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1 This article was downloaded by:[kaiser, Robert] On: 11 September 2007 Access Details: [subscription number ] Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: Registered office: Mortimer House, Mortimer Street, London W1T 3JH, UK Industry & Innovation Publication details, including instructions for authors and subscription information: The Munich Feature Film Cluster: The Degree of Global Integration and Explanations for its Relative Success Online Publication Date: 01 September 2007 To cite this Article: Kaiser, Robert and Liecke, Michael (2007) 'The Munich Feature Film Cluster: The Degree of Global Integration and Explanations for its Relative Success', Industry & Innovation, 14:4, To link to this article: DOI: / URL: PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: This article maybe used for research, teaching and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. Taylor and Francis 2007

2 Industry and Innovation, Vol. 14, No. 4, , September 2007 Research Paper The Munich Feature Film Cluster: The Degree of Global Integration and Explanations for its Relative Success ROBERT KAISER & MICHAEL LIECKE University of Munich, Germany ABSTRACT In this paper we assess the role that a secondary feature film cluster can play in an industrial sector largely dominated by the major Hollywood studios. In order to do this we proceed in two steps. We first evaluate as to how Munich-based firms are integrated into the production, distribution, financing and technological development of globally successful feature films. Then we investigate the factors that explain the relative economic success of this regional industry. Here we argue that major corporate actors that established a core group within the cluster have turned the industry towards specialized niche products and have been significantly supported by public policy measures. KEY WORDS: Feature film industry, globalization, flexible specialization, regional cluster, innovation, public policy 1. Introduction: The Globalization of the Feature Film Industry Today there is a widespread consensus across many scientific disciplines that the process of globalization is a multidimensional phenomenon characterized by increasing exchange and interdependence among countries and actors across the world. Globalization thus refers not only to the increase of trans-border flows of capital, goods, knowledge, information and services. Rather, as Hirst and Thompson have argued, the intensification of economic exchange alone can be characterized as internationalization, since it is based only on the extension of already existing activities across national boundaries (1996: 7). Globalization, however, is qualitatively different from internationalization, because it also implies, as Dicken claimed the functional integration of internationally dispersed activities (1998: 5). Correspondence Address: Robert Kaiser, University of Munich, Geschwister-Scholl-Institute of Political Science, Oettingenstrasse 67, Munich 80538, Germany. robert.kaiser@lrz.uni-muenchen.de Print/ Online/07/ # 2007 Taylor & Francis DOI: /

3 386 R. Kaiser & M. Liecke Based on this differentiation, it can be argued that the internationalization of the feature film industry started at the end of the Second World War, when the Hollywood studios extended their activities in the distribution of feature films to all major export markets. As a result, the global market share of Hollywood productions has increased continuously while the position of the European film industry has significantly weakened. By the end of the 20th century, the European feature film industry was only one-ninth of its immediate post-second World War size (Miller et al., 2001: 5; Scott, 2004: 54). Parallel to this transatlantic development, feature film industries emerged in other parts of the world. Today India, the Philippines and China produce a larger number of full-length feature films than the USA does. Their presence in markets outside Asia is, however, still limited (Scott, 2005: 162). The internationalization of the feature film industry has essentially led to an increasing penetration of foreign markets with US-made motion pictures as well as a dramatic change in the relative importance of the world s main production centers for feature films. More recently, internationalization has taken a qualitatively new step as the feature film industry became subject to functional integration at a global scale. Here a first important trend has been the global concentration of ownership across different sectors of the media and entertainment industries. The major Hollywood studios have been integrated into transnational media conglomerates. A portion of these conglomerates are in fact European and Asian multinationals that have invested significantly in the US-American entertainment sector (Scott, 2004). Media concentration also accelerated a process of re-organization in the feature film industry. This process had already been initiated in the USA in the 1940s. The US Supreme Court decision in United States v Paramount Pictures, Inc., 334 US 131 (1948) forced studios to abstain from attempts to control the country s movie theaters. As a result, the major Hollywood studios followed a combined strategy of product specialization and vertical disintegration (Christopherson and Storper, 1986; Aksoy and Robins, 1992). Both strategies, along with the Hollywood studios financial crisis in the 1970s, provided momentum not only for the emergence of new independent production companies, but also for the de-territorialization of cultural production (Elmer and Gasher, 2005: 1). In this new division of labor, the major studios concentrated on large and high-budget feature films whose production depended more and more on flexible networks of specialized suppliers. However, a functional integration of the feature film industry at a global scale takes place only if the production of motion pictures adopts a transnational dimension. Already in the 1960s, the first wave of runaway production confirmed the capability of the majors to organize film production across regional and national borders. In this period the Hollywood studios shooting of feature films outside California took place not for creative reasons, but mainly to reduce production costs (Miller et al., 2001: 56 64). This trend was driven by the fact that the average cost for the production and distribution of Hollywood blockbusters had risen dramatically between 1975 and 2000, while tax advantages that were offered to the studios in foreign countries and the strength of the US dollar relative to many other currencies made foreign shooting even more lucrative. For that reason, the major studios invested in existing foreign studios or built new studio facilities outside the USA, especially in Canada (Jones, 2002). The complexity of motion picture production has undoubtedly increased as the major Hollywood studios have been integrated into larger transnational media and entertainment companies. Today, these companies make use of a globally dispersed infrastructure for feature film production without losing centralized control of production and distribution

4 The Munich Feature Film Cluster 387 (Goldsmith and O Regan, 2005: 2 3). The major studios can rely on their access to multiple, self-organized, and networked pools of skilled labor which exist in a growing number of production locations around the world (Christopherson, 2006: 742). Among those locations, or media cities, the inter-regional competition for Hollywood contracts has intensified. Christopherson notes that subnational, regional or state authorities enter into that competition by reducing the overall production costs for transnational media companies (2006: 742). Tax incentives and direct labor cost subsidies are the two predominant instruments that provide such incentives for the feature film industry. However, this does not mean that every location that provides some studio facility can stay competitive due to state intervention. Given the complexity and project-based character of the production process, competitive locations offer extensive and complete packages of facilities, services, and natural and built environments (Goldsmith and O Regan, 2005: 6). Roughly speaking, those locations can be differentiated into cinema and media cities (Goldsmith and O Regan, 2003: 32). Cinema cities, such as the Cinecittà and Barrandov studio complexes (in Rome and Prague, respectively), serve as one-stop shops for large international feature film and series productions. Media cities cluster a broader segment of services ranging from information and communication technologies (ICT) and television broadcasting to book publishing and advertising. Apart from the production of blockbuster motion pictures, a functional integration of the global feature film industry is also obvious in financing, distribution and technological development. Goldsmith and O Regan have shown that the international dimension of the production and distribution of films has gained ground primarily in terms of financing, where budgets for feature films are likely to be drawn from many international investors (2003: 10). In view of the distribution of feature films, coordinated action must occur in order to manage a global simultaneous release. In this context, technological progress plays an important role. In recent years digitalization has led to a rapid technological change in this sector. This has had a significant impact not only on film production, but also on various marketing channels and their legal ramifications (Culkin and Randle, 2003, 2005). The industry s return on investment is thus increasingly affected by access to innovative production technologies, the availability of advanced user equipment and the international enforcement of intellectual property rights. In fact, intellectual property rights have become an increasingly important issue in public policy since the early 1990s. The comprehensive regulation of property rights is handled primarily by the so-called TRIPS agreement negotiated under the roof of the World Trade Organization (WTO). As a consequence, film producers property rights are at least in principle protected in all of the 149 member states of the WTO. Against this background we will address how a regional feature film cluster, such as Munich, can generate commercial success and international competitiveness. In principle we have identified two promising strategies. A first strategy, which could be labeled an adjustment strategy, would be mainly targeted at the enhancement of the infrastructure and the provision of favorable conditions for international (co-)productions. This strategy would accept the strong and stable dominance of Hollywood feature films in the home market and delegate resources for its own productions mainly to television films for national and European broadcasting companies. The economic benefits of the adjustment strategy would stem from access to global networks in the production and distribution of foreign

5 388 R. Kaiser & M. Liecke feature films. Another benefit would be an increasingly integrated European television market in which US-American companies would have far less importance. In contrast, an alternative strategy of diversified specialization would rely on market niches within the domestic sphere of feature films. Here Hollywood productions generate a much lower level of competition. As a result, revenues could be expected not only from the national market, but at least to some extent from film exports as well. This strategy would require a diversified and well-established infrastructure as well as continuous access to a skilled labor force at the local level. Moreover, foreign firms would not centrally coordinate the feature film production. On the contrary, we would expect to find a number of local actors who turn the industry towards this strategy. Therefore, we should be able to identify an institutional arrangement of leading firms that can establish a core group for the coordination, financing, production and distribution of niche market feature films. We will test both hypotheses with reference to the Munich feature film cluster. Today Munich has the most competitive agglomeration of this industry in Germany. We will proceed in three steps. Step one will reflect on the development of the German feature film industry and provide empirical data on the comparative position of the Munich cluster within the national context. In step two we will assess the extent to which the Munich cluster is actually integrated into the global film industry. Here we will focus on four dimensions associated with feature films: financing, production, distribution and technology. In our third step we will show that there has been indeed a process in which producers, distributors, financiers and other local service providers have identified market niches in which the presence of the Hollywood industry is less distinct. We will subsequently show that public policy support has been crucial for this process. However, it becomes evident that although state engagement has increasingly assumed multi-level characteristics, regional public support certainly played the most important role. 2. The German Feature Film Industry and the Development of the Munich Cluster The German feature film industry is today characterized by two organizational and economic peculiarities directly related to the process of reconstruction after the Second World War: a decentralized production structure and a weak position on the national market. Until the 1940s, Germany had one of the strongest and most productive feature film industries in the world (Shandley, 1999: 104). The industry seized that position not least because of its collaboration with the Nazi regime that recognized the benefits of feature films for political propaganda and cartelized and supported the leading production companies. Consequently, after gaining control over Germany, the Allies dissolved the cartel and prohibited filmmaking in the immediate aftermath of the war. In the rebuilding process, the Allies failed to find a common approach to the restructuring of the industry that could be standardized in all four major occupation zones. Under tight political control the Soviets sponsored the reconstitution of a filmmaking monopoly in their zone of occupation. Their effort established the German Film AG (DEFA) in Babelsberg. The British military government focused mainly on the broadcasting industry and supported the establishment of relatively small production infrastructures. These later developed into leading public broadcasting corporations in Hamburg and Cologne. In contrast, the US authorities showed

6 The Munich Feature Film Cluster 389 reluctance to license any German filmmakers in their zone of occupation. The first feature film made by the Bavaria studios was produced only in All in all, the reconstruction of the German feature film industry occurred under the constraints of a lack of critical mass at all production locations and the absence of a sufficient domestic market in addition to a lack of capital for higher budget films. For decades film exports played virtually no role while Hollywood productions sustained a market share of percent. Under these conditions, the German feature film industry developed quite differently at its various locations. Compared to its major competitors in Germany the Munich film cluster performs remarkably well. In 2003 Munich was home to 14,000 media firms employing 187,000 people. In 2002 these firms consolidated revenues amounted to 24.5 billion euros. Even during the difficult post-tech-boom years of revenues within the Munich cluster increased by 28 percent (IHK, 2003). The gamut of media sub-sectors is represented in Munich. With regard to broadcasting 51 percent of private German TV programs are produced in Munich. Twenty-one of the 45 nationwide TV stations are based there. Munich is also the leading national location for information and communications as well as multimedia and Internet technologies. Today Germany s four larger centers of film production are located in Munich, Cologne, Hamburg and Berlin. Within the German context, the Munich cluster certainly is in the leading position. As Table 1 shows, Munich s share in the total number of employees and firms indicates that the cluster possesses a slightly higher number of more mature firms compared to the other locations. In 2002, the 1,190 firms in the Munich film sector generated 2.7 billion euros (Bayerische Staatskanzlei, 2003: 144). This amounts to more than 40 percent of the industry s nationwide annual revenues. The Bavaria Film Studios south of Munich are today the biggest film production facility in Europe, with estimated revenues of some million euros per year. Apart from the Bavaria Film Studios, the firm structure is, as in other German locations, predominately marked by young, small and medium-sized enterprises (SMEs). According to a survey by Ernst and Young, about 70 percent of the German film businesses were founded after 1990 and employed on average only eight people (Moser, 2003: 12). Large enterprises are thus the clear exception. This differentiates the German, and even so the Munich film sector, from the world s most competitive cluster in Los Angeles where the Hollywood majors make use of a highly decentralized production system, but maintain centralized control over film distribution. Table 1. The dominant position of the Munich feature film cluster in Germany in 2001 Munich National share in percent Film industry firms 1, Film industry employees 8, Employees in television production firms 2, Film industry turnover (million euro) 2, Turnover of television producers (million euro) Source: Deutsches Institut für Wirtschaftsforschung (2002).

7 390 R. Kaiser & M. Liecke 3. The Functional Integration of the Munich Cluster into the Global Feature Film Industry In order to assess the Munich cluster s degree of functional integration into the global feature film networks, one must examine the four dimensions of production, distribution and financing as well as technological development. In this regard we can clearly show that German film productions hardly play any role on the international or even on the European market. After an examination of the top grossing cinema movies of the last 10 years worldwide, in the USA, within the European Union and in Germany the results are striking. The rankings are similar for the worldwide, the US and European markets. With the German market being anomalous within the group. German productions had true market potential only in their domestic market. Within Germany they did perform relatively well. In 2003 and 2004, five German productions were among the 20 most domestically successful commercial films. In 2004, two of them even managed to rank first and third domestically. In a 10-year perspective 12 national productions have reached a domestic top 10 ranking. Nevertheless, even within the domestic sphere the Hollywood film industry dominates in terms of market share. Between 1995 and 2002, the market share of national film productions was between 9.4 and 18.4 percent. More importantly, the large US-based film distributors such as UIP, 20th Century Fox, Warner and Columbia Tri-Star also dominate two-thirds of the German distribution market. This leads to a situation in which German film producers compete with US companies not only at the box office, but also at earlier stages of distribution such as gaining access to the cinema distribution channel. In the next step we identified transnational collaborations in which Munich-based corporate actors have been involved. With an emphasis on production we tallied how many Hollywood blockbuster films were shot in Munich in the last decades. By doing this we found that the Munich feature film cluster profited from runaway production mainly in the 1960s. At that time, the Bavaria studios were chosen for a number of feature films by major Hollywood studios that were successful both at the box office and at international film festivals (Table 2). The Munich cluster began to profit from the trend of outsourcing production 40 years ago while today the high level of labor costs can make the production of feature films in Germany for foreign producers unattractive at least in comparison to locations in central Table 2. Major blockbuster films shot in Munich ( ) Film title Year of production Director Enemy Mine 1985 Wolfgang Petersen Twilight s Last Gleaming 1977 Robert Aldrich Cabaret 1972 Bob Fosse The Great Escape 1963 John Sturges The Playgirls and the Bellboy 1962 Francis Ford Coppola One, Two, Three 1962 Billy Wilder Paths of Glory 1957 Stanley Kubrick

8 The Munich Feature Film Cluster 391 Europe. In some cases, however, Munich-based firms provided specialized services to film productions that have taken place more recently in the Barrandov studios in Prague. Functional integration is weak not only in terms of Munich being chosen as a filming location, but also in production, financing or distribution of Hollywood s most successful feature films. This becomes evident if one looks at the IMDB database for all-time worldwide box-office rankings. Taken into consideration were the 30 most successful feature films, which reached worldwide box-office sales of more than US$600 million each. All in all, as Table 3 shows, the involvement of Munich-based corporate actors is extremely low. Whereas in terms of production, financing and distribution, the Munich feature film industry is only marginally integrated into the global industry, the situation is different in terms of highly specialized technologies used in the production process. This refers, inter alia, to cameras and camera equipment. In that specific segment of film technologies the Munich cluster holds an extraordinary strong position on the world market. Two corporations dominate the motion picture camera world market. Panavision, based in California and ARRI (abbreviation for Arnold & Richter Cine Technik GmbH & Co. KG), headquartered in Munich. The relation between these two firms is in a way unique, as Panavision is not only a rival but also a customer of ARRI products. In fact, Panavision acquires ARRI cameras on a large scale and modifies, panavises them, to rent them to film production companies through their own rental services. Furthermore, given the fact that cameras are rarely sold, but mostly rented, the two manufacturers both run their own rental houses. In addition, several independent rental companies exist. These deal predominantly in ARRI products. ARRI not only produces cameras and equipment but also manufactures so-called digital labs, a laser system used in post-production for the integration of digital material into the film. This technology has turned into an industry standard. In order to shed light on Munich s strong market position in film technologies we made an inventory of scientific and engineering awards specific to the film industry that Munichbased companies have received in recent years. More specifically, we looked at the Table 3. Role of Munich-based corporations in producing, financing and distributing Hollywood s most successful feature films Film title Year Involvement of Munich-based firms The Lord of the Rings: The Return of the King 2003 Lord Dritte Productions Deutschland Filmproduktion GmbH & Co. KG (co-production, financing) The Lord of the Rings: The Two Towers 2002 Lord Zweite Productions Deutschland Filmproduktion GmbH & Co. KG (co-production, financing) Star Wars: Episode III Revenge of 2005 ARRI Media (digital film master recording) the Sith The Da Vinci Code 2006 ARRI Media (camera equipment) The Sixth Sense 1999 Constantin Film (distribution Germany) Star Wars: Episode II Attack of the Clones 2002 ARRI Media (digital film master recording) Source: IMDb Internet Movie Database.

9 392 R. Kaiser & M. Liecke Technical Achievement Award, the Academy Award of Merit and the Scientific and Engineering Award which are rewarded on a yearly basis by the US-American Academy of Motion Picture Arts and Sciences. As Figure 1 shows, the position of the Munich cluster is outstandingly strong, compared to other German locations. Apart from ARRI, which has received nine awards since 1967, several other companies in the Munich area received awards. The crucial point we make here is that those companies could not attain the strong world market position in this critical technological field without complementary competencies within the Munich film cluster. This includes financial as well as infrastructural resources that certainly are the crucial preconditions for the cluster s competitiveness at least within the domestic and the European sphere. This holds for the Munich feature film and television production industry, but also for the media sector in general. As mentioned, apart from film technology that originates from Munich-based companies, the functional integration of the cluster into the production, financing and distribution of Hollywood blockbusters is low. However, there are at least a few examples of domestic feature films produced in Munich, which were able to perform well in international markets. In this respect, we looked at the 30 most successful German feature films that were produced in Munich. By doing this we were able to identify six motion pictures that did remarkably well especially in the USA during the last decade (Table 4). The feature film Das Boot (The Boat), shot in the Bavaria Studios in 1981, is still the internationally most successful Munich film. This list of successful feature films produced, financed and distributed mainly by Munich-based firms indicates that there are specific constellations of firms and network dynamics that play an enormous role within this cluster. In the following section, we will further elaborate on this point. It will in fact be shown that the cluster s economic performance largely relies on niche market feature films. Figure 1. The scientific and engineering awards from 1980 to 2005

10 The Munich Feature Film Cluster 393 Table 4. Feature films produced in Munich and their performance on international markets US box office Film title Year sales (US$) Involvement of Munich-based firms Perfume: The Story of a Murderer ,208,939 (as of 25 February 2007) Bavaria Studios, Constantin Film Production, Constantin Film, ARRI Film and TV Services, ARRI Rental, Bayerischer Banken-Fonds, FilmFernsehFonds Bayern Der Untergang (The Downfall) ,501,940 Bavaria Studios, Constantin Film Production, Constantin Film, ARRI Rental, CA Scanline Production, Blow Up Filmtechnik, Bayerischer Banken-Fonds, FilmFernsehFonds Bayern Nirgendwo in Afrika (Nowhere in Africa) ,173,485 Bavaria Film, Constantin Film Production, Constantin Film, CA Scanline Production, Blow Up Filmtechnik, FilmFernsehFonds Bayern Smilla s Sense of Snow ,221,994 Bavaria Studios, Constantin Film Production, Constantin Film, FilmFernsehFonds Bayern Comedian Harmonists ,828 Bavaria Studios, Senator Film, Bavaria Film Das Boot (The Boat) ,433,134 Bavaria Film, Neue Constantin Film, ARRI Film Source: IMDb Internet Movie Database. 4. Flexible Specialization in Market Niches: Dominant Actors and Network Effects in the Munich Feature Film Cluster As we have shown, the Munich feature film cluster is only to a limited extent functionally integrated into the global motion picture industry. Its economic performance largely relies on products that perform well on the national and selected international markets. In order to assess the cluster s performance we made an investigation into which firms were involved in the 30 most successful films to originate from the Munich cluster. Our analysis shows two important trends. First of all, the Munich feature film cluster seems to possess a critical mass of firms in the main fields of the feature film production process. Figure 2 displays all companies that were involved in at least three of the 30 feature films. The more striking result, however, is that the cluster has a core group of firms that were involved in the majority of these feature films. In the figure the different connecting lines point to different quantities of collaborations. The thinner lines represent engagement in 5 10 feature films, the thicker lines represent more than 10 participations. The cluster s core group consists of: N Bavaria Film Studios. Producers of 10 of the 30 most successful domestic German feature films. The Bavaria Film Studios are the biggest film production facility in Europe, with estimated revenues of some million euros per year. The studios provide office space on site for 120 firms, which are engaged in the feature film industry. This facility is of salient importance as it is the central focus for film production within the cluster. The company provides production and post-production facilities, as well as productionrelated services. Founded in 1919, today it is predominantly owned by semi-public regional authorities.

11 394 R. Kaiser & M. Liecke Figure 2. Network dynamics in the Munich feature film cluster N Constantin Film Production. Producer of 12 of the 30 most successful domestic German feature films is the second largest film-production company in Munich. It does, however, not possess any studios or related shooting facilities. Constantin projects are often actually produced in the Bavaria Studios. N Constantin Film. Distributor of 19 of the 30 most successful domestic German feature films holds a leading position in the regional and national distribution market. The company went public in 1999 and reached a total turnover of 210 million euros in fiscal year The company clearly dominates the distribution market segment of regional feature films. Other distributors, such as Buena Vista International or Columbia, clearly play a minor role compared to Constantin. N FFF (FilmFernsehFonds Bayern Film and Television Fund Bavaria) is a publicly owned and financed support agency for the Munich motion picture cluster, which was established in The FFF spent an estimated 22.5 million euros in Firms may apply for funding if they produce or shoot mainly in Bavaria. In case of funding, they get support on a credit base, which means that they have to pay back the state aid if their project succeeds. Roughly 150 percent of the amount a firm receives must be reinvested in Bavaria. The Bavarian state, private and public broadcasting companies, and incomes from mature investments predominantly finance the FFF.

12 The Munich Feature Film Cluster 395 N Bankenfonds (BBF) is tightly affiliated to the FFF, and was founded in As a supplementary fund, raised by private and public Bavarian banks, the BBF increases available funding for Bavarian film projects. Both the FFF and the BBF financially supported the majority of successful Munich feature films. In terms of film technology and specialized services, the ARRI film is in most cases not directly involved. CA Scanline Production GmbH is a special effects company that is part of the core group and supported 12 of the 30 feature films. Within the last decade, this core group of actors has successfully guided filmmaking activities in Munich into specialized market niches. Three genres can be singled out with respect to the 30 best performing feature films: the first genre can be characterized as family entertainment. At least 12 of the successful feature films belong to this category. Most of them are either based on well-known children s books or on modern literature for young people. The second genre consists of comedies, which are closely related to specific kinds of German humor. Ten out of the 30 successful feature films belong to this category; three of those films were also the most successful in the German market in recent years. The remaining eight feature films can be characterized as art house films. They also often broach historical issues. Feature films, such as The Downfall (2004) or Sophie Scholl The Final Days (2005), are representative of this genre. These feature films performed well at the (national) box office. They also received numerous prizes and nominations. In the last decade, feature films originating from the Munich cluster received 5 Oscars and 13 Oscar nominations. The network dynamics within the Munich feature film cluster are thus particularly intense within a relatively small group of organizations. These organizations have almost monopolized the production, distribution and financing of local motion pictures. The most obvious explanation for the density of this network is the existence of strong, trust-based personal interrelations of individuals within these organizations. There is indeed an informative basis for the assumption that those personal contacts had been established before the individuals entered the organizations of the core group. In this context the Munich Academy for Television and Film ( Hochschule für Film und Fernsehen, HFF) plays a significant role. The Academy was established in the mid-1960s and covers a wide range of occupational fields in the media industry: story editors, film directors, production managers or producers. The HFF, as a public institution, is predominantly financed by the Bavarian state government, the city of Munich and a large public broadcasting station. In order to measure the importance of the HFF for the establishment of personal relations, a new analysis was made using production data of the 30 most successful feature films produced in Munich. This analysis showed that 11 of the directors and 16 of the producers had studied at the HFF. Ten out of these 30 feature films were directed and produced by former students of the HFF. Given the fact that both the HFF and the main financing organizations in the Munich feature film cluster are public, it is evident that state intervention plays a crucial role. In the next section we shed further light on the role of public policy at the different territorial levels. 5. The Role of Public Policy: State Support in a Multi-level Governance System Public support for the feature film industry is offered from different levels of government, from the state and federal level to the European Union. Within the national context, this is

13 396 R. Kaiser & M. Liecke due to the fact that the German constitution allocates the authority to regulate cultural affairs mainly to the federal states ( Länder ). Competencies of the European Union to support national feature film industries are strictly limited to measures that provide added value to activities taken by the member states. First of all, the Munich film cluster profits significantly from various public policy measures that have been implemented by the Bavarian state government. By and large, those activities can be characterized either as the direct financial promotion of film productions or as specific sectoral infrastructural measures. In the latter case, the Bavarian state government has most recently established a cluster-oriented approach for various modern industrial sectors, such as biotechnology, nanotechnology or the media sector. The direct promotion of film productions falls under the responsibility of the previously mentioned Bavarian Film and Television Fund ( FilmFernsehFonds Bayern or FFF). In principle, film producers receive support on a loan basis and must repay the loan if the project is financially successful. In fact the return flow has been rather small. On average, only about 20 percent of the loans are reimbursed by the debtors. Nonetheless, the FFF investments have produced a positive effect in the Munich film cluster. Production firms which received financial support invested more than 60 million euros (or roughly 290 percent of the FFF aid) in films produced in Bavaria. The state of Bavaria, private and public broadcasting companies, and incomes from matured investments finance the FFF. In 2005, the fund supported the production of 23 cinema movies and 21 television films. Apart from direct financial contributions, the state of Bavaria has made significant investments in the infrastructure of the Munich feature film cluster. Those have been financed to a certain degree through revenues gained from privatization of a formerly stateowned enterprise on the lot of the Bavarian Film Studios. Public subsidies were used to build up a special studio hall, which is strictly reserved for cinema movie productions. The hall is the largest on the European continent. With this investment the state government has made sure that the Bavaria studios were able not to dedicate a predominant amount of studio capacity to productions for television. Given the fact that the demand for television studios is still rising, the Bavarian government also invested in the upgrading of an exhibition hall of the Munich trade fair for large-scale TV productions. In 1991, a state initiative led to the establishment of the Bavarian Film Center ( Bayerisches Filmzentrum Geiselgasteig ) also located on site at the Bavaria studios. This film center provides office space and services to newly established small companies in the film sector. Today, the film center is under joint sponsorship of the Bavarian Ministry of Finance and the Bavaria Film Corporation. Public support and sponsorship also exist for a number of specialized organizations and events in the Munich film cluster. This holds not only for the Munich Academy for Television and Film, but also for the Bavarian Movie Awards, the Bavarian television award as well as the Munich Film Festival and the annual international media convention Medientage München which is the largest event of its kind in Europe. The European Union has been engaged in the field of media policy since the late 1980s. This has been primarily as a regulator of the market for television programs, but also as a supporter of the cross-border distribution of feature films. By implementing its MEDIA programs, the European Union has aimed since 1990 at strengthening the audiovisual industry through a variety of different measures. The most recent MEDIA Plus program provides a total sum of 513 million euros for professional training measures, production

14 The Munich Feature Film Cluster 397 company support, distribution support for audiovisual works and support for cinematographic festivals. The MEDIA Plus program is designed in such a way that complements national and subnational activities within the member states. According to a mid-term evaluation report, European measures have been compatible with national initiatives, especially since the European program does not provide funding for production (Commission des Communautés Européennes, 2003). Thus the focus of the program is clearly cross-border distributional support, which has no national equivalent. Roughly 58 percent of the funds are reserved for this purpose. In 2002, about 90 percent of European films that were distributed outside their domestic territory were supported in this manner. The impact of European MEDIA programs on the development of the Munich film cluster can be classified as relatively low. The program certainly supports the activities of local film distributors who in 2005 received roughly 50 percent of all contributions that were directed to German distributors. All in all, in 2005 firms of the Bavarian film industry received some 4.5 million euros from this EU program (FilmFernsehFonds Bayern, 2006: 19). In contrast to the European Union, the German federal government explicitly supports the production of feature films, but not of television programs. This is done through its film promotion agency ( Filmförderungsanstalt, FFA). In 2004, the FFA spent some 73.5 million euros. Out of the eight different activities for which funding is provided production, production of scripts and film distribution are the most important ones. Established by public law in 1968, the FFA raises its budget in the form of film levies from cinemas and video distributors. In addition, public broadcasting stations provided varying amounts. For example, they contributed about 11 million euros in Film promotion at the federal level aims for both cultural diversity as well as economic success. The principal objective is to raise quality and ensure the success of German films at home and abroad. The FFA has implemented two major instruments: Project Promotion and Reference Support. Project Promotion is given for films that are still in the planning or pre-production process. Reference Support can be characterized as a specific promotion for already produced films, which have reached a certain number of visitors or received nominations for film awards. The producers receive financial support, which has to be reinvested in new projects. The Munich feature film cluster benefits greatly from federal support. Of the 31 projects the FFA supported in 2004, 16 were produced in Munich (Filmförderungsanstalt, 2005). 6. Conclusions In this paper, we sought an explanation for the Munich feature film cluster s relative economic success. We started from two alternative hypotheses. The first one pointed to an adjustment strategy of providing favorable conditions for the attraction of international productions. This strategy would have therefore aimed at functionally integrating the location into global networks of production, distribution, financing and technological development of Hollywood blockbusters. However, our empirical data showed that this is hardly the case. Apart from financial contributions provided by private German film financing funds, Munich actors played a role only due to the outstanding role of the camera producing company ARRI. Our second hypothesis assumed that economic success could be explained by the cluster s flexible specialization in market niches in which there is less competition. We posit

15 398 R. Kaiser & M. Liecke that flexible specialization indeed provides the explanation. The Munich cluster largely relies on the existence of a relatively small group of companies and public agencies that established a closely interconnected core group. By creating a dense network these actors have proven their capability to direct resources for the production, distribution and financing of feature films into promising market segments of which family entertainment films and domestic comedies are the most important ones. Besides that this organizational arrangement managed to produce a certain number of art house films that earned international recognition. In a further step we tried to identify what factors supported the establishment and stability of this network. Here we found that trust-based personal relationships play a major role. Those relationships are very often built upon long-term acquaintances of individuals who got to know each other during their studies at the Munich Academy for Television and Film (HFF). The network, like the cluster as a whole, has been generously supported especially by regional policy measures of the Bavarian federal state. Public intervention for feature film production is certainly not an untypical phenomenon. In the Bavarian case, however, investments in the respective infrastructure as well as direct financial contributions to feature film projects are considered reasonable mainly for two reasons. Firstly, this industry plays an important role in a broader strategy to support competitiveness of the regional ICT and multimedia industry. In this respect, public policy considers Munich s potential in economic development certainly under the perspective of a media city rather than a cinema city. Secondly, feature films are not solely regarded as an economic good, but also as a form of cultural expression and are as such regulated and sponsored almost exclusively by the federal states. With respect to public policy support from other governmental levels we found evidence for a rather low impact on the Munich cluster from measures taken by the European Union while the amount of funding received from the national level confirmed the outstanding position of the cluster within the domestic sphere. All in all, domestic feature film productions were not able to reach substantial market shares in foreign countries, but they are today certainly in a much stronger position to compete with Hollywood blockbusters on the home market. Their domestic success is largely determined by the fact that they address a specific national culture. This finding certainly opens up a perspective for comparative studies that could attempt to measure the extent to which reference to the domestic culture provides a certain competitive advantage for a local industry that can hardly be contested by productions targeted towards a global audience. Acknowledgement The authors would like to thank the two anonymous reviewers for their valuable comments and references. References Aksoy, A. and Robins, K. (1992) Hollywood for the 21st century: global competition for critical mass in image markets, Cambridge Journal of Economics, 16(1), pp

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