Dubai as a Logistics Cluster

by Giorgi Machavariani

Dubai as a logistics cluster is one of the most successful cluster at the global level. It is a highly developed region of the United Arab Emirates (UAE). The country enjoys with relatively high income per capita (approximately 36.2 thousand USD). In the UAE the service sector represents 47 percent of GDP. As for Dubai, it has the most dynamic economy within the UAE where logistics play very important role in economic activities. Its share in GDP is 8.8 percent (including communication). Besides logistics are an industry that influences on the competitiveness of an economy. Logistics comprise transportation, inventory, material handling, warehousing, and packing and also very often security services.

Dubai has developed a dynamic logistic cluster that is playing a central role in the Europe-Asia-Africa trade. It also serves local markets and operates as a regional trade hub. Three main factors must be underlined in explaining why Dubai is such a successful logistic cluster. These factors are: advantageous geographical location, market conditions, and the role of the government.

The region has very strategic location in Gulf and therefore part of the fortune of Dubai is related to its proximity to some of the fastest growing economies in the world, basically China and India. So, advantageous geographical location helps this region to take a prominent position in the global logistics network and therefore today it is one of the critical nodes in the world’s supply chain.

Dubai’s (as a logistic cluster) market conditions are analyzed by using the diamond model of Porter (1990). Based on this model following four key factors must be considered: firm strategy, demand conditions, related and supporting industries, and factor conditions. Actually, these factors are the basic drivers of competitiveness of an industry which is crucial for a success.

From firm strategy point of view 6 factors must be highlighted: open markets in logistics and transportation sector, business supportive economic policy, favorable complementary policies, massive infrastructure investments, attractive regulatory and business environment, and growth oriented governmental companies. In fact these became contributors of Dubai’s logistic cluster development. It is also worth noting that massive and aggressive infrastructure spending became a key element for a success (see figure1).

Dubai’s ability to operate as a regional trade hub has been spurred by the demand conditions as well. Six main demand conditions can be underlined: Jebel Ali Free Trade Zone, domestic manufacturing sectors, Dubai Industrial City, population growth, increased import caused by economic growth, and trade measures against Iran. Among them most important factors are free zone, industrial city and domestic production. These determinants create economic activities and push significant demand for logistical services and much of it is captured by Dubai.

Related and supportive industries play considerable roles in the Dubai’s logistic cluster development. It, in fact, includes not only industries but also trends in related sectors, clusters and markets, associations and supportive governmental organizations. There are 6 main factors in this regard: highly developed finance, insurance, construction, and tourism clusters, substantial increase of FDI, rise in local capital markets, cluster associations, Dubai Industrial City, and rapid growth in trade. These industries and organizations provide necessary services, markets and information for improvement and strengthening of competitiveness of the logistic cluster (see figure1).

Dubai’s logistic cluster has some beneficial factor conditions – in particular its natural assets (harbor, oil, gas), advanced physical infrastructure (ports, airports, highways) and geographical proximity with the potential suppliers (mainly China and India) and buyers (EU, Asia) (see figure1). All factors listed above reinforce the potential of Dubai’s logistic sector to be competitive at the global level.    

State plays very important and active role in Dubai’s logistic cluster. In order to promote logistic sector the government (both local and central) actively intervenes. It has 5 main priorities: 1. Spurring growth by massive infrastructure spending; 2. Facilitating collaboration (public-private and personal relationships); 3. Strengthen links between port, free zone and customs; 4. Evolve innovations (for example airport in the port), and 5. Develop complementary policies (trade, fiscal, business environment improving).

The UAE’s government succeeded in creating world class infrastructure in transportation (seaport, airport, roads) energy, communication, and tourism sectors. This infrastructure is a strong asset and plays essential role in encouraging logistical development. Recently, for instance, a new logistics centre in Dubai Logistics City has been launched. 

The UAE government attempts to facilitate interactions between the government and business sector. This is crucial for a success of the logistics cluster because public-private and personal relationships are central issues in improving the competitiveness (Porter, 1998). In this regard, the major institution is the Chamber of Commerce. Its objectives are: encourage collaboration with private sector and support the development of small and medium sized enterprises. Besides the government launched the Dubai Cluster Platform and before this was created Focus Group of all stakeholders (public and private companies, service providers, educational institutions, associations, related and supportive industries) in logistics sectors. The aim of these actions was: boosting the competitiveness of Dubai in logistics by creating and fostering permanent network of collaboration.

It is also worth noting that the UAE government also uses complementary policies to spur logistics sector. It implemented business friendly tax system (very low corporate tax) which significantly reduces the cost of doing business. I addition, creation free zones also have positive impact on the cluster. It attracts capital form abroad and raises mobility of it.       

Hence, the main forces that make Dubai’s logistics cluster successful are favorable geographical location, market (factor, demand) conditions, effective complementary policies, highly developed related industries, and the world class physical infrastructure.

Construction Cluster - First and Successful Clustering Experience of Ukraine

by Denis Nedin

One of the biggest achievements of Khmelnytskyi region is introduction of the first in Ukraine cluster model of regional policy of economy. Moreover, this case is especially interesting since it serves as a prominent example of effective cooperation of government, business and institutions concerning in revival of regional economy. This was activity of Khmelnitskyi Regional Civil Organization “The Podillya Pershyi Association” which united heads of regional state authorities, heads of Khmelnitskyi authorities, directors of private and state enterprises, professors, bankers, leaders of NGO. As a result, the Khmelnitsky Regional Public Association “Construction Cluster” was registered in August 14, 2000 and started implementing in full a managerial role in the cluster.

Distinctive feature of clusters, in spite of its scale and industrial accessory, is focus on creation and production of competitive products which can be exported abroad or at least to other regions. However, the cluster in Khmelnytskyi region is special form of the cluster model because construction industry is, first of all, oriented on domestic market and main product is building of modern comfortable housing.

Nevertheless, possibility of cluster creation in this industry area was feasible due to several reasons. First, Khmelnytskyi region is transitional territory for high financial flows: there are large wholesale markets, and significant amount of remittances are being transferred from abroad. Therefore, it was expected that activity of the Construction Cluster would assist redistribution of these transits in favor of local construction and production of construction materials.

Second, Khmelnytskyi region has large reserves of natural resources, most of them are used in construction, which stimulates active building in the region. Thus, utilization of own minerals for producing construction materials provides corresponding workload of associated companies, reduces transport costs and positively affects prime cost of final product .

Construction cluster differs from other types of clusters because of very diverse members and broader scope of goals. The cluster combines all components of production process ranging from minerals suppliers to consumers of final goods, including service sector and specialize infrastructure.

Nowadays, Construction Сluster consists of 32 companies specializing in implementation of construction works, production of construction materials, projecting, designing, enterprises and establishments of infrastructure which provide trade, juridical, audit, marketing, training and research development services. The most important players are: Khmelnitsky Design Institute "Tsyvilprombud", Khmelnitsky National University, PF "Prospektbud", LLC "Budklast", LLC "Budvest-tempo", LLC "Building Industry", PF "Dita", JSC "Khmelnitsky Plant Building Materials ", LLC" Trade House "Megapolis", HF JSC "State Export-Import Bank of Ukraine", Podolskiy Department of Capital Construction of Ukraine, Scientific-Production Enterprise "City", CJSC "Electro", JSC "Hmelnytskhaz", HF "Ukrsotsbank", HF JSC "Bank", JSC "Slavuta Ruberoid Plant", LLC "Kamenetz", Center for Scientific, Technical and Economic Information, State Center for Standardization, Metrology and Certification, and others .      

The main goal of the integration is achievement of concrete economic result – production of competitive product which enhances efficacy of activity of every individual enterprise and accelerates the development of regional economy.

In order to assess effectiveness of the cluster, I consider dynamics of the construction companies (table 1). As we can see, over the period from 2000 to 2009, the volume of realized products in construction increased 5 times. At the same time, the number of construction enterprises increased by 50 per cent, from 14 in 2000 to 21 in 2009.

The raise in number of economic agents indicates attractiveness for investments. It is worth to point out that decrease in number of people employed in construction and, at the same time, the growth of realized products during analyzed period is an evidence of boost in labor productivity which is certainly positive tendency. There is also observed an increase in average wages of constructors by more than 8 times from 2000 to 2009, which is the biggest rate in Khmelnytskyi region.

Table 1. Main indicators of construction cluster

The level of profitability increased three times – industry turned from unprofitable to profitable.

Economic effect of creation construction cluster is caused by production and building cooperation which allowed: to use effectively aggregate potential of network partners; to diminish costs on modernization of construction products by passing part of work to specialize partners; to enhance effectiveness of supplying construction production with building materials, details, constructions on the basis of establishing long-term partnerships; to increase efficiency of execution of certain managerial functions through division of labor, involvement of specialize organizations of building profile; to increase efficiency in marketing, servicing and purchasing of essential resources; to improve reliability of network partners in investment and production sphere .

The Success of ZGC Science Park, China

by Anastasiia Shirinina

In the 1980s, the idea of a science park establishment quickly moved beyond the Western countries and parks were also established in Brazil, India, Malaysia, in the former "Eastern Bloc" - in Eastern Europe, CIS and China.  There are about 400 science parks created in the world today. Many others are in the process of creation. The success of science parks in promoting technology transfers and attracting clusters of technologically intensive and innovative firms has motivated countries all over the world, including China, to give an incentive to regional development. Due to the economic significance of China, its unique and complicated political and economic structure, the increasing number of foreign investments targeted to diverse spheres of Chinese economy, its considerable integration into global economy, the Chinese model of science parks can be a very peculiar example.

Zhongguancun (ZGC) Science Park in Beijing is the first and largest science park and cluster of semiconductor, computer, telecommunications and other firms in China. This park is not only a considerable income and research contributor of the economy, but also it bears a historical significance in providing the important transition from government control to relative freedom; moreover, it gave a rise of technological creation and transformation, new science parks foundation based on the government strategy to promote science.

The huge Chinese Zhongguancun Science Park is integrated into the city of Beijing, what is a very typical trend in the last quarter century - "science park in the city",  what makes it easier to connect innovators with financiers, moreover, the park itself reinforces the development of the city. However, all fragments of the parks are located in different parts of Beijing, where the large sub-parks usually have own specialization: software and electronics, new energy and industrial design, new materials, biotechnology, medicine, digital media, creative industries, etc.

There are over 22,000 companies (9 per day were recorded at the peak of development) and about a million employees in this park. No other places in China have such a large pool of talents as ZGC Science Park does. This is the "youngest" region in China - the average age of people here does not exceed 30. Park consists of more than 30 leading universities like Peking University and Tsinghua University, over 200 research institutions represented by the Chinese Academy of Sciences and Academy of Engineering, the largest national library in Asia, and the State Patent Office. The average annual income of the ZGC Park is $75 billion, including 650 companies with annual income more than $10 billion. The park is developing rapidly: profits volume of scientific and technological development has increased by 30% per year at the end of the last century, in the last decade it gave a steady growth over 25% per year.

It all started in October 23, 1980 - one of the scientists from Chinese Academy of Sciences Chen Chunxiao opened the first office of technological development at Zhongguancun street. Chinese economy at the time was in the rapid process of transition to a market economy and was extensively developing. After six years there were about 100 innovation companies, dealing with electronic equipment and marketing. The street became known as "e-street".

The computer era and then Internet era came. Communist Party of China quickly realized what an important phenomenon emerged in the street Zhongguancun, and decided to support it. In June 1999, the "Zhongguancun Science and Technology area of development" was officially opened under the motto "develop science and technology for the construction of the state." This is how the first Science Park appeared in China.

Zhongguancun Park has been created and developed as a top national project under the strict guidance of the Chinese government. However, in August 18, 2000 (almost a year before WTO accession) it was privatized to Beijing ZGC Life Science Park Development Co., Ltd. what was approved by Beijing Municipal Government. This was a breaking point and significant step to marketization of the economy and reason for a rapid rise of the other science parks and scientific centers which are more than 130 nowadays. However, the state still takes careful care of these research parks.

The park has large information, industrial and experimental base.  There are more than twenty multinational corporations’ branches opened here. They are attracted not only by the Chinese government’s subsidies, but the main reason is that the global giants are interested in the local market where they have an immense opportunity to promote their innovative products.

Many important discoveries were made in ZGC Science Park, like the first set of printing technique of Chinese characters, the first crystal of large integrated circuits with millions of subscribers. The first China's commercial Internet was opened here. Thanks to Zhongguancun China achieved the international communication and information standards.

Along with science parks a program of "100 Talents" has been developed: every year 100 brilliant scientists from around the world were invited to work in China, being offered very high salaries. Moreover, a large ethnic Chinese group who had worked for the Silicon Valley companies came back to PRC and led strategically important companies, became the directors of research institutes or held other important positions.

All these achievements and results prove the success of the first and the biggest ZGC Science Park in China, Beijing.

Figure 1. ZGC Science Park Map in 2006

Figure 2. ZGC Science Park Production Distribution

Skolkovo – the Heart of Russian Modernization

by Aleksei Khlystun

20 years after the collapse of Soviet Union Russian economy is still backward and highly uncompetitive. The major source for resent growth is constantly growing commodity prices which are heavily exported abroad. However, during financial crisis when drop in oil prices led to 7% contraction of GDP, government realized scale of structural problems and in 2009 announced federal program of economy modernization. The aim of this program is to develop new innovation industries, improve competitiveness of domestic producers, and achieve higher levels of economic growth. To accomplish this ambitious goal, authorities decided to utilize development of innovation parks.

The first step in this direction was made in 2010 when federal law “About innovation center “Skolkovo”” was signed. This so called Russian Silicon Valley is expected to be fully completed by 2015; some parts were completed earlier in 2011 and have been already used. Skolkovo project aims creating of environment which will promote concentration of intellectual capital and leading global companies which through cooperation can generate innovations and progress. It will specialize in priority sectors of economy modernization: space and telecommunications, medical technology, energy efficiency, information technology, and nuclear technology. Each of these areas will get own industrial cluster where Russian and foreign companies will work together. Industrial clusters will be situated around main technological park where participants will have necessary facilities, research equipment, scientific and technological expertise, interaction with venture funds and business support.

Given the level of priority devoted for the project, the government approved various benefits and exemptions for companies operating in Skolkovo, including:

• Pay VAT on the general terms or obtain an exemption;
• Pay income tax on the general terms or obtain an exemption (until accumulated profits reach 300 million rubles, profit tax rate is 0%);
• Pension fund contributions at  reduced rate - 14%, payments to the social insurance and mandatory health insurance funds eliminated;
• Organizations are exempt from property tax and land tax;
• Customs duties and import VAT on imported equipment will be offset by a subsidy;
• Simplified work permit procedure for foreigners.

These measures can significantly facilitate operation of innovation companies and provide some incentives for foreign companies to enter and invest into development of Russian economy.

Funding for innovation center will come from the federal budget to develop logistic and scientific infrastructure. Other expenses, related to the commercial environment and innovation projects, will be co-financed. In 2010, $150 million has been allocated from federal budget, in 2011 - $500 million, in 2012 - $730 million and in 2013 - $600 million. Moreover, following companies agreed to provide venture capital for innovation projects in Skolkovo: VTB Capital, Softline, Pangaea Ventures ($20 million), Runa Capital ($5 million), etc. In total, venture capitalists have committed around $260 million. As a result, of this domestic and foreign capital inflow, Skolkovo has already funded 40 start-up companies with $200 million. These companies cover wide range of innovations: visual search, cyber attacks security, 3D animation, data analysis, etc. In total by the end of 2013 Skolkovo will distribute $1 billion for start-ups.

In addition, like in many traditional innovation parks, operation of Skolkovo will be based on the close cooperation between universities and companies. For this purposes, the Moscow School of Management was opened here to teach new business leaders. But the real achievement is that in 2011 an agreement between Skolkovo and Massachusetts University of Technology (MIT) was reached to establish joint Skolkovo Institute of Science and Technology (SIST) which will be capable to integrate business and innovation in educational programs and scientific research. Both of these universities will create pool of qualified labor force for local companies and research centers.

Skolkovo graduates most likely will find job opportunities very quickly since already 200 companies registered there; in the future this number will reach 800. What is more important is that Russian innovation park already managed to attract global high-tech titans such as Intel, IBM, Microsoft, General Electric, Siemens and Sisco. These companies already agreed to open their R&D and production facilities and provide capital for development of Skolkovo. For example, just Sisco alone is willing to spend $1 billion on development of their research facilities. Attraction of foreign is extremely important for success of the project since they can bring additional FDI, enhance image of the project and create necessary critical mass for innovation progress. In the near future ABBYY, Novartis, Honeywell, Airbus, Alstom, DuPont, Google, Kodak, and John Deer can join Skolkovo.

Skolkovo is relatively new project, so it is hard to judge about its success or failure. Even though, some minor projects, as program for improvement of utility sector efficiency and development of business incubators, were completed, according to estimates it can take 15 years for Skolkovo to produce feasible results. At the current stage, creation of Skolkovo Institute of Science and Technology (SIST) in partnership with MIT can be one of the greatest achievements which in the long run can boost innovation acceleration and knowledge spillovers in the innovation cluster. Moreover, it worth to highlight positive dynamic with which Skolkovo attracts big international players and venture capital and subsequently funds new startups (more than 40 in less than year). However, due to country specifics the future success of the project will depend on government policies effectiveness to mitigate problems associated with Russian business environment and stimulate positive dynamic between participants of Skolkovo.    

Ingria Techno Park: A Promising Start

by Tetiana Protasova

Among the many incubators and techno-parks of Russia, Ingria proudly stands out from the crowd. Not only does it possess a substantial amount of capital (the total volume of investment in the creation of Ingria techno-park equals to 720 ml euro , but it also seems to have learned a lot from the success and failure of similar projects worldwide.

Overcoming Superficiality

Russia currently harbors over a hundred business incubators, most of them financed publicly. The standard list of services provided to the residents includes: free or under-priced office premises, conference rooms, channeling communication with investors and potential clients and mentoring. However, to-date most Russian business incubators and techno parks have not yielded any substantial innovations. World practice shows that getting the money and building a large office block is not enough for a government-initiated project to work. Similar to having the water fill the banks of a river, human capital in the face of incubatees and small businesses along with prospective investors need to come together, and with a bunch of innovative ideas, bring life to the freshly-built premises of a techno park. No wonder such concept as virtual incubators is up and running - material endowment can only be extra to knowledge and networking.

Good Examples

The number of successful enterprises that have left the incubator is by far the most important signal for the prospective incubatees. “The fact by itself that a business incubator has tenants is not a proof of success; the latter can only be decided if we are able to examine the incubated clients and their survival rates in a perspective of 3-7 years.”  Ingria has only been launched in 2007, and with such short history it is too soon to label it complete success, however its pilgrims have gained merit even in this short time frame. Ingria currently harbors sixty-four residents , many of them about to leave the nest of the incubator. Those who already did, are currently co-owned by big international corporations and appear to stand on solid ground.

Media and Culture

Another important success factor of a techno park is its popularity in the media and the familiarity with the concept of incubation in the society. Given it is a fairly new concept for this part of the world, incubation appears to gain popularity among the progressive Russian youth. IT specialists are in the forefront, as Internet is flooded with information concerning incubators and the success stories worldwide.  Further, ideology plays a crucial role in attracting IT specialists to business, as the popular US movies  give a sense of courage, and a feeling that a good concept and a will to succeed are enough to make a break. The fact that Ingria cooperates with all the major universities in St. Petersburg is also a good sign. Universities can offer entrepreneurs equipment, laboratories, training programs and special services that would not be available to them in their own organizational framework . Students and fresh graduates, having closely observed the incubation while studying may also aspire to become a resident, to invent and to cooperate. Acquiring professional skills and specialization is also easier and faster when a student knows what skills he would require after graduating.

Reasonable Eligibility Requirements and Transparency

Eligibility criteria has to be clear and reasonable in order to attract innovative projects. For instance, one of the requirements introduced by Skolkovo is to have at least one foreign specialist on your team when you apply for their residency. No wonder Ingria is already 2 years ahead of Skolkovo . According to Russian press , Skolkovo simply doesn't want to attract prospective specialists, it is said to harbor corruption, as the sphere of nanotechnology is difficult to monitor. This is why Ingria's apparent transparency, ensured by regular report publication, statistical data provision and the support of large multinational corporations is a good start to attract further success.

Hopefully Ingria will continue the inspiring trend and will further serve as a fine example of wise policy-making to science parks, incubators and innovation clusters in other developing countries.