GERMANY IN UKRAINE

THE CASE FOR CLUSTERS: How to boost Ukraine’s international investment attractiveness

Cost-effective clusters could help attract international investment to the Ukrainian economy

Dr. Ricardo Giucci
Thursday, 06 October 2016 15:57

Economic policy in Ukraine is under pressure to rapidly support economic growth, boost exports and create employment. However, there are only very limited financial resources for this task. Therefore, the government needs to seek out low-cost, high-impact measures to foster innovation and investment in promising sectors. Clusters may be one of the best available options.

 

Tailor-made for today’s Ukraine

In the recent past, clusters have gained increasing prominence in international debates on economic development. Clusters are geographic concentrations of interacting companies and institutions in related value chains. They comprise players from three groups - private sector companies, government institutions, and research and educational institutions. The logic of clusters is simple - they are driven by the co-existence of collaboration and competition. While players collaborate in certain areas, they compete in others. Because of their proximity, cluster players can benefit from several location-specific externalities and synergies.

Cluster development is a particularly attractive approach given the current circumstances in Ukraine. It requires limited resources from government, yet may generate a significant impact and high visibility amongst investors. In many countries, cluster programmes have been introduced to strengthen competitiveness and to tackle structural change. In this context, investment and export support, innovation and competitiveness, as well as job creation and skills development, represent areas of strategic importance in which clusters can be leveraged to increase the efficiency of existing policies. Furthermore, cluster support is in line with the objective of decentralisation, which is of high relevance in the Ukrainian context.

Clusters are also of great interest for Ukraine’s international partners, which in many cases have had their own positive experience with this instrument. Numerous international partners would likely be ready to support the establishment of clusters in Ukraine with both technical and financial assistance, in the hope that official financing is followed suit by export revenues and private investments flows into Ukraine, which in turn would contribute to a further macroeconomic stabilisation and to economic growth.

 

Identifying cluster-friendly industries

It seems advisable to start the cluster development process with a limited number of pilot clusters in order to generate impact as early as possible, raise awareness, and gather first-hand experience for a larger future rollout. Key selection criteria for pilot clusters include promising potential with respect to internationalisation (investment attraction and export promotion), employment creation, and skills development, as well as innovation and upgrading potential. Clusters need to have a sufficient critical mass and geographic concentration to generate the necessary synergies and attract investment. A balanced mix of SMEs and large anchor companies would provide a sound basis. Crucially, cluster development also requires shared interests and a willingness to collaborate between the players.

Against this background, a quick scan involving interviews with experts from companies, associations, government and financial institutions indicates that the Ukrainian IT and automobile sectors represent particularly promising potential for the development of pilot clusters. Both industries have a strong track record of FDI attraction, export generation, and job creation, while they both boast sufficient geographic concentrations. Furthermore, existing cooperative initiatives in the IT industry and initial efforts towards collaboration in the automotive industry indicate a willingness among market players to participate in cluster activities. The combination of automotive and IT pilot clusters would allow for the testing of support measures as well as institutional models in two industries differing significantly with respect to their structural characteristics, which is helpful for the future preparation of larger scale efforts.

 

Practical steps

To move the cluster initiative forward, the Ministry of Economic Development would need to take a policy decision and develop a cluster support programme. This would then need to be officially presented in a workshop with stakeholders from business, local governments and educational institutions. The workshop would also provide an opportunity to assess interest in participation amongst stakeholders. Taking into account the results, the programme could be refined and finalised. As a next step or in parallel, international organisations could be approached regarding the possible funding of the programme.

With adequate support secured, the next step would be to select a number of regional clusters for the pilot phase of the project. The chosen clusters would then be provided with technical assistance and funding, with the necessary corresponding monitoring and evaluation mechanisms established. At the level of central government, a lean coordination and exchange mechanism would need to be formed to generate synergies between regional clusters (e.g. training for cluster organisations). Regional cluster management organisations could then integrate key stakeholders from business, the public sector and academia, and provide specific services in the areas of cluster marketing and business development, start-up and innovation support, and skills and infrastructure development.

A sustainable financing model for regional clusters would encompass base public funding from government or international organisations, revenues generated (e.g. fees, income from cluster services) and third party funding. The necessary funding volume for a cluster support programme is estimated at about EUR 5 million for a five-year period. At a time when the Ukrainian state has huge ambitions but limited resources, this is feasible given the international support such an initiative could expect to receive. 

 

About the author: Dr. Ricardo Giucci is team leader of the German Advisory Group (www.beratergruppe-ukraine.de) in Ukraine and Managing Director of Berlin Economics. The primary goal of the German Advisory Group is to support the economic reform process in Ukraine. The group advises different ministries, the National Bank of Ukraine, the Presidential Administration and Parliament on issues of economic policy.

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