. Publicly-
owned companies play a significant role as well

Activities Cluster initiatives are effective, if they identify the specific bottlenecks that affect
companies in their cluster and launch targeted activities to remove them. Generic action plans or the
misunderstanding that cluster initiatives are synonymous with a particular type of activity are
problematic.

 In Europe, supply chain improvements and specific efforts to upgrade the business environment,
particularly the transportation infrastructure, dominate. But investment attraction is gaining in
importance

o Think Tanks organized under the umbrella of EPCA have identified opportunities for
improving supply-chain collaboration through horizontal and vertical collaboration

o An effort for collaboration of European chemical sites has been launched in 2005 under the
name ECSPP to provide potential investors with more accessible information on chemical
sites throughout Europe

 In Asia, investment attraction and the infrastructure development are the main activities that
cluster initiatives tend to engage in

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The Role of Clusters in the Chemical Industry

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The Role of Clusters in the Chemical Industry

4. Conclusions
Based on a discussion of the role of clusters in global competition, this report has analyzed the
available data on clusters in the chemical industry, focusing on Europe. More data is needed, on the
performance of chemical clusters in a wider range of indicators besides employment, on the specific
profile of these clusters in terms of activities and market focus, and on the strength of the regional
economies and business environments in which these clusters operate. More data is also needed on
the many different cluster initiatives and other policy efforts to improve the competitiveness of the
chemical industry and specific chemical clusters. But while the available data is in many ways only a
beginning, a number of important observations are emerging.

First, this report underlines the importance of location in global competition. The economic
activity in the chemical industry is concentrated in a number of competing and cooperating clusters
around the world. Clusters benefit from their proximity to key markets. But being in a growing market
is clearly not enough. Within Europe, different clusters have experienced quite different development
paths. Strong clusters can create levels of productivity that can make them an attractive basis of
operation for serving foreign markets, even if they are facing high factor prices. But there are multiple
ways to success; not all successful clusters look the same. In Europe and in the world economy,
different clusters and different nations have developed different patterns of specialization within the
chemical industry.

Second, this report here contributes to the understanding of the clear strengths but also the visible
challenges that the European chemical industry is facing. Europe is the home of many strong
chemical clusters and many European countries have important positions in global chemical trade.
But these positions are under threat and many strong European clusters have lost employment and
market position, to Asia but also to other parts of Europe, in recent years. The maturity of European
cluster supports high productivity but it comes with a legacy of assets that now have to compete with
facilities in Asia that can exploit potential economies of scale and new technologies to a higher
degree. And there are also signs that the level of consolidation has not progressed as much in
Europe as in other parts of the world.

Third, this report argues that a new approach is required to fully leverage the opportunities of
cluster-based efforts as tools to upgrade the competitiveness of the European chemical industry.

 Companies need to overcome the tendency to view productivity improvements as the result of
internal innovation or stronger competitive pressure on suppliers; the next level of productivity
improvement will depend on concerted changes across many companies and government
policies.

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The Role of Clusters in the Chemical Industry

 Cluster initiatives need to broaden their perspective from a natural focus on supply-chain
collaboration to a broader agenda of identifying the specific strategic positions of individual
clusters and upgrading all relevant parts of their respective business environments; more
changes – with some variation across different cluster locations depending on their respective
strategic positions – will be necessary to sustain the potential for further productivity growth.

 Collaboration between companies and the private sector needs to move to a new model. Many
of the key challenges that the European chemical industry is facing – the emerging bottlenecks
in transportation infrastructure and the increasing pressure from demanding product regulation –
can only be addressed if companies and the public sector find a productive platform for dialogue.
Cluster initiatives can form the foundation for such a dialogue and create a context of mutual
understanding that allows trade-offs between different goals to be made based on facts rather
than ideological positions.

During 2007, many industry groups within the European chemical industry, including the EPCA Think
Tanks on Supply-Chain Collaboration, worked on new concepts to improve the competitiveness of the
European chemical clusters. On 14 June 2007 the European Commission formally decided to set up
a High Level Group on the Competitiveness of the Chemicals Industry in the European Union.
Cluster data – a much more detailed collection of cluster-specific facts should be a priority – and
cluster initiatives are key tools for these efforts to succeed.

Europe has the ability to develop its strong chemical industry further. And it is increasingly showing
that it has the willingness to do so as well.

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The Role of Clusters in the Chemical Industry

Selected publications on chemical clusters


Bathelt, Harald (2000), Persistent structures in a turbulent world: the division of labor in the German
chemical industry, Environment and Planning C, Vol. 18, pp. 225 – 247.
Chapman, Keith (2005), From ‘growth center’ to’cluster’: restructuring, regional development, and the
Teeside chemical industry, Environment and Planning A, Vol. 37, pp. 597 – 615.
Croufer, Edouard, Pieter-Jan Mermans, and Christian Weigel (2005), The Staying Power of Europe’s
Chemical Industry, Arthur D. Little, Prism, Vol. 1, p. 29 – 43.
EPCA Think Tank (2007), A Paradigm Shift: Supply Chain Collaboration and Competition in and
Between Europe’s Chemical Clusters, EPCA: Brussels.
European Chemical Industry Council (2004), Chemical Industry 2015; Roads to the Future, CEFIC:
Brussels.
European Commission – DG Enterprise (2005), European Industry: A sectoral overview, Commission
Staff Working Paper SEC (2005) 1216, Brussels.
European Commission – DG Enterprise (2000), Competitiveness of the Chemical Industry Sector in
the CEE Candidate countries, Brussels
He, Canfei, Yehua D. Wei, and Xieuzhen Xie (2006), Globalization, Institutions, and Industrial
Location: Economic Transition and Industrial Location in China, Regional Studies, forthcoming.
Janne, Odile E.M. (2002), The emergence of corporate integrated innovation systems across regions:
The case of the chemical and pharmaceutical industry in Germany, the UK and Belgium, Journal of
International Management, Vol. 8, pp. 97–119.
Ketels, Christian, Jeffrey Fear (2006), Cluster Development in Mitteldeutschland, HBS Case 707-004,
Harvard Business School Press, Boston.
Koch, Thomas (2004), Global Chemicals: China remakes an industry, McKinsey Quarterly, 2004
special edition.
Mariani, Myriam (2000), Networks of inventors in the chemical industry, mimeo., MERIT
McCann, T.J. (1999), Chemical industry integration, Journal of Business Administration and Policy
Analysis.
O’Mahony, Mary and Bart van Ark (ed.) (2003), EU productivity and competitiveness: An industry
perspective, European Commission: Brussels.
Patel, Mitesh (2004), Competitiveness of Singaporean Petrochemical Industry, paper presented at
the Bottom Line Improvement Conference, Singapore.
Patti, Anthony L. (2006), Economic clusters and the supply chain: a case study, Supply Chain
Management, Vol. 11, No. 3, pp. 266–270.
Pillai, Jayarethanam (2006), Importance of Clusters in Industry Development: A Case of Singapore’s
Petrochemical Industry, Asian Journal of Technology Innovation, Vol. 14, No. 2.
Sikorski, Douglas (1997), Public Enterprise in the International Petrochemical Industry: The case of
Singapore, Energy Resources, Vol. 19, pp. 309 – 323.
Wang, Jason H J, Henry Wai-chung Yeung (2000), Strategies for global competition: transnational
chemical firms and Singapore's chemical cluster, Environment and Planning A, Vol. 32, pp. 847 – 869.

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THE EUROPEAN PETROCHEMICAL ASSOCIATION