The annual release of the State of the Regions Report by National Economics and the Australian Local Government Association always makes good reading. The recently released 2002 Report is no exception, prompting headlines like: New Creative Elites Prefer Big City Vibe; Poorest Regions Slipping Behind; and Creative, Gay & Bohemian, as the descriptor for those cities and regions winning in the new economy.

The report argues that regions with the highest concentrations of creative energies and talented people also have the greatest levels of innovative and high tech industries and consequently, show superior economic growth and an ability to compete in the global economy.

Global Sydney and inner Melbourne perform well on these scales, while much of suburban and rural Australia runs a poor second.

At the heart of National Economics' analysis is the proposition that:

(i) a region's endowment of skilled, creative, well-educated human capital drives its economic prospects; and

(ii) this new mobile class of people are attracted to places that are open, tolerant, diverse and vibrant.

While there is much debate about how far a region's economic development is determined by its score on a creativity/knowledge worker index, there is widespread recognition that clusters of world class knowledge, technology, relationships and capability foster a region's competitiveness and bring considerable social and economic benefits.

The value of industry clustering for regional, indeed for national, economic development was on display in Australia recently at the 5th Global Conference of the Barcelona-based Competitiveness Institute. With around 200 delegates from as far afield as Thailand, Slovenia, Jordan, North America, New Zealand and Scotland, the Competitiveness Institute probed different models of industry clustering, how they worked and their track record in boosting innovation, trade and investment in both developed and developing countries.

While not a magic solution to regional economic development, industry clustering of firms and supporting organisations like universities, trade associations, business service providers and development boards, was seen as a potent tool for growing new business opportunities and industries, revitalising declining regions and fostering large scale competitiveness.

The work of Harvard Professor Michael Porter – one of the founding participants of the Competitiveness Institute and a presenter at the Global Conference – remains highly influential in the debate about clusters and their contribution to the competitiveness of firms, nations and regions.

Despite diverse definitions and fluid boundaries, industry clustering, to quote Porter, revolves around '' the enduring competitive advantages.....arising from concentrations of highly specialised skills and knowledge, institutions, rivalry, related businesses, and sophisticated customers''. (M Porter, 1998, On Competition, Harvard Business School Press).

In our efforts to foster regional economic development, it is not enough just to recognise the natural connections in a geographic area between economic actors. These interactions must be harnessed to create distinctive capabilities that come to characterise the region and drive its economic prosperity.

Deliberate and disciplined efforts are required to encourage the collaboration that puts a region's enterprises in touch with the know-how, resources, technologies, skills and motivation that pushes them along an outward-looking, high growth path. The performance and productivity of such firms then serves to attract other investors, suppliers and competitor firms into a critical mass of business capability and community connections that becomes self-reinforcing. The end result is a viable industry cluster (or more likely, multiple clusters), a regional hub with proven capacity for stronger participation in global supply chains.

The Australian wine industry is a much quoted example and one that is a significant contributor to the economic development of several Australian regions. There are no shortages of other Australian examples – the food industry in Adelaide, environmental management and eco-tourism in North Queensland, an information technology cluster in Western Sydney, mining and engineering in the Hunter region of NSW and around Gladstone in Queensland, to name a few.

While still a work in progress, there is mounting testimony that industry clusters are effective vehicles for regional and industry development. Industry clusters around the world are more often defined by their diversity and versatility, than by their similarity.

This may be a comfort to those regions that don't see their economic and social future being determined by the location preferences of the creative elites.