Presented by: Kevan Patrick O’Connor, Weijiun (Gene) Chieh, Cristian Rene Cardenas

Cayman Islands: Considering a Cluster

Presentation Outline

1. Economic Clusters and Project Deliverables

2. Cluster Analysis¾4 Domestic Clusters

¾5 International Clusters

3. Cayman Islands: Cluster Recommendation

1. Economic Clusters and Project Deliverables

What is an Economic Cluster?“The new economics of competition” – Michael Porter

As defined by Porter:

“Critical masses – in one place –of unusual competitive success

in particular fields.”

Factors that define a cluster

� Geographic proximity of interrelated firms and institutions

� Operational synergies

� Productive social and information networks

� Skilled local labor pool

1) Porter, M.E . (1998). Clusters and the new economics of competition. Harv. Bus. Rev. 76, 77–90.Figure adapted from Porter, 1998

A cluster is a geographical area of unusually high competitive advantage

Grapes

Harvesting Equipment

Irrigation technology

Agriculture Cluster

Agriculture Cluster

Agriculture Cluster

State Government

Growers & Vineyards Wineries

Educational, research, and

trade organization

Wine-making

equipment

Bottles

Barrels

Caps and Corks

Labels

PR & Advertising

Agriculture Cluster

Agriculture Cluster

Food & Dinning Cluster

Agriculture Cluster

Agriculture ClusterTourism Cluster

Anatomy of the California Wine Cluster

Fertilizer

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Why do economic clusters matter?Clusters provide competitive advantage

Cluster advantages

� Access to supply side inputs

� Access to specialized workers

� Access to information

� Access to institutions

� Access to distribution channels

Cluster effects on business

� Increased productivity of firms

� Increased capacity for innovation

� Increased growth

� Fertile environment for new business

1) Porter, M.E . (1998). Clusters and competition: new agendas for companies, government, and institutions. Compet. 197–288.2) Porter, M.E . (1998). Clusters and the new economics of competition. Harv . Bus. Rev. 76, 77–90.

“A cluster allows each member to benefit as if it had greater scale or as if it had joined with others without sacrificing its flexibility” – Michael Porter

“Paradoxically, the enduring competitive advantages in a

global economy lie increasingly in local things - knowledge,

relationships, and motivation that distant rivals cannot

match.”

– Michael Porter

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Project Deliverables

What are we doing?

� Examine the core factors that catalyze the formation of technology and biotechnology clusters

� Examine why clusters fail

Why are we doing it?

� Apply the success factors to establish an enduring technology cluster in Cayman Islands

Analysis framework

� Clusters Factor Comparison

� Porter’s Diamond

What is the feasibility of initiating cluster development in the Cayman Islands?

Scientific Policy

Private Investment

Knowledge Development

Infrastructure Development

1) Brown, R. (2000). Cluster dynamics in theory and practice with application to Scotland (University of Strathclyde, European Policies Research Centre).

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Factors1Los

Angeles

Silicon

ValleyBoston

San

DiegoDubai Singapore

Costa

RicaScotland Ireland

Strong Science Base

Entrepreneurial Culture

Growing Company Base

Ability to Attract Key staff

Infrastructure

Availability of Finance

Business support Services

Skilled Work Force

Effective Network

Supportive Policy

Environment

Many factors affect a cluster’s success. Some are more important than others

1) Brown, R. (2000). Cluster dynamics in theory and practice with application to Scotland (University of Strathclyde, European Policies Research Centre).

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Good

Fair

Poor

Key:

Analysis FrameworkCluster Factor Comparison

Porter’s Diamond is the standard for understanding cluster dynamics

Firm Strategy,Structure,& Rivalry

DemandConditions

Related &SupportingIndustries

Factor (Input)Conditions

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Analysis FrameworkPorter’s Diamond

2. Cluster Analysis

BostonBiotechnology

Highly interconnected network that spurred from academia

� Institutions, mainly MIT, spill information, knowledge, and talent into surrounding area

� Spin-offs from institutions result in cluster firms

A strong culture of financiers promotes new business development

� Historical finance hub provides fertile landscape for capital intensive innovation

� Capitalizes the spin-offs forming the cluster

A successful cluster needs local knowledge and financing sources to promote new business formation

Status: Success

1) Casper, S. (2008). Creating successful biotechnology clusters. In Presentation for “The Shape of Things to Come”, Conference, Stanford University,.2) Feldman, M.P., and Romanelli, E. (1976). Organizational legacy and the internal dynamics of clusters: The US human bio-therapeutics industry.Figure Adapted from Casper, 2008

Boston: Inventor Networks

1995

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Los Angeles: Manager Connections

Los Angeles Biotechnology

1) Casper, S. (2009). The marketplace for ideas: Can Los Angeles build a successful biotechnology cluster. Rep. John Randolph Haynes Found. Keck Grad. Inst. Appl. Life Sci.2) Cooper, C., Sedgwick, S., and Poghosyan, M. (2013). Industry Clusters of Sothern California in 2011.Figure Adapted from Casper, 2009

A fully matured cluster requires a productive network and a strong mechanism for tech transfer

Status: Emerging

2004

11

Poor industry network

� Lack of productive network creates colonies rather than a single web

� City layout is not conducive to interpersonal information trade

� Possible cultural barriers may hinder cluster formation.

Low promotion of academic tech transfer

� Lack of strong tech transfer offices in local universities

� San Francisco and San Diego siphon many of the best ideas away from the area

Silicon ValleyInformation Technology

Historical Government Spending

� WWII technology spending sparked initial labor pool

� Successive waves of innovation localized firms around the Valley’s labor pool

Growing VC Culture

� VCs flocked to area during each wave

� VCs financed risky innovation

� Provided vital professional management to young firms

1) Henton, Doug. (2000). The Silicon Valley edge: a habitat for innovation and entrepreneurship (Stanford, Calif.: Stanford University Press), P. 46.2) Hellman, Thomas F. (2000). The Silicon Valley edge: a habitat for innovation and entrepreneurship (Stanford, Calif.: Stanford University Press), P. 276.

Historical events can create a geographical concentration of an industry that attracts venture capital

Status: Success

•Hewlett-Packard

•Varian •Fairchild•Intel •Apple

•Netscape•Cisco

1950 1965 1980 1995 2010

Defense Spending

Integrated Circuits

Personal Computers

Internet

0

500

1000

1500

2000

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000

1975 1980 1985 1990 1995 2000 2005

Firm

s

VC F

undi

ng ($

Mil)

New VC Funding VC Financed Firms

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San Diego (La Jolla) Biotechnology and Pharmaceuticals, Biomedical

Historical government defense spending

� Military contracting during WWII provided financial support for R&D that created a skilled labor pool

Highly interdisciplinary and entrepreneurial research institutions

� Strong science base within UCSD

� Success in securing large federal R&D grants

� Success of Hybritech, an early venture in the1980’s, spawned a cadre of serial entrepreneurs that created other successful companies

1) Walshok, M. et al. (2010). Biotechnology Cluster Project – San Diego Analysis (Report prepared for the US Studies Centre by Global ConnectFigure adapted from Casper. S (2008), Creating Successful Biotechnology Clusters

Clusters have experienced success by capitalizing on historical labor pools through careful allocation of funds

Status: SuccessHybritech

Forward Ventures

Genesys

Somafix

Gyphen

Triangle

Cyphergen

GenQuest

First Dental Health

Combi-Chem

Applied Genetics

Coxixa

Columbia HCA

Kingsbury Partners

Chomagen

DigiRad

Novatrix

Biowest

Amylin

Biosite

Cytel

Pyxis

Medmetric

Vical

Gen-probe Ligand

Birndorf Biotech

Nanogen

Kimmel Cancer Inst.

Urogen

Gensia

Cypros11 Other

non-prolific firms

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Singapore Biotechnology

Government spending

� Investment in STEM education to build skilled labor force

� Investment in R&D and translational science to develop new domestic enterprise

Recognized scientific advisory council

� World renowned scientists guide domestic research efforts

� Market differentiation to address regional Southeast Asia medical need

Government directed initiatives can guide a cluster’s scientific direction and competitiveness

Status: EmergingAttract pharma

multi-nationals to establish

manufacturing operations

Develop clinical

research

Stimulate supporting services

Promote translational research &

tech transfer Promote spin-offs and start-

upsEstablish public research

institutions

Encourage shift to R&D and clinical

trials

Attract VC

Expand R&D and education

at local university

Biopolis

1) Wong, P.-K., and Singh, A. (2011). OECD Review of Innovation in Southeast Asia: Country Profile of Singapore (Research report commissioned by OECD. 306 Poh-Kam Wong, Yuen-Ping Ho, and Annette Singh).Figure adapted from Wong, 2011

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1) Gvaramadze, S. (2012). Regionomics: Dubai as a Logistics Cluster.2) Zumbach, K.U. (2010).The Role of Cluster Theory for Economic Development: Does Porter’s Competitive Diamond Fail to Explain Dubais Financial Cluster? Bowling Green State University.3) "Dubai Science Park: Business Partners." Http://dsp.ae/. Dubai Science Park, 2015. Web. 10 Dec. 2015.4) Bhatti, S., Fung, J., Gavage, J., and Yoo, J. (2006). Dubai financial services cluster: Oasis or mirage (Microeconomics of Competitiveness (Spring)).

Dubai Realty/Logistics/Tourism/Bioscience

Healthy public and private capital

� Visible success through government and private investment in infrastructure

� Carefully planned spending

� Oil-related wealth

Growing company base and enterprise zones

� Over 300 businesses represented

� Branding themselves as the hub of the Middle East

Clusters by design are possible, but require focus for near-term success

Status: Emerging

Factor (Input) Conditions+ Government Policy Support+ Foreign Human Capital+ State of the Art Infrastructure+ Proximity to Suppliers/Buyers+ Political Stability- Low Skilled Domestic Labor- Minimal Academic Presence- Bureaucratic Red Tape

Related & Supporting Industries+ Local Supplier Quality+ Existence of Trade port, Tourism, Real Estate, Finance, Insurance, and Construction Industry+ Dynamic Local Capital- Environmental Limitations- Local Supplier Quantity

Firm Strategy, Structure, & Rivalry+ Arabian Hub of Capital+ Rapid Development+ Open Market+ Logistics Capability- Regional Terrorism Risk

Demand Conditions+ Buyer Sophistication & Wealth+ Local Capital for Investment- Demanding Regulatory Standards

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IrelandBiotechnology

Government created ‘supply-side’ inputs

� Government telecom enterprise became leader during telecommunication boom of 1980’s

� Recognized for international call services and charges

� Establishment of Regional Technical Colleges created a skilled labor pool

Favorable Tax Policy

� Low 12.5% Corporate tax rate2

� Variety of industry specific tax incentives

¾ 25% R&D tax credit3

“Fortune favors the well prepared,” even in the case of governments and clusters

Status: Success

Leader in Telecom

Favorable Tax Policy

Skilled Labor Pool

Attractive landscape for foreign investment and cluster development

Gov’t Funded Higher

Education

Gov’t Telecom Funding

Irish Free State 1922

1) Burnham, J.B. (2003). Why Ireland Boomed. Inst. Public Aff. Rev. 55, 4–7.2) Corporate tax. Revenue. http://www.revenue.ie/en/tax/ct/index.html3) Research & Development. Revenue. http://www.revenue.ie/en/tax/ct/research-development.html

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Scotland (Dundee)Digital Media and Creative Industries

Historical heavy manufacturing industry

� Historical heavy engineering created skilled labor pool that allowed for expansion into technology and digital media

Formation of the Scottish Screen company

� A result of the failure to secure majority of filming of “Braveheart”

� Development of a creative cluster –multimedia, digital technologies, animation, on-line videos and film – to support the film industry

� Emphasis on cultural enterprise

1) Turok, I. (2003). Cities, clusters and creative industries: the case of film and television in Scotland. European Planning Studies 11, 549–565.2) Ontario Ministry of Tourism, Culture and Sport. Introduction: Ontario’s Creative Cluster. Retrieved from http://www.mtc.gov.on.ca/en/creative_cluster/cluster_report_intro.shtmlFigure Adapted from mtc.gov

Creative media firms benefit from a cluster that provides a flexible and liquid skilled labor pool

Status: Emerging

SupportingCreative

Content

Core

Core Arts and Cultural WorkersActorsWriters and AuthorsVisual & Performing ArtistsCultural Institutions

Content Production ClusterNewspaper PublishingBroadcasting (Radio and TV)Video ProductionMusic Recording and PublishingCommercial TheatreInteractive Digital MediaPrint Publishing

Wider Creative IndustriesDesign (Industrial, Graphic, Fashion, etc.)Advertising

Supporting IndustriesConsumer ElectronicsITSoftware DevelopmentPrintingRecording MaterialsBroadcast DistributionWireless CarriersSpecialized FinanceSpecialized Education

Creative Industries

Cultural

Industries

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Costa RicaInformation and Communications Technology

State electric enterprise led to local labor pool

� Need for skilled labor in electric enterprise led to technical education programs

� Program graduates founded about 20 local firms

Network failure prevents typical cluster synergies

� Network failure creates information failure

¾ Lack of value-added through information spill-over

� Results in failure to transition from ‘colony’ to cluster

1) Ciravegna, L. (2012). Promoting Silicon Valleys in Latin America Lessons from Costa Rica. (Hoboken: Taylor & Francis).

Complete cluster evolution requires the formation of social and information networks

Status: Emerging

Local Labor Pool

Government

Specialized Education Programs

State Electric Enterprise

Intel Manufacturing

Presence

Other Cluster Firms

Indicates influence of one entity on another

Indicates direct transfer/use of talent

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Primary and Secondary Drivers of a Successful Cluster

Government investment in knowledge and infrastructure developments are crucial to attract private capital

Industry

Infrastructure

FederalR&D Grant

UniversityPrivateInvestments

GovernmentSpending

VC

Mobility

InnovationTradeGroup

Entrepre-neurship

Network

Policy

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Los Angeles

� Firms created colonies due to a poor network opportunity

� Lack of effective tech transfers from universities

� Supporting Industries were matured too far beyond a supporting role

Dubai

� Supporting industries are still being established

� Lack of a single industry focus

These factors can be seen in many successful clusters, a break down of one interrelationship can be detrimental

Firm Strategy,Structure,& Rivalry

DemandConditions

Related &SupportingIndustries

Factor (Input)Conditions

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Porter’s DiamondExplaining Cluster Failure and Success

3. Cayman Islands: Cluster Recommendation

Established Startup

Biotechnology

Least Feasible� Equipment intensive

� Labor deficit

� Minimal benefits, unless HQ is moved here

Moderate Feasibility� Equipment intensive

� Flexible of startup team

� Zero capital gains tax

New Media

Moderate Feasibility� Minimal benefits, unless HQ is

moved here

� Relative abundance of labor from firms in house labor pool

Most Feasible� Requires basic facilities

� Flexibility of startup teams

� Relative abundance of labor through body shopping

� Zero capital gains tax

Given the resource constraints of the islands, new media start-ups are the most feasible new venture

Increasing Feasibility

Increasing Feasibility

Comparison of New Venture ProspectsCayman Islands

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Offshore > Local VC or Banks

Incubator Shareholders & Incubator Start-ups

Local Autonomous VC firms

1) New Business Friendly 2) Favorable Tax Policy Government VC Fund Education Programs

Local Senior Management/Leadership & Talent

Included in Incubator Firms

1) Mature labor pool 2) Local Professional

Management

Basic Facilities 1) Housing Facilitates 2) Operating Facilities

Sales, Equity, & Capital Gains

Industry Specific Configuration

Sales & Capital Gains Equity in Local Firms & Capital Gains

Industry KOL

Global Connection

Local Presence 1) Influence in Local firms 2) Reputation as a Local Expert

Minimal 1) Small & Productive but Closed 2) Consisting of incubator firms

Colony Incubator Cluster

Inpu

tsO

utpu

ts

Talent

Policy

Financing

Infrastructure

Position Advantage

Network

Wealth Generated

Factors

1) Skilled labor 2) Remote or Local

Management Industry SupportingEducation Programs

&

Network Forming Trade

Groups

Cayman Islands Cluster Sandbox“A potential framework for investor driven cluster formation”

An incubator in the Cayman Islands may provide the stepping stone required for complete cluster formation

Recommendations for New Cluster Development in the Cayman Islands

Recommendation:

Create a VC funded incubator to segue from individual firm to cluster dynamics

� A VC funded incubator would allow an investment group to establish a series of related companies under a single network with incubator managers at the center

¾ Incubator managers would maintain influence over incubator progeny as cluster develops

� Incubator shareholders would gain additional equity in new businesses as compensation for incubator services

¾ Zero capital gains tax maximizes profits from eventual sale of equity

� Incubator managers would become local experts

¾ Provides influence on policy making and attracts more start up firms to the incubator

� Incubator managers could develop supporting services for incubator progeny for profit

Most relevant near-term requirements

� Local skilled and available labor

� Productive social and information networks

� Local education/training programs

Most relevant long-term requirements

� Operational synergy among cluster firms

� Local autonomous VC

� Development of supporting services

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