I have discussed in past AFR BOSS mentor reports the significance of business clustering for greater innovation in Australian firms and regions. A notable example was detailed in the Australian Business Foundation's study of the global success of the Australian wine industry, and more recently in our regional infrastructure report.

In the last few days, the Australian Business Foundation's members and friends have had the benefit of new insights on enterprise networks and clusters from Alistair Nolan, the OECD's leading authority on entrepreneurship, small business, clustering and local economic development. He is visiting Australia courtesy of Smartlink, the National Institute for Manufacturing Management.

Let me share with you some of the OECD's current intelligence on what makes for the most successful business clusters and networks.

Firstly, Alistair Nolan distinguishes between clusters and business networks. Business networks refer to explicit alliances or contractual arrangements between specific firms to co-operate usually to achieve a particular commercial goal for those who are members of the network, eg joint purchasing or training, information sharing and peer learning or filling export contracts impossible for any individual enterprise.

Clusters, on the other hand, describe the phenomenon of the physical agglomeration of firms, supply chains and related businesses that provide a hub of specialised economic activity usually in a geographic region. Silicon Valley is an example, as are Italy's ceramics and textiles regions or the high tech zone around Cambridge University in the UK.

Nolan summarised the differing characteristics of clusters and networks as follows:

• clusters have open membership, networks are restricted;clusters are outcomes of market dynamics, networks are based on contractual agreements;
• clusters attract specialised services to regions, networks allow access to lower cost specialised services by member firms;
• clusters generate demand for more firms with related capabilities, networks can help firms engage in complex production;
• clusters require competition, while networks focus on cooperation.

Whatever the distinctions, collaboration for business and wider economic benefit is the thing that clusters and networks have in common. Both facilitate the flow of ideas, knowledge and people, which Nolan describes as "the oxygen for innovation".

The OECD observes that in general enterprises which work with others do better. Benefits come in the form of everything from lower transaction costs to superior access to information to economies of scale in production. They also observe that clustering policies seem to be universal – evident in both rich and poor countries, from interventionist regimes as well as by laissez-faire governments, in both the developing and the developed world.

The OECD's work concludes that for business networks and clusters to be successful, they must go with grain of the market. It is a mistake to create clusters artificially or to engage in some form of social engineering.

Among the key messages are:

• Let the private sector lead. The public sector should play a catalytic role, eg introducing the concept of collaboration to business, providing start-up financial support for network brokers or feasibility assessments, ensuring access to specialised infrastructure, communications and transport.
  
• Refrain from seeking to build new clusters of firms, but support existing or emergent clusters.
  
• Target investment attraction to the areas where the cluster is weakest, to the gaps in a region's economic base.
  

Counter-intuitively, Alistair Nolan counselled against a special policy focus on clusters. He said that policies should be agglomeration–neutral, but collaboration-positive. In other words, the aim should not be to create clusters, but to foster productive linkages between firms to encourage entrepreneurship and new capabilities in small businesses and to make it conducive for new enterprises to be born.

The OECD's insights are vital for those seeking to revitalise economically distressed regions or to build prosperous new industries and communities in both metropolitan and regional Australia.

More detail can be found in Alistair Nolan's book for the OECD called "Entrepreneurship & Local Economic Development. Programme & Policy Recommendations" available for purchase online from www.oecd.org/bookshop.