A View of Ontario: Ontario’s Clusters of Innovation (Working Paper No. 1) by the Institute for Competitiveness and Prosperity (Toronto: April 2002, 56 pp, available for free)

If I were a business entrepreneur or a young person trying to figure out where to apply my talents, I would rush over to the website of the Institute for Competitiveness and Prosperity download this working paper, and soak my brain in it for a few days.

At the Work Research Foundation, we care deeply about the social architecture of economic life. Until we can track down someone who has done for Ontario what AnnaLee Saxenian has done for Silicon Valley and Boston’s Route 128, this working paper is the best rough sketch of that architecture available for this province.

Using Michael Porter’s cluster theory of regional economies and working under the supervision of Ontario’s Task Force on Competitiveness, Productivity, and Economic Progress (chaired by Roger Martin, the Dean of the Rotman School of Management at the University of Toronto), the Institute for Competitiveness and Prosperity in this paper gives us a strategic overview of the way in which Ontario business people are realizing—or failing to realize—the economic possibilities of the province.

The central argument of the paper is that for Ontario to continue to flourish, the primary task of economic leaders is to innovate the products and processes of the province’s leading traded clusters.

The first half of the paper is taken up with an argument intended to show that provincial prosperity depends on innovation in traded clusters. The second half maps Ontario’s traded clusters and compares them with a few other North American jurisdictions.

The basic assumption of the paper (with which I will not take issue here, but see my opening contribution in this issue of Comment) is that “economic progress and the resulting increase in the standard of living of individuals is built upon growing our gross domestic product (GDP) and that GDP per capita is a key indicator we need to monitor and investigate.”

Starting from this assumption, the paper’s authors argue that the key element of GDP per capita that can be affected by concerted effort is productivity (loosely meant as “an ability to sell the same product as someone else but produce it at a lower cost or to create superior products at the same cost”), and that the only significant way to improve productivity is through product or process innovation.

Drawing on research results from an extensive study of U.S. industries, the authors posit that traded clusters have higher levels of innovation—as well as higher productivity and higher wages—than local clusters.

What particularly interests me in this paper is the recognition by its authors that “economic relationships are intertwined with social relationships.” Because of this recognition, they pay attention to social capital, defined as “the social networks and norms that facilitate collective action.”

“A region with a high degree of social capital is likely to support effective collaboration between customers and suppliers (and even between competitors). Social networks tend to be conducive to shared ideals, norms, and values, fostering a sense of trust and thereby facilitating economic activity. Trust lubricates the gears of the economic engine.”

The way in which “economic relationships are intertwined with social relationships” is evident in the development of clusters—particularly in the interaction of trust and rivalry in a market:

The presence of demanding and sophisticated customers encourages the formation of multiple local rivals. The presence of a number of local rivals encourages the local establishment and growth of supplier industries and other related industries. The presence of local rivals and supplier industries spurs the creation of specialized local infrastructure and educational institutions. These in turn help the local rivals innovate and upgrade their capacity to serve the local customers even better, spurring even more sophisticated demand.

The report continues with a number of benchmarking exercises. It elaborates the ranking of 41 traded clusters in Ontario, relative to their ranking in Canada as a whole and the U.S., and to all the states and provinces with populations over six million. (For what it’s worth, in terms of labour productivity Ontario ranks thirty-second out of all 60 jurisdictions in Canada and the United States, thirteenth out of the 16 jurisdictions with populations of over six million, and second out of all of Canada’s provinces and territories.)

The report compares the composition of Ontario’s traded clusters with that of Alberta (the leading province in Canada in terms of GDP per capita and productivity), Michigan (Ontario’s leading trading partner), Illinois (a state that is quite similar to Ontario in traded cluster composition), and Massachusetts (a state that differs significantly from Ontario in its traded cluster composition and that is ranked third in Canada and the U.S. in terms of productivity).

The final part of the report consists of a closer look at Ontario’s traded clusters. It looks a little more closely at the largest traded clusters for 10 of Ontario’s 11 census metropolitan areas (the eleventh CMA too has been recently separately designated to have accumulated helpful data). It also looks a little more closely at four traded clusters: the entertainment cluster (although this cluster only ranks twelfth in employment of Ontario’s traded clusters, and ninth of Toronto’s, both Ontario’s and Toronto’s entertainment clusters ranked third in employment among comparable entertainment clusters in Canada and the U.S.); the automotive cluster (Canada’s ninth largest traded cluster, with Ontario ranking third in employment among automotive clusters at the province/state level in Canada and the U.S., and Toronto, Oshawa, and Windsor respectively ranking second, eleventh, and fourteenth among automotive clusters at the metropolitan level—Detroit ranking first, of course); the pharmaceuticals and biotechnology cluster (in which Ontario ranks seventh at the province/state level in Canada and the U.S., and Toronto fourth at the metropolitan level); and the financial services sector (in which Ontario ranks third at the province/state level in Canada and the U.S., and Toronto third at the metropolitan level—behind New York and Chicago). The report also quickly glances at two sub-clusters: Ontario’s retail fixtures and design cluster and the cold climate testing cluster in Timmins.

While A View of Ontario is fascinating, and will reward any strategic thinker who pays attention to it and to the thinking that informs it, it is only a rough sketch of the architecture of Ontario. The authors recognize this and identify many questions that require further research. Among these, they conclude with the following:

Given the finding that Ontario has a high proportion of employment in traded clusters and yet suffers from overall poor productivity growth, is the context for traded clusters in Canada different from that in the U.S.?

Do Ontario’s traded clusters have lower productivity than similar clusters in the U.S., and if so what prevents Ontario’s clusters from achieving comparable productivity growth?

In what ways does Illinois differ from Ontario that allow a similar industrial structure to be much more productive?

How has Massachusetts produced a mix of clusters that appears more capable of generating prosperity than Ontario’s?

So what good would all this information do me if I were an entrepreneur or young person soaking my brain in it?

As one listens to the susurration of the world in the attempt to hear a calling down some vocational path, one consideration—surely—is to find a fit between oneself and the possibilities available in one’s place and time. Learning how the world works, and evaluating its grief and joy, equips one for finding that fit. One must understand the design of the world—the laws and principles that structure the reality within which we live.

But, as Paul Marshall writes, “Principles are never themselves sufficient to give all the guidance we need. Apart from principles and absolutes, we need to know about particulars and concrete situations.”

A study like A View of Ontario can serve as experience-by-proxy of such particulars and concrete situations. It gives us a strategic overview of the economic life of a place and time, a rough sketch that allows us to at least begin to find our own place, and to find out how we can contribute to the cultivation of flourishing workplaces in flourishing markets.

Ontario’s Ten Largest Traded Clusters

1. Business services
2. Financial services
3. Automotive
4. Education and knowledge creation
5. Hospitality and tourism
6. Metal manufacturing
7. Transportation and logistics
8. Distribution services
9. Heavy construction services
10. Publishing and printing

Definitions

(from A View of Ontario: Ontario’s Clusters of Innovation)

Cluster: “A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, including product producers, service producers, suppliers, universities, and trade associations. Clusters arise out of the linkages or externalities that span across industries in a particular location.”

Traded clusters: “Traded clusters are made up of traded industries. Traded industries sell products and services across economic areas, so they are concentrated in the specific regions where they choose to locate production, due to the competitive advantages afforded by these locations. Employment levels in traded industries thus vary greatly by region, and have no clear link to regional population levels.”

Local clusters: “Local clusters are made up of local industries. Local industries provide goods and services almost exclusively for the area in which they are located, which explains why they must spread all across the country. Indeed, local industries show employment in every region, regardless of the natural or competitive advantages of a particular location. As a result, their regional employment should be roughly proportional to regional population.”

Further Resources

Michael E. Porter. The Competitive Advantage of Nations: With a New Introduction . (Free Press, 1998). Porter’s magnum opus, and a thorough introduction to cluster theory, with many examples of its application to particular countries and specific industries.

Toronto Competes: An Overview—An Assessment of Toronto’s Global Competitiveness . An application of cluster theory to Toronto.

The Innovation Systems Research Network’s working papers

The (U.S.) Council on Competitiveness’s reports

The Cluster Mapping Project of the Institute for Strategy and Competitiveness at Harvard Business School [sign-up required]