San Diego Business Journal

Despite the hammering of the Golden State by a steep recession, San Diego has more than held its own.

The state’s jobless rate hovers around 12.5 percent. San Diego’s? Around 10 percent.

The secret? In a word, clusters.

The region benefits from a diverse economy based on critical concentrations of companies in so-called clusters, accounting for the current relatively healthy employment rate as well as a more optimistic outlook for future job growth.

Marney Cox, chief economist for the San Diego Association of Governments, or Sandag, says the importance of clusters was discovered after the collapse of the Soviet Union in the early 1990s.

That’s when more than 10,000 to 12,000 jobs were lost when General Dynamics, the region’s largest defense contractor, downsized and reorganized, abandoning manufacturing facilities.

“They literally disappeared,” said Cox, of the defense jobs.

Geographically Connected

What are clusters? Well, the short answer is that they are businesses in a similar industry located near each other.

First, they are geographically centered in a region, said Cox, such as biotechnology or defense. “There are a higher concentration of them here than elsewhere,” said Cox.

Second, they are interrelated. “They sell goods and services among themselves.”

He noted that the area’s biotech cluster, for example, is an ecosystem of important companies surrounded by service providers and research and development agencies, mostly in higher education and research.

These clusters consist of industries in which the work is performed here and then sold to customers outside the region, bringing in new dollars for the economy.

Sandag lists 16 cluster sectors, which grew more than 20 percent in the decade of the 1990s, compared with 14 percent for business overall in the same period.

“They are the drivers of new jobs,” he said. “Twenty-five (percent) to 30 percent of the companies provide 80 (percent) to 90 percent of the growth in the economy.”

The current clusters include such industries as agriculture, biotech, biomedical, computer and electronic manufacturing, entertainment, defense, medical equipment, tourism and wireless communications.

Spinoffs Are Common Attributes

Cox says an important facet of a cluster is the ability of the companies to morph into new industries, such as one area of biotech growing into businesses based on genomic research.

But clusters can feature ordinary businesses, too. Cox pointed to food companies in the region that produce and ship Mexican-style food.

New clusters include those listed under the so-called environmental technology umbrella, such as green energy, which now counts 12,000 to 13,000 workers, and is rapidly growing.

Understanding the importance of clustering helps economic development agencies to focus their recruiting and retention efforts for best effect.

Previously, these agencies went after everyone and anyone, but now target their efforts.

“The old model was inefficient,” Cox said.

He noted that in the 1990s when medical instrument companies were getting started, they employed only 2,000 to 3,000 people. Now, that cluster employs 25,000 to 30,000.

“We started out with a small number of companies that grew very rapidly,” said Cox.

Competition Is Intense

Sanford Ehrlich, executive director of the Entrepreneurial Management Center at San Diego State University, said one overlooked aspect of the cluster phenomenon is the intense competitiveness in most clusters, which helps to foster creativity.

“It’s a paradox,” he said. “Collaboration drives competition, and competition drives collaboration.”

That so many like-minded companies are close together helps to foster innovation, and helps a cluster grow.

Sanford said another phenomenon of clustering is the convergence of technologies, for example the convergence of health care and wireless to foster new ideas in mobile health applications on smart phones.

He said Connect, the San Diego public-private organization pushing the formation of new companies, is looking to create a cluster around companies that supply products and services to other companies, so that clusters can “near source” their needs rather than outsourcing to other regions.

The success of clustering has had a number of positive effects for the area, including a more educated work force.

National Recognition

Sunset magazine ranked San Diego as the “Best Place to Hatch Big Ideas” in its February issue.

And the Web site newgeography.com recently named the region as among the country’s biggest brain magnets because of the high concentrations of residents with college degrees.

Julie Meier Wright, president and chief executive officer of the San Diego Regional Economic Development Corp., noted the success of clustering industries is connected to such national recognitions.

She says one reason why San Diego has been so successful in building clusters in health care and technology is the extensive research base housed in the local colleges and universities, where it can be moved to the business sector in rapid fashion.

Those laboratories have been important drivers of the economy, Meier Wright said, noting that research into cellular technology by the Navy decades ago led UC San Diego professor Irwin Jacobs to launch Qualcomm Inc., a company that now provides more than 12,000 jobs for the regional economy.

But she says the region needs to be on alert, as does the rest of the state, given the intense competition to copy what’s been accomplished.

“California used to be the fifth largest economy in the world; now it’s the eighth largest,” she said. “If we can’t keep up, so much for growth and potential.”

Tom York is a contributing editor for the San Diego Business Journal.