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7. The Strong Role of Government

Published onMar 26, 2020
7. The Strong Role of Government
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Several observers note that many governments have aspired to create industry clusters, especially knowledge-based clusters of the “next Silicon Valley” type, without success. They see governments’ efforts as discredited “industrial policy” and point to the failure of most governments to “pick winners” while attributing the success of clusters solely to entrepreneurial fervor and risk taking.1 Examples of failed attempts include Tsukuba, Japan’s science city; Akademgorodok, “City of Science” in Siberia; and Egypt’s “Silicon Pyramid.”2

Most economists, however, acknowledge the role of government in the investment and stewardship of a cluster. For example, Harvard’s Michael Porter cites access to public goods and a wide array of institutions, including government agencies, as one of five factors contributing to superior productivity in clusters.3 The stories of Zaragoza, Singapore, Panama, and other logistics clusters suggest that this type of cluster not only benefits from accommodating government policies in trade, taxation, and zoning but requires significant public investment in logistics infrastructure as well as regulatory support.

Unlike private investments, which are driven by economics, government investments involve many other goals, such as social equity, environmental stewardship, and other manifestations of public good.

Governments’ Roles in Creating Logistics Assets

As mentioned in chapter 6, logistics requires a significant base of physical assets, many of which require both initial and on-going government funding and are subject to government regulations. First, logistics relies on government investment in transportation infrastructure such as public roads, ports, airports, and (in most countries) railroads. Second, governments also control the use of land. Urban planning, zoning regulations, and building permits directly influence the private creation of logistics assets such as logistics parks, intermodal terminals, and warehouses. Third, governments offer direct or indirect incentives to encourage new asset development and private investment to bring “good jobs” to specific areas. Fourth, governments provide “soft” public goods such as educational institutions and other incentives for workforce development. Last, governments control trade regulation, taxation policies, immigration rules, environmental policies, and other levers that can make a location more or less business-friendly to logistics operations. While showing me several logistics facilities in Memphis, Dexter Muller, senior vice president of community development of the city’s Chamber of Commerce, summarized the role of government in logistics clusters’ development: “Economic development is unavoidably tied in with government. Because they’ve got infrastructure. They have zoning. They issue permits. They have incentives.”

Public Investment: Creating Large-Scale Shared Infrastructure

Governments fund, own, and maintain much of the physical infrastructure described in the previous chapter. Most of the government-funded logistics infrastructure is transportation-related and is shared with individuals, businesses, and the military. To fund the building and maintenance of these infrastructures, governments use a combination of general funds, fuel taxes, tolls, and other user fees.

Funding Roads
Heavily loaded trucks have an outsized impact on the lifespan of road surfaces—in fact, the process for pavement design calls only for estimating the expected number of heavy truck axle loads because cars and light truck traffic create almost inconsequential pavement damage by comparison. Heavy loads create compression and bending of pavements, leading to rutting and cracking. For example, a 20,000-pound truck axle consumes over 1,000 times as much pavement life as a 2,000-pound automobile axle.4 Consequently, heavy truck traffic requires continuous investment in maintenance and rehabilitation of highways around logistics clusters.

The shared use of roads by truckers and commuters can create public support for taxation and justify the use of general funds for transportation improvements. For example, some California counties, such as those of the Inland Empire east of Los Angeles, increased their sales taxes with provisions that the proceeds go directly to congestion-reducing transportation projects. Citizens voted for higher taxes to shorten their commutes and reduce frustrating traffic jams. Reducing congestion, however, helps both commuters and truckers around Inland Empire, which is one of the largest logistics clusters in the United States.

Most infrastructure development programs around the world are dwarfed by the pace of Chinese development in the first part of the twenty-first century.5 The Chinese “7-9-18” plan calls for the development of a system of expressways modeled after the US Interstate system, with seven expressways radiating out of Beijing, nine north–south expressways and eighteen east–west expressways. The network will link all cities with populations over 500,000 and increase economic opportunities for the western provinces. The total length of the Chinese expressway system was 74,000 kilometers in 2010 (comparable to the length of the US Interstate system) and was expected to reach 108,000 kilometers by 2016. The total costs of the Chinese national expressway network have been estimated to be $240 billion. Almost all the roads in the system are toll roads built and operated by private companies and financed by loans from China Development Bank and from self-financing bonds.

Creating a Rail Network
In many countries, governments own and operate the national rail network as a result of historical factors. Whereas most US, UK, and German railroads are privately owned and operated, railroads are government owned in many other parts of continental Europe, as they are in most developing countries. In many of these cases, national priorities, favoring passenger service over freight, can lead to degradation of the reliability of rail freight services.

Some rail corridors in Europe, however, are specifically built for freight, especially around logistics clusters. For example, the Dutch spent nearly five billion euros on the 160-kilometer double-track Betuweroute for moving freight between Rotterdam and Germany.6 Engineers tailored the line’s design for freight trains. Extra-high-clearance overhead electrical lines and tall tunnels enable double-stack container traffic. High-voltage power lines support powerful locomotives pulling heavy freight loads and make the route incompatible with Dutch passenger trains. The corridor is a key part of the Trans European Freight Rail Network (TEFRN), which aims to allow freight trains free access across the entire EU without having to stop at borders or make way for passenger trains.

The US government has also supported freight rail, despite its private for-profit nature. For example, the CREATE (Chicago Region Environmental and Transportation Efficiency) project around Chicago includes seventy government-funded upgrades to rail infrastructure that will reduce congestion, increase train velocities, and increase capacity of the region’s rail network. Congestion associated with heavy rail traffic adversely affects both commuters and local business activities. Each day some 500 freight trains pass through the Chicago region, with some of these trains almost two miles long—enough to block all at-grade rail crossing simultaneously in some Chicago-area communities.7 Freight trains also vie with commuter rail in Chicago, where the conflicts create delays for both. A train that may take as little as forty-eight hours to travel the 2,200 miles from Los Angeles to Chicago spends an average of thirty hours traversing the Chicago region.8 Traffic congestion creates long commutes, frustration, added fuel consumption, and a drag on the economy.

To alleviate this burden, project CREATE was launched in 2003 as a partnership between the US Department of Transportation, the state of Illinois, the city of Chicago, and both the commuter rail and the US freight railroads. By 2010, almost $3 billion was invested in dozens of transportation improvement projects in the area to alleviate the problems. Justification for the government’s support includes increased employment, improved commuter rail operations, reduced road congestion, improved safety at rail crossings, and reduced pollution from slow-moving trains.9 Los Angeles’ Alameda corridor project, which involved a below-grade rail link from the port to the city’s rail terminals, had similar objectives, as described on p. 170 in chapter 6.

As is the case with other infrastructure projects, the Chinese investment in rail—both high speed passenger routes and freight railroading—is massive. The Chinese rail system was 91,000 kilometers long at the end of 2010 but continued investment, driven in large part by increasing freight volumes, is expected to grow the system to 110,000 km by 2012. (This is still less than half the total mainline track in the United States.)

Maybe nothing is more symbolic than the new silk road inaugurated in July 2011—a freight rail line linking Chongqing, a Chinese logistics hub, to Duisburg, a German logistics hub,10 running through the far western Xinjiang Uygur autonomous region, Kazakhstan, Russia, Belarus, and Poland, before finally reaching Germany. Even though the railway track existed for over a decade, it was not in use until China signed a strategic agreement with Russia and Kazakhstan to open the new freight route. The first train departed Chongqing in July 2011 carrying laptop computers and LCD screens.

The PLAZA That Aragón Built
PLAZA’s development first got me interested in the subject of logistics clusters, and the Zaragoza project demonstrates how governments can successfully lead their development. In the case of PLAZA, the Aragón Government envisioned the project, designed the concept, developed a self-funding model, appropriated the land, built the infrastructure, and recruited key companies to locate to the park. In creating PLAZA, government officials used tools uniquely available to governments, such as creating new laws, expropriating one small patch of land from a recalcitrant landowner, and pushing essential approvals through the Spanish bureaucracy. The government also was able to take substantial financial risks by guaranteeing project completion dates for the first important tenant, Zara.

Military Infrastructure
Since the days of the Roman Empire, the military has depended on logistics and logistical infrastructure, which then also support civilian freight use. Roman Legions built the Netherlands’ first canals to defend the Northern border of the Roman Empire. The United States funded the Panama Canal to aid naval defense of the Western Hemisphere. High-speed road networks, such as the German Autobahn and the US Interstate Highway system, provided mobility for military materiel. Yet these military infrastructure projects also supported civilian applications, including the movement of commercial goods.

With the end of the Cold War, logistics firms enjoyed a Peace Dividend. As mentioned in chapter 1, Zaragoza’s airport—now the third largest in airfreight volume in Spain—was a former NATO airbase. Lessening of NATO defense concerns enabled expanded civilian use and the incorporation of the Zaragoza airport into the PLAZA concept. Similarly, the Joliet, Illinois, complex of logistics parks and intermodal facilities sits on a former US Army ammunition plant created in the run-up to WWII. These former military facilities often have large contiguous expanses of land, making them ideally suited for logistics parks. Moreover, the closure of a military facility creates a gap in the local economy that logistics operations can fill. Other military facilities redeveloped for civilian logistics include Subic Bay in the Philippines and Howard Air Force Base in Panama. Government investment in military logistics can thus aid contemporaneous or subsequent civilian logistics.

Education and Research
Besides investing in the physical assets that support a logistics cluster, governments invest in the human assets that work in the cluster, as well as in knowledge creation. In most countries, government funds training, education, and research in logistics, which drive both current performance and future competitiveness. The Zaragoza Logistics Center,11 Dinalog (the Dutch Institute for Advanced Logistics12), the Logistics Institute Asia Pacific in Singapore,13 and the Malaysia Institute of Supply Chain Innovation14 exemplify the kinds of educational and research facilities that governments support. In a competitive environment, a quality work force, innovation, and technology define the difference between ineffective and efficient logistics. Chapter 8 delves into this crucial element of logistics clusters in greater depth.

Permitting Land Use and Regulations

“Sometimes the urban planning is very easily forgotten,” said Ricardo García-Becerril, General Manager of PLAZA in Zaragoza. Whereas high-tech startups can sprout in any garage or urban loft, logistics facilities generally depend on vast tracts of cleared land. Moreover, roads, railroads, and canals have geographic constraints on straightness and slope, which limit their siting and may force governments to expropriate private lands. Governments’ roles in permitting land use, assessing environmental impacts and issuing building and occupancy permits make them an indirect facilitator or inhibitor of private investment in logistics clusters.

Although not as injurious as heavy industry, logistics activities create heavy vehicle traffic, which degrades the environment with noise, pollution, and road congestion. Objections by residential and environmental groups can stymie development and hinder operations. For this reason, industrial real estate developer Watson Land Company in Los Angeles explicitly avoids developing land adjacent to residential areas or areas that might, in the future, become residential areas.

Land use in logistics can require far more than buildings and roads. The civil engineering needs of logistics often require large-scale modification of the land such as: leveling hills, cutting grades, dredging ports, and filling in parts of rivers and oceans. Thus, environmental laws in many parts of the world affect large-scale logistics projects such as port expansions. For example, the Pan American Highway remains incomplete near the Panama-Colombia border because of strong environmental concerns about the rain forests, tropical diseases, and indigenous peoples of the Darien Gap. In other cases, gaining approval for a major project may take years and include lengthy court battles.

Complex government permitting processes also affect the development of logistics clusters. Major projects at the port of Los Angeles, for example, must gain the permission of the California Coastal Commission, the federal Environmental Protection Agency, as well as local authorities. To date, the port of LA has won the right to create new land and pursue large-scale land and sea modification projects by finding offsetting environmental remediation projects elsewhere in California. A “remediate-one-acre, build-one-acre” strategy can even create net environmental benefits because the new infrastructure is built to high sustainability standards.

Similarly, Rotterdam’s Maasvlakte 2 project (see p. 173 in chapter 6) required a host of offsets in order to balance the environmental impacts. The port of Rotterdam agreed to build 750 hectares of nature habitat as well as new beach recreation areas, a seabed protection area, and a large landscape park around Rotterdam as part of the project. In addition, the Rotterdam Port Authority committed to constructing an electrical grid for barges moored at inland shipping docks, increasing the stowage rate of trucks, and decreasing pollution from lighting for the benefit of migratory birds.15

Governments can also accelerate development by streamlining regulatory and permitting processes. Panama, for example, reduced the burden on new companies coming to the country’s new Panama Pacifico mixed-used development (including a logistics park), by creating a “one-stop shop” for permits and regulatory issues.16 “There’s one building here that deals with every single bureaucratic requirement that a company might have in terms of establishing [itself] in Panama. [Issues with the] Ministries of Works, social security, and migratory issues all get solved at a one-stop shop in one building,” said Henry Kardonski, managing director of Panama Pacifico. This single point of contact for twelve different government ministries reduces the costs and complexities of relocating a company and its executives to Panama.

Attracting Private Investment: Incentives, Subsidies, and Taxes

In addition to providing a solid infrastructure base and accommodative regulations, most governments actively recruit companies through a wide range of incentives such as subsidized land, temporary tax abatement, loan guarantees, and preferential regulatory treatment. Whereas some aspects of a business-friendly climate apply to all companies operating in the location, government incentives generally go only to specific companies that make new or additional investments. Incentives are but one factor in companies’ site selection decision processes. Telephone interviews conducted by my colleague Bruce Arntzen with several big-box retailers in the United States about their location decisions for distribution centers elicited the opinions that other important factors are network economics and labor force quality. Commenting on the location decision process, David Rocco, director of logistics strategy for Staples Inc., stated that while Staples considers government incentives, they are but one of many factors influencing the location decisions for distribution centers. Similarly, Steve Carter, director of transportation planning and strategy at the Target Corporation, said that “The overall list of attributes offered by a site drives the ultimate decision, with price being one of several key factors.” Specifically, Colby Chiles, director of online transportation at the Home Depot Company, said that once the general geography of a new distribution center has been chosen based on network optimization models, which account for total supply chain costs, the company will consider which jurisdiction can move faster to approve development and compare the incentive packages between these jurisdictions.

Government Recruiting of Land Developers
Governments sometimes take the lead in developing, or redeveloping, land for economic purposes. Aragón’s role in PLAZA is one clear example. Another, Joliet, also illustrates the Peace Dividend effect. After the US Army decommissioned the Joliet Army Ammunition Plant in 1993, the government started working to clean up the heavily polluted land and convert it to civilian use.17 Part of that project included transferring 3,000 acres to the state of Illinois. The state then created the Joliet Arsenal Development Authority (JADA) to spur economic development in the area.

JADA recognized that “the availability of a large parcel of land in the region, in proximity to major transportation infrastructure of rail and highway, made the JADA property a prime location for a major intermodal transportation facility.”18 Thus, JADA sought bidders for the land who would then develop it. In 1999, CenterPoint bought 1,900 acres of the JADA parcel as well as 375 acres of private farmland to create the CenterPoint Intermodal Center (CIC). Today, the expanded CenterPoint Intermodal Complex located in the Joliet and Elwood areas spans 6,000 acres. The CIC-Elwood development attracted leading logistics tenants such as Walmart, DSC Logistics, Georgia Pacific, Potlatch, Sanyo Logistics, Partners Warehouse California Cartage, Maersk, and Bissel.19 Other major JADA projects include the 776-acre ProLogis Park designed to accommodate regional and super-regional distribution centers. Local governments also helped through annexation, flexible zoning terms, and tax incentives. In turn, CenterPoint donated some land to the US Forest Service, to the city of Elwood, and for wetland conservation.

In another example, the Port Authority of New York/ New Jersey teamed with the New Jersey Economic Development Authority for its “Portsfield” initiative.20 The redevelopment is converting seventeen brownfield sites within twenty-five miles of the ports into high-quality distribution space. Government aid includes financial support as well as administrative assistance with government bureaucracy and environmental regulations.21

Will Give Incentives for Work
To attract companies to a region, governments will offer direct incentives if the company promises to create jobs in the area. Jobs were the main reason that Aragón and Zaragoza pursued the PLAZA concept. The development has created an economic base and attracted numerous new businesses to the area, so much so that in 2009 Aragón reached a low unemployment rate of 11 percent and what the Economist referred to as “near full employment”22 immediately following the 2008 World Expo hosted by Aragón.23

Similarly, economic development efforts by local governments in Illinois (Joliet), Panama, Singapore, Memphis, Rotterdam, and elsewhere focus on jobs. Memphis, for example, ties tax incentives to wages such that companies who promise to bring higher-paying jobs receive more incentives. Singapore and Panama offer lower corporate tax rates for companies who move regional or global headquarters to the country, because headquarters bring with them higher-paying white-collar and executive-level jobs.

Incentives and economic stimulus money can also forestall job losses during an economic downturn. Mary Yeo, UPS vice president of supply chain operations South Asia Pacific, explained that during the 2008 recession, the Singaporean government “gave us quite a bit of grants to help us tide over, but with the promise that we don’t lay off our people.” Similarly, the US government dispensed some $1.5 billion in Transportation Investment Generating Economic Recovery (TIGER) grants. Of these, the three largest projects gave money to private railroads to improve freight rail infrastructure, including in logistics cluster locations such as Memphis and Chicago.24

Build It and They Will Use It
Logistics companies may require new investments in infrastructure to support relocated or expanded operations. FedEx moved from Little Rock to Memphis because the former was unwilling to invest in more airport infrastructure. FedEx needed a second runway and buildings for a sorting hub to ensure reliable operations, but Little Rock refused to build it. In contrast, the Memphis airport offered hangers and ramp parking space. In addition, the chairman of the Memphis Airport, with the endorsement of the airlines serving Memphis at the time, led the efforts to float a $2.9 million bond to help FedEx establish its hub.25

In attracting developers to buy land in Joliet and invest, federal, state, and local governments secured $160 million in grants to create essential roadway components,26 and new water and sewer systems, as well as other infrastructure.27 These examples demonstrate that government’s willingness to upgrade infrastructure can affect site selection decisions of logistics companies.

Logistics for No Money Down
Governments generally enjoy a lower cost of capital than do private companies, and that can help develop cluster infrastructure and other large-scale private logistics facilities. For example, during my visit to the Joliet logistics park, Neil Doyle, CenterPoint’s executive vice president of infrastructure and transportation development, explained how O’Hare Airport in Chicago developed through a combination of publicly-raised capital invested in private development: “They were able to issue airport bonds for the construction of all the buildings, so government said, ‘You know, we can get really cheap money doing this, but we’re not putting the taxpayers of Chicago on the hook for you.’ And the companies said, ‘Fine, we’ll back the bonds, but you issue them.’” The result is “everybody wins. We developed that whole park at 3.5 percent money. That’s a big difference. We don’t want to strain the taxpayers, but government has skill sets we don’t have, tools we don’t have,” concluded Doyle.

Even Governments Get Regulated
Governments, too, face regulation from larger scale governments and the global community. In particular, the World Trade Organization (WTO) restricts countries from subsidizing local industries, which limits governments’ abilities to offer blatant incentives to exporters. EU regulations echo this prohibition against government favoritism, with exceptions for economically disadvantaged areas. Aragón, for example, couldn’t offer direct subsidies to potential occupants of PLAZA because Aragón was not considered economically disadvantaged at the time.

Global financial regulations also can limit what countries can do to attract capital and investment. In the past, Panama attracted investment and companies through very favorable constitutionally-guaranteed banking secrecy laws that made the country a tax haven. The system also helped to create a sophisticated financial sector that facilitated Panama’s logistics companies’ prowess in international trade. However, rising global concerns about tax evasion, money laundering, and terrorism have forced many countries, including Panama, to curtail or repeal their tax and financial haven laws. In 2000, the Financial Action Task Force (FATF) put Panama on its blacklist, which forced Panama to increase monitoring of banks and expand prosecution of money laundering.28 In 2009, the Organization for Economic Co-operation and Development (OECD) put Panama on its gray list of countries that lack sufficient financial openness, which led some foreign banks to leave the country.29 In 2010, Panama acceded to global regulatory demands for more openness by signing a Tax Information Exchange Agreement (TIEA) with the United States and curtailing some features of Panama’s banking secrecy laws.30 In addition, some of Panama’s export incentives came under the watchful eye of the WTO, and Panama had to modify its laws accordingly. These larger-scale regulations can limit a government’s ability to offer incentives or to create a preferential climate for recruiting companies to a cluster.

Governments’ Impact on Logistics Operations
Governments affect the costs, speed, and reliability of logistics operations through taxes, regulations, energy policies, import/export procedures and other government-run processes. In turn, that affects both shippers and carriers’ decisions to operate in, or to avoid, a given region. A 2010 study assessed the opportunity to turn the region of southeast Michigan, northwest Ohio, and southwest Ontario into a logistics cluster.31 Most of the study’s recommendations focused on government support in the provision of infrastructure, appropriate regulations and competitive taxation.

Logistics-Friendly Laws and Regulations

If “capital goes where it’s appreciated,” then logistics companies go where they can create the lowest operational cost structures to serve the highest possible freight volume. Government taxes, regulations, and policies affect logistics costs, which in turn affect a region’s attractiveness as a transshipment and distribution hub. The most onerous taxes for logistics businesses include import taxes, property taxes, inventory taxes, vehicle taxes, and fuel taxes.

Non-Taxing Tax Structures
Singapore jump-started its status as a logistics cluster when Sir Thomas Stamford Raffles established the location as a free port in 1819. This free-port policy contrasted sharply with the stiff tariffs and duties charged by other neighboring ports in Malaysia and Indonesia. Instead of taxing ships and freight, the original colonial administrators of Singapore raised money through taxes on alcohol, gambling, and opium. News of the free port spread rapidly and within six weeks, 100 ships came to the new port; within five months, the new outpost had 5,000 inhabitants. In his farewell remarks, Raffles assured them that “Singapore will long and always remain a free port and no taxes on trade or industry will be established to check its future rise and prosperity.”

Dubai Logistics City (DLC), the integrated development anchored on Jebel Ali port and Al Maktoum airport, was developed with an eye to optimize business logistics operations. To attract offshore company formation, DLC allows for 100 percent ownership with no taxation and 100 percent repatriation of capital and profits. These benefits are in addition to the tax and regulatory advantages of a free trade zone and low tariffs.

Logistics businesses located in the AllianceTexas Logistics Park enjoy “triple freeport inventory tax exemption.” All three taxing entities—city, county, and school district—have enacted this exemption. The result is that at Alliance, companies pay no tax on inventories that are forwarded out of Texas within 175 days of the date the inventory was acquired or brought into the state. This is in addition to the Foreign Trade Zone designation of Alliance.

How governments collect the taxes matters, too. For example, VAT—Value-Added Taxes—have to be paid by distributors the moment they buy goods for inventory. In most countries, the distributor then applies for a refund when it sells the goods, and the customer pays the VAT. This refund can take months—as many as twelve months in some countries, like Italy. Under this refund-based collection process, the distributor’s up-front VAT payment and delayed VAT refund becomes a de facto interest-free loan to the government and consumes the company’s working capital. In contrast, the Netherlands has a distribution-friendly VAT collection method based on accounting principles. Companies track purchased and sold inventory and pay the net VAT accordingly. In the end, companies still pay the same total amount of VAT, but they avoid the hassles, costs, and working capital penalties of the refund process.

Government-related costs can modulate shippers’ geographic decisions to push logistics clustering over a border. With the deregulation of US interstate trucking in 1980, state trucking rate regulations still held sway over intrastate shipments. The California Public Utility Commission set such high rates that a fifteen-mile state-regulated shipment from San Francisco to Oakland often cost more than a 200-mile deregulated interstate shipment from San Francisco to Reno, Nevada.32 Needless to say, shippers moved across the border to locations such as Reno. Although California eventually partially deregulated intrastate trucking, other state government differences between California and Nevada continue to make the latter state more attractive for logistics. On business taxes, Nevada ranks nearly the best (#3 in the United States in 2012) and California is nearly the worst (#48).33 Nevada logistics companies explicitly highlight the tax advantages of their state.34 As a result, the Reno area has more than sixty-five major freight companies, intermodal yards for Union Pacific and BNSF, forty-eight million square feet of industrial space, and a 7,500-acre Free Trade Zone.35 Companies such as Amazon.com, Barnes and Noble, Walmart, Petsmart, and Starbucks use Reno for cost-effective overnight access to fifty-three million consumers on the West Coast. Amazon.com and other Internet retailers, especially, use Reno to avoid California sales taxes that they would have to pay if they put a distribution center in California.

Conveyance Size Limits
Conveyance regulations affect carrier efficiency and how carriers structure their networks. One of the key factors for controlling transportation costs is the ability to utilize large conveyances, which have better efficiency both in terms of labor and fuel. But sometimes government regulations stand in the way of cluster development. Much of FedEx’s early history was defined by its battle to deregulate the air transport industry. In particular, FedEx led two years of intense lobbying effort in the US Congress, which culminated in the 1977 Airline Deregulation Act. The law enabled FedEx (and all other cargo airlines) to use larger aircraft with no geographic restrictions on routes. FedEx promptly bought seven Boeing 727 aircraft with cargo capacity of 40,000 pounds each to augment its fleet of twenty Dassault Falcon converted executive jets. The cargo capacity of the 727 is almost seven times larger than that of the Falcon.

Ironically, the old US civil aviation laws were rooted in logistics: the US Postal Service’s use of private carriers for air mail began in the 1920s. These laws (Air Mail Act of 1925, Air Mail Act of 1934, Civil Aeronautics Act of 1938, and Federal Aviation Act of 1958) were intended to maintain a viable, safe, non-monopolistic air transportation system. The laws heavily regulated the aircraft, routes, and pricing of air transport. Over time, the unintended consequence was the creation of an anticompetitive oligopolistic system.36

Had FedEx been prohibited from using larger aircraft, it would have been forced to rely on a large network of much smaller hubs, assuming the company would have been able to survive at all. Without using ever-larger aircraft, the Memphis Aerotropolis cluster would never have formed and no such air-freight cluster would have formed in the United States. The reason is that the total volume of airfreight at any one airport would have been strictly limited by aircraft size and the aircraft spacing limits for landings or take off. That limitation on volume, in turn, would have made it uneconomical to develop the kind of end-of-runway, time-sensitive, nation-spanning distribution operations seen in massive logistics cluster hubs like Memphis, Louisville, and dozens of others around the world.

The same holds true for other modes of transportation. Singapore, Rotterdam, or LA/LB would not have been able to become such important logistics clusters if only small ships were allowed to operate the high seas or if train length or truck sizes were limited. The resulting congestion—both seaside and stateside—would have prevented the positive feedback loop that led to the development of these clusters, keeping them from reaching their current potential.

Market-Oriented Infrastructure Operations
How governments manage critical pieces of public infrastructure makes a significant difference to the volumes of logistics business using that infrastructure. When the United States ran the Panama Canal, it viewed the canal as a strategic asset, rather than a commercial asset. Consequently, the United States managed the canal as a not-for-profit utility: tolls were set just to cover operating costs and little was done to promote the canal or optimize its operation to improve service. After the 1999 hand-over, in contrast, the Panamanian government pursued a market-oriented business model—one that focused on customer service and reliability.

Under Panamanian control, canal fees increased, but so did service levels, because the Panamanians reinvested the profits in maintenance and upgrades to the canal. The Panama Canal Authority (ACP—Autoridad del Canal de Panamá) instituted a sophisticated system of booking transit slots, including an auction mechanism that allowed time-pressed ships to pay for jumping the queue to enter the canal. This is just one example of the philosophical change from setting tolls based on cost under the American regime to setting tolls based on the value of the service provided, under the Panamanian regime.37 Freight volume surged, and not just because Asia-US trade increased. The canal’s market-share in handling northeast Asia to US East Coast shipments grew from 11 percent in 1999 to 40 percent in 2006, at the expense of West Coast ports and the US transcontinental intermodal system.38 “We have demonstrated to the world that we are not only able to operate the canal, but we can do it efficiently and with big benefits for the country,” the authority’s head, Alberto Aleman Zubieta told me. “Today, we serve customers better,” he added emphatically.

Free Trade Zones
In clusters like Rotterdam and Singapore, the vast majority of goods do not remain in the host nation but are re-exported to other countries. Paying import duties on all these re-exported items would damage the viability of these clusters. Governments can encourage transshipment activities in logistics clusters by creating special zones that are exempt from the usual litany of import duties, quotas, and export paperwork. These include Free Trade Zones (FTZ), also called Foreign Trade Zones, bonded warehouses, export processing zones, free ports, and special economic zones. The legal details of which taxes are deferred or eliminated, what paperwork is not required, or which licenses do not have to be obtained if operating within the confines of these zones, vary. Regardless of the name or details, they share the common characteristic of reduced or deferred government taxes and import/export regulations in exchange for private investment (often by foreign companies) and export-oriented economic activities.

Logistics park developers such as CenterPoint, Hillwood, and Watson tout the availability of FTZs in their parks. Although traditionally associated with ports and border crossings, FTZs can be found in inland dry-ports (e.g., Alliance and Joliet) and freight-handling airports (e.g., Memphis and Louisville). With an FTZ, goods can come through a seaport and travel by rail, truck, or airplane without “entering the country” in a legal sense. FTZs let companies perform value-added activities such as assembly of imported parts or the addition of local content and then re-export the finished goods, often at lower duty rates.39

FTZs also offer financial benefits even if the goods remain in country. Companies often hold inventory bound for domestic consumption in the FTZ to defer any import duties. This tactic is beneficial to matching the wide variations in seasonal goods demands to the limited supply of manufacturing and transportation capacity. For example, the limits of manufacturing operations in China and cross-Pacific maritime transportation capacity mean that consumer goods companies must begin stockpiling goods on American shores well in advance of the December holiday season. An FTZ or bonded warehouse lets a company hold these growing inventories and then do the legal formalities of importation, including the payment of customs and duties, only when the goods leave the facility and sent to retail outlets.

Unintended Consequences of Restricting Passenger Travel
Other, nonfreight-related laws and policies can impact logistics and the attractiveness of a region for logistics operations. For example, prior to 9/11, significant numbers of passengers transited the United States through the Los Angeles International Airport (LAX). LAX handled people changing planes and planes refueling for flights between Asia, South America, and Europe. After 9/11, new rules requiring visas even for transiting passengers induced a two-thirds drop in transiting passengers, leading to a reduction in the number of flights. This affected freight operations because many of these international flights carried belly freight, too. With lower frequency of flights resulting in less total capacity, LAX became less attractive for airfreight logistics.

Government Efficiency

In logistics, time really is money. Both speed (having items delivered quickly) and reliability (having items delivered consistently) affect operating costs. Both elements of service influence inventory carrying costs because inventory is required to cover long lead times and uncertain deliveries. Government policies affect delivery times and delivery time variability through management of public infrastructure, the provision of government services, and social stability. To the extent that governments regulate logistics operations directly and indirectly, the efficiency and timeliness of those government functions modulate the attractiveness of any logistics cluster.

A World Bank survey of global logistics indicators found that the government burden on logistics services varies markedly throughout the world and impacts trade.40 Exporting a twenty-foot container of cotton apparel takes ninety-three days in Kazakhstan, sixty-seven days in Mali, and only six days in Sweden. A typical export transaction requires forty-two approval signatures in the Democratic Republic of Congo, forty in Azerbaijan, thirty-nine in Nigeria, and thirty-three in Mali—but only two in Australia, Austria, and Canada, and one in Germany. Customs-clearance times range from about one day for Hong Kong (China) and the Netherlands to twenty-one days for the Syrian Arab Republic and twenty-five days for Uzbekistan. Countries with high government “overhead” have significantly less trade.

Consider, for example, the ports of Jebel Ali in Dubai and Jeddah in Saudi Arabia. Jeddah is right on the trunk line between Asia and Europe in the Red Sea and has the potential to also handle the massive Saudi internal trade. This geographical and market advantages, however, are counterbalanced by Dubai’s better policy and processes. “We would be happy to have services into Jeddah,” said Biji Thomas, transport manager for Schneider Electric, a French maker of power equipment. “But Saudi Arabia has customs issues that Jebel Ali doesn’t. It takes five days to clear a container in Jeddah where you get same-day clearance in Jebel Ali. Maybe in the future that will change.”41

The relatively undifferentiated nature of distribution facilities makes it potentially easy for companies to shift distribution operations from locations with inefficient or non-accommodating governments to locations with logistics-friendly governments. For example, a company creating a pan-European distribution center might consider Antwerp, Rotterdam, or Hamburg. All three have large, efficient ports and hinterland access that can be used for distribution of items coming from Southeast Asia into Europe. But differences in import/export processes, VAT collection, and paperwork might influence which location wins the new distribution center. Of course, some countries make it easier to set up a warehouse than others do. Setting up a warehouse takes 528 days in Russia, 481 in Zimbabwe, 363 in China, but only 56–60 days in Finland and South Korea.42 Ultimately, locations with efficient government processes, such as Singapore and Hong Kong, become magnets for regional and global distribution facilities and logistics clusters.


Faster Service: Time-Efficient Government
Singapore epitomizes the kind of government efficiency that promotes logistics cluster development. To eliminate the problems with paper, Singapore introduced TradeNet in 1989, creating a single-point portal for submitting trade declarations to twenty separate Singaporean government agencies. “We have a very healthy, very high-tech customs. In Singapore, no longer do you have to do a lot of pen and paper stuff. You don’t have to sign big sheets of that declaration, or small sheets of receipts,” said UPS’s Yeo. Before TradeNet, companies had to prepare multiple application forms, employ dispatch clerks and couriers to rush documents to and from government offices, and could only transact with the government during normal business hours. The processing of paper-based declarations took on the order of two days for most shipments.

With TradeNet, companies submit a single electronic document directly to the online system anytime of the day or night and get the needed approvals in ten seconds to ten minutes.43 Automated algorithms with more than 7,000 rules replace the labor of government functionaries and enable the system’s high-speed 24×7 response to declarations. TradeNet has 12,000 users and handles about thirteen million trade declarations per year. “We actually can declare everything on-line, so less paperwork, everything is more efficient,” Yeo added.

Singapore also developed PortNet, which was the first nationwide business-to-business portal and e-community to provide integrated services to shipping lines, hauliers, freight forwarders, shippers, and local government agencies.44 Currently, PortNet has 8,000 users and handles 130 million transactions per year.45 TradeNet and PortNet were part of a much broader government-initiated master plan to make Singapore an “intelligent island, where IT permeates every aspect of society.”46

At other clusters, similar systems accelerate the customs inspection process. At UPS, US Customs and Border Protection agents work in the depths of the Louisville Worldport using classified computer algorithms, pattern search tools, and the agent’s keystroke commands to direct UPS’s conveyors to route selected packages directly to the customs agent for inspection. After inspection, if the agent finds nothing suspicious, the agent puts the package back on the conveyor and it resumes its journey to its destination. Smart systems mean that most packages clear customs instantly, and yet the system catches more contraband than the old manual inspection methods.

Supramunicipal Status for Clear Management of Super Projects
Prospective cluster members and developers also experience government efficiency, or lack thereof, in terms of jurisdictional issues. Logistics developments, with their sprawling size and impacts on regional public infrastructure, can become entangled in approvals processes of multiple jurisdictions. In Memphis, several local executives mentioned to me the complexity of government approvals in their area. Both the city of Memphis and Shelby County claim overlapping jurisdiction. Seeking approvals for large-scale private projects, getting public investments, or affecting changes in ordinances means gaining the endorsement of two mayors and seeking majority approvals from thirteen council members and thirteen county commissioners.

In contrast, the regional government of Aragón dealt with overlapping jurisdictional issues with a special law in 1999 for “supramunicipal” projects by which the regional government took priority for urban planning and could make fast-track land use decisions for projects such as PLAZA (see p. 21 in chapter 1). Although the City of Zaragoza retained some overall approval rights and got a 20 percent equity stake in PLAZA, the city government didn’t have day-to-day oversight and couldn’t become an obstacle to timely decision-making.

Sustainability

Transportation—especially trucking—can have detrimental impacts on the environment and on the people working in and living around logistics clusters. In addition to air pollution, transportation activities also bring congestion to public infrastructure and noise that might take place twenty-four hours a day.

Logistics clusters are cleaner than many industrial clusters because they don’t have the smokestacks, heavy metal emitting smelters, industrial solvents, and exotic chemicals used in many manufacturing industries, including high-tech clusters. Some parts of Silicon Valley and other high-tech clusters suffered serious groundwater pollution from the heavy metals and solvents used to make chips, disk drives, and electronic circuits.47 Nonetheless, logistics operations that use current transportation technologies do bring smog, particulates, and greenhouse gas emissions. Efforts are underway to implement cleaner diesel technologies in the United States through various federal and state initiatives, including the Environmental Protection Agency’s SmartWay program.

No Easy Solution for Pollution
The diesel engines typically used on trucks, locomotives and ships are more fuel efficient than gasoline engines, but they tend to emit higher levels of dangerous particulates. The black soot that belches from an exhaust pipe contains a host of carcinogens and respiratory irritants.

This problem led Los Angeles mayor Antonio Villaraigosa and the port of LA to create the Clean Truck Program in 2008. “Los Angeles has said enough is enough. When 1,200 lives are cut short every year by toxic emissions coming from the Port, we have a moral mandate to act fast and effectively,” said Mayor Villaraigosa. “That is why I am signing into law the cornerstone segment of the world’s most comprehensive, sustainable plan to clean up a major port.”48

The tough terms of the law49 included: a ban on all older trucks as well as trucks not meeting some of the toughest environmental standards in the nation; a proof of off-street parking to prevent congested on-street parking in neighborhoods around the port; requirements for maintenance, safety, security, and driver training; and incentives and fees to accelerate replacement of old, heavy-polluting trucks.

Of Carbon and Clusters
In addition to local concerns about the impact of trucking on city streets, concerns about global climate change and greenhouse gases (GHG) accumulations mean a growing array of government regulations and taxes on fuel consumption and CO2 emissions. These government interventions could have three main impacts on logistics clusters, affecting both the volume of freight in clusters and the locations of clusters.

First, higher fuel prices tend to favor manufacturing and distribution centers in local and “near-shored” locations rather than distantly produced goods. Thus, as fuel prices rise, Eastern Europe and Mexico may prove more attractive than Southeast Asia for manufacturing, assembly, and distribution into Europe and North America, respectively.

Second, higher fuel prices and pressure to reduce the carbon footprint of logistics operations may push shippers and carriers to use more fuel-efficient transportation modes, which generally involve larger and slower shipments (e.g., from LTL to TL, from TL to rail, and from rail to water, as well as less airfreight). Fuel-efficiency-driven consolidation of freight means more freight flowing through logistics clusters because large shipments need to be handled in central locations.

Third, regional government GHG policies, mandates, and taxes have the potential to remake the map of logistics clusters. For example, starting on January 1, 2012, airlines have been introduced into the European Emissions Trading Scheme (ETS).50 Consequently, all flights into, out of and within Europe will be subject to increasing cap-and-trade fees. Over time, this regulation may penalize global logistics clusters within Europe as airfreight (as well as passenger) airlines shift their operations to minimize the ETS burden by flying through hub airports in Dubai or North America instead of Europe, increasing the attractiveness of the former and fueling their development as logistics clusters.

Biofuel for the Road
Biofuels such as ethanol and biodiesel, when produced efficiently, provide a low- or zero-carbon footprint fuel source as one possible replacement for fossil fuels to power trucks, railroads, and even aircraft. Governments are mandating more biofuel use, such as the EU mandate for a 10 percent use of renewable transportation fuels by 2020.51 Government carbon taxes and emissions trading schemes have the potential to create incentives for more biofuel production by lowering—and possibly inverting—the price difference between biofuels and fossil fuels.

Logistics clusters make ideal locations for biofuel production because of the ready availability of bulk shipping, bulk storage, and bulk-handling infrastructure for both agricultural feedstocks and produced liquid biofuels. In 2010, Neste Oil Corporation opened the world’s largest biodiesel plant in Singapore, not far from Jurong Port, with a capacity of up to 800,000 metric tons per year. In 2011, the Singapore plant will be matched when Neste Oil completes construction of a similarly sized plant in Rotterdam.52 With the new plant online, Rotterdam will have four biofuel producers with a combined production capacity of over two million metric tons per year.53 In an elegant environmental feedback loop, one of Rotterdam’s biofuel producers, Abengoa Bioenergy Netherlands B.V., pipes CO2 created by its biofuel production processes to greenhouses in the Dutch agricultural cluster of Westland, just north of the port. Enriching the air in the greenhouses with CO2 spurs plant growth, directly absorbs the CO2 waste byproducts of biofuel production, and eliminates the burning of natural gas that greenhouse operators formerly used to boost their greenhouses’ CO2 in the past.54

Old Cities and New Ideas
Distribution to urban retailers and end consumers creates congestion on urban roadways. This problem can be acute in crowded cities, especially older cities in which medieval cart routes or cow paths defined the original narrow, meandering road networks. In the late 1990s and early 2000s, with the rise of “Green” political parties, several city governments in Germany launched projects to reduce urban truck traffic.

For example, the ISOLDE project in Nuremberg consolidated urban deliveries of parcels and LTL freight into a single “freight village” (“Gueterverkehrszentrum” or “GVZ”) located outside the core urban area. Partially filled trucks were prohibited from entering the city center, necessitating consolidation in this freight village. Similar projects started around the same time in Heidelberg, Freiburg, Berlin, Duisburg, Frankfurt, and other German cities. Each freight village consolidated a single city’s distribution activities into one logistics park with good intermodal access.

Yet in the ten-year period after the initial euphoria, most projects were abandoned or stillborn for a variety of reasons, mostly because of the added costs and delays of filling the trucks in the freight village and making multiple stops. One novel idea for distributing retail goods via the city’s mass transit system—wheeling goods-laden dollies onto subway cars during off-hours—proved to be too unwieldy, slow, and costly. Other projects became superfluous because retailing evolved from city-center small format stores to suburban “big-box” large format stores located outside the congested city center. At the same time, retailers themselves created their own efficient approaches to replenishing.

Some concepts did survive. The freight villages continue to operate, even if they do so to serve broader commercial needs rather than the originally intended government-envisioned urban logistics needs. As my colleague Professor Peter Klaus of Nuremberg University describes it, Nuremberg still uses its narrow battery-powered delivery trucks to navigate the old city’s twisting streets and pedestrian shopping districts.55

Governments’ Mediation of Cluster Relationships

Governments play a major role in mediating relationships between clusters in different regions and within the cluster’s region. Logistics in clusters thrives on trade, especially high-volume global trade. Governments play an inevitable role in promoting or inhibiting free trade through the quality of relationships with other countries, trade agreements, and the regulations that governments place on the free flow of goods, conveyances, and money across their borders.

Internal Cluster Governance and Jurisdiction

Within a region, governments mediate relationships among different constituent interest groups by balancing the competing interests and adjudicating local disputes. The priorities and ideologies of the government affect resource allocation, taxation, and regulations of the various constituents. Some governments use bottom-up consensus methods, while others use top-down economic leadership models. Either strategy can marshal a region’s resources toward a development goal such as nurturing a logistics industry to support economic development. The constituents within a region might also organize into an industry group or chamber of commerce to pool the resources of the industry and represent its interests.

Consensus vs. Command
Different societies manage the cluster development process differently. In the case of PLAZA, the government creators conveyed a sense of the strategic importance and public correctness of the project for the region. Sitting in his office at the Aragón Ministry of Science, Technology, and University, Javier Velasco described the process leading to the establishment of PLAZA. “We were able to reach a consensus with civil society to do this [PLAZA] because, for some time, people had theorized about the geostrategic location of Aragón and, more specifically, of Zaragoza. When we conceived the project, we presented it with the firm belief that we would be able to deliver. We asked everyone to collaborate. Not long after that, business confederations, trade unions, the Chamber of Commerce, the city of Zaragoza and other institutions—all agreed to back the plan. At the time, both the Central Government and the city of Zaragoza were run by the center-right Partido Popular (PP) party, and we, the Partido Socialista Obrero Español (PSOE) party in the government of Aragón, were the political opposition there. Nonetheless, we succeeded in garnering support from all quarters.”

Whereas the developers of PLAZA created consensus to gain support, the creators of Singapore’s logistics cluster relied on top-down development and strong guidance of the economy by the central government.56 When Singapore gained independence from Malaysia in 1965, it was a rough-and-tumble place with open sewers, opium dens, and high rates of tuberculosis. The first postindependence prime minister, Lee Kuan Yew, formed a government dedicated to cleaning up the island, attracting foreign investment, and driving economic development.

Singapore’s Economic Development Board (EDB) is billed as “Singapore’s lead government agency for planning and executing strategies towards shaping the future of Singapore’s economy.” EDB created Jurong Port in 1963 as part of the EDB’s National Industrial Estate Infrastructure Development Program. When the government of Singapore decided the country should become an “intelligent island,” the EDB drove development of leading-edge information technology applications to improve port operations and efficiencies.

By 1988, Singapore surpassed Rotterdam in total freight to become the largest container port in the world (it was surpassed, in turn, by Shanghai in 2010). While some lament the Singaporean government’s heavy hand in some cases, it has created an extraordinarily trustworthy business culture virtually free of corruption. The World Bank ranks Singapore number 2 in the world on its logistics performance index.57

Institutions for Collaboration
Organizations such as industry associations and chambers of commerce play a special public-private role in clusters. Porter calls these organizations “Institutions for Collaboration” (IFCs), which are intermediary entities that aren’t commercial enterprises, government organizations, or educational institutions.58 As collaborative groups, each IFC consists of interacting members who share some common purpose and who may be companies, individuals, governments, or even other IFCs. Activities of IFCs include: facilitating the exchange of information and technology, conducting joint campaigns (e.g., marketing, lobbying, shared investment, etc.), and fostering coordination among members. IFCs create formal mechanisms for collaboration that go beyond the asset sharing among cluster members described in chapter 4.

In the context of logistics clusters, the most salient IFCs are local chambers of commerce and logistics industry organizations. Clusters create critical mass for niche IFCs that can focus on specific issues in specific areas. For example, in addition to its Chamber of Commerce, Rotterdam sports the Association of Rotterdam Shipbrokers, Association of Rotterdam Bulk Cargo Stevedores, Terminal Operators Association of Rotterdam, and other niche IFCs. These IFCs can cross-coordinate, electing other IFCs as members. For example, the board of the Rotterdam Port Promotion Council includes representatives of Deltalinqs (a Rotterdam association of logistical and industrial companies), The Rotterdam Chamber of Commerce, the Netherlands Association for Forwarding and Logistics (FENEX) and the Association of Rotterdam Shipbrokers and Agents (VRC).59

The privately funded Greater Memphis Chamber includes a subgroup called the Regional Logistics Council,60 which exemplifies the types of activities pursued by logistics cluster IFCs. The council consists of four committees pursuing a variety of projects chosen by the members. The first council committee oversees transportation infrastructure over a sixteen-county, four-state area. The strategic alliances committee works to build mutual cooperation agreements with other logistics-intensive regions such as: the port of Prince Rupert, British Columbia, Canada; Seattle, Washington; Mobile, Alabama; Rotterdam, the Netherlands; and Antwerp, Belgium. The marketing committee promotes Memphis through national and international advertising and by publishing HUB magazine, which goes to 1,500 site-selection consultants. The workforce development committee focuses on education and training, such as supporting the development of the Mid-American Transportation Technology Education Center.

Note that the four committees’ efforts parallel common functions of governments. Governments also work on economic development, strategic alliances with other jurisdictions, infrastructure development, and education. IFCs often work with government by acting as collective representatives for their members in lobbying the formal government and in affecting policy.

External Alliances, Diplomacy, and Trade Relations

World trade underpins the largest logistics clusters like Rotterdam, Singapore, Panama, Hong Kong, Shanghai, Los Angeles and New York/New Jersey. Even inland clusters, such as Memphis, Zaragoza, Alliance, and Joliet, carry a high volume of international goods. Trade relations, especially free trade agreements, help foster a free flow of goods which, in turn, implies a growing need for logistics activities.

International Trade Relations
Preferential Trade Agreements (PTAs), such as the North American Free Trade Agreement (NAFTA), Common Southern Market (Mercosur), Asia-Pacific Trade Agreement (APTA), the Greater Arab Free Trade Area (GAFTA) and others, change trading patterns by reducing the cost, time, and variability associated with border crossings. NAFTA created a progressive lowering of trade barriers between Canada, the United States, and Mexico after 1994. Trade between the United States and its NAFTA partners—Canada and Mexico—had more than doubled in dollar value by 2010. Mexico’s growing share of imports61 and analysis of trade data62 suggest that a significant fraction of the growth was due to the agreement. NAFTA also increased trade between Canada and Mexico. Between 1993 and 2009, trade between Canada and Mexico increased almost fivefold in dollar terms.63

Growing volume of traded NAFTA goods (including continent-spanning Mexico-Canada trade) moving across the United States64 means increases in logistics activity. Texas, in particular, handles the entry of 56 percent of land-based Mexican freight, and almost two-thirds of NAFTA freight traverses Texas at some point in its journey.65 AllianceTexas touts its favorable distance to Mexico and adjacency to Texas’s main north–south interstate highway (I-35) as one of its connectivity advantages. That’s one reason LEGO moved its central distribution center to Alliance. LEGO produces its toy blocks in Monterrey, Mexico just over the border. It ships the toys in large quantities to a warehouse in AllianceTexas and then distributes the toys as needed to North American retailers. A proposed second main NAFTA corridor, I-69, is slated to pass through the Memphis area and its rich logistics cluster.

Marketing to Companies and Foreign Governments
Governments can also help attract tenants to a cluster directly through marketing and recruitment efforts. Economic development agencies, trade delegations, support for trade expos, hosting of visiting company representatives, and government-funded marketing all help “sell” the cluster. Singapore’s EDB and the Netherlands Foreign Investment Agency (NFIA) take the lead in actively recruiting companies who are looking to set up logistics and distribution facilities in those countries. NFIA, for example, maintains a network of twenty offices around the world, including in other logistics cluster cities such as Singapore, Dubai, and Chicago. As Marco Smit, the NFIA executive director in Boston explained to me, NFIA identifies companies looking for expansion in Europe, brings their representatives to the Netherlands, and works with them on all aspects of locating there. Likewise, Kelvin Wong, EDB’s logistics executive director, told me, “The government has always believed that by bringing in global companies to Singapore, we will actually accelerate the growth of our industries, bring in technologies, bring in capabilities, and hopefully with these capabilities, then we residents in Singapore will do good for our local companies as well.” Similar active efforts to attract logistics operations include Belgium’s Flanders Investment and Trade Organization, Germany’s Invest and Trade GMBH, the Hungarian Investment and Trade Agency, and many others.

Local, private boosters such as IFCs also help in marketing the cluster and in recruiting companies. Recruiting new companies requires intense effort on the part of the local government and the local economic development team. Key activities in recruiting a company include marketing and advertising to generate leads; visiting prospective recruits; answering requests for information from prospects (including dozens of pages of questions); hosting visits and tours by the prospects; matching the prospect to local land developers or real estate options; completing proposals; and negotiating government incentives.

“People don’t understand how competitive recruiting is. They just think somebody ends up showing up at the door and they are asking for an incentive and that’s it. They don’t realize there might have been two or more years’ worth of work to get them to that point,” sighed Dexter Muller of the Great Memphis Chamber of Commerce.

On-site visits play a big role in fostering external relationships and recruiting companies. Delegations of government officials and local companies often travel to recruit companies or lobby governments for mutual benefit. Tom Schmitt, senior vice president of FedEx Solutions told me, “Our new city mayor is open for business. He goes with us to China and he went to New York and DC, because we had to close a deal with Sharp [Electronics Corporation] to expand here. We also had to convince Smith & Nephew [Plc] that the US headquarters should be here and not in North Carolina. And the mayor said, ‘let’s pack our suitcases and go.’ And then we pitched and he’s the main pitchman for our community saying, ‘we’re gonna make this work for you, Sharp or Smith & Nephew.’”

Cluster-Cluster Cooperation
Cluster-to-cluster relationships help to coordinate growth, exchange knowledge, and enhance flows, as all logistics clusters are part of the global trade network. For example, the port of Charleston, South Carolina, is one of the logistics hubs hoping to cash in on the Panama Canal expansion. To this end, Panamanian officials visited various East Coast ports, including Charleston, while Charleston port officials and South Carolina lawmakers visited Panama to understand the expansion efforts better.

Governments play a key role in these cluster-to-cluster relationships. Politics may be local, but logistics is global; enlightened politicians know that collaborating with other global logistics clusters brings local economic benefits. For example, in 2009, Marcelino Iglesias, president of Aragón, went to Tangier, Morocco, for a two-day official visit for the signing of a joint cooperation between PLAZA and Tanger-Med seaport development. President Iglesias brought Aragónese entrepreneurs on the visit to meet with Moroccan government ministers and port officials over possible business opportunities. During his visit he stressed the need to “deepen relations between Aragón and Morocco.”

The Aragón/Tanger-Med cooperation agreement requires improving infrastructure on both sides to connect the two hubs to each other and to broader population centers (e.g., from PLAZA up to Paris and the rest of Europe and from Tanger-Med down into Morocco and the rest of Africa). The cooperation agreements also include joint promotion of each other’s logistics activities, sharing of platform design and operating knowledge, and ongoing meetings between the two clusters.

Gaining Greater Expo-sure
Governments help boost economic development of their region through high-profile fairs and expositions. “Zaragoza was the perfect location for many companies to place their logistics headquarters. The only problem was that the city wasn’t nice enough for living or investing, and there wasn’t enough promotion,” said José Atarés, mayor of Zaragoza from 2000 to 2003. Along with contributing to the development of PLAZA, Zaragoza contributed to other transportation infrastructure improvements, including high-speed rail links, attracting discount airline flights, and expanding bus service. “Now that the infrastructure problem was solved, we had to promote ourselves,” Atarés said. In 2004, Zaragoza won the right to host World Expo 2008. In total, World Expo 2008 attracted over 5.6 million visitors over three months. “Zaragoza’s main long-term goal is to become the third most important city in Spain,” said Alberto Belloch, mayor of Zaragoza since 2003.66 Logistics industry conferences are often hosted in logistics clusters who are interested both in attracting a large audience and in giving conference goers a chance for site visits of local facilities (e.g., a tour of the port). Almost all large logistics clusters hold regular professional conferences and expositions.

Positive Feedback in Government and the Economy

Individually, no single government-provided factor (such as high infrastructure investment, low taxes, fast permitting processes, free trade, or low crime) alone suffices to attract outside logistics investment. But each factor increases the probability that logistics operators will consider a location favorably. Some of these factors aren’t logistics-specific. Attractive corruption-free government, low crime rate, and good schools will be attractive to any business decision-maker. Attracting companies who can operate profitably will, in turn, provide the tax base and economic energy that gives governments their resources and mandates to continue investment in the region and in the cluster.

Although there are many cases where government incentives needlessly subsidize for-profit companies (and these cases grab headlines), most monies invested in promoting logistics clusters seem to be reasonably well invested. In most cases, logistics cluster developments convert low-value, under-utilized land into much higher-value property with a growing tax base.

For example, in addition to building much of PLAZA, the Aragón Government offered extremely favorable land and project-completion guarantees to Inditex’s Zara in order to convince the well-respected clothing retailer to drop its prior plans to develop a site in neighboring Catalonia. In explaining the incentives, Velasco said, “They are only justifiable from an economic perspective. The logic here was that we could give away land to a company that would generate economic interest, prestige, and publicity for PLAZA.” The government’s strategy worked. With Zara’s corporate parent, Inditex, as the anchor tenant, some 160 companies subsequently moved to the park, creating over 10,000 direct jobs. Chapter 9 delves into this issue of economic impacts—showing that governments can and do recoup their investments in logistics clusters.

Governments have to balance competing objectives and accommodate the different priorities of disparate groups of citizens. For example, the industry contacts and even government officials I interviewed in Los Angeles spoke of the legendary antibusiness climate of California. Tough environmental laws, bulky approvals processes, and lawsuits asserting environmental claims make logistics infrastructure development and operations more challenging. California ranks dead last of the fifty US states in ChiefExecutive.net’s annual CEO survey of states’ business climates.

Yet it was equally clear that companies continue to ship freight through Los Angeles and Long Beach, even though they could go to competing West Coast ports or ship via the Panama Canal to East Coast and Gulf Coast ports. These alternatives, however, are not dominant—for example, it takes longer to go from China to the US heartland (and even the East Coast) through the Panama Canal than to use the LA/LB plus rail option. In addition, other West Coast ports are not significantly friendlier to businesses than California. Furthermore, despite tough development policies, the governments around Los Angeles did provide significant support for the region’s logistics cluster through projects such as the Alameda corridor, ongoing port expansion projects, and congestion-reducing improvements to road infrastructure. People at the companies I interviewed complained about California’s regulatory burden, but most seemed committed to staying.

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Copyright © 2012 Massachusetts Institute of Technology. (All rights reserved.)
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