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Cluster-based economic development has been a popular tool for regional and
state economic development programs for the past decade. Stemming from Michael
Porter's work on competitive advantage, cluster-based economic development holds
out the promise of generating growth in communities primarily by enhancing the
existing economic base using a limited number of policy tools. This article
addresses the concept of clusters, policy implications, and general approaches
that economic development organizations have used to implement cluster-based initiatives.
The Concept of Industry Clusters in Economic Development
Michael Porter's 1990 book, The Competitive Advantage of Nations, offered readers a place-based
theory of corporate competition. Porter argued that competitive advantage comes from the ability
of industry to innovate and upgrade, not minimize costs or achieve economies of scale. The ability
to innovate stems from the advantages of particular locations and varies by industry. In a world
where companies can locate anywhere, then, the role of location becomes more important in building
competitive advantage.
Porter used a diamond graphic to show the four location-based elements that allow companies to
innovate and compete globally. These are:
- Factor Conditions - such as skilled labor and infrastructure
- Demand Conditions - such as sophisticated domestic customers
- Related and Supporting Industries - such as internationally competitive suppliers
- Firm Strategy, Structure and Rivalry - such as industry management and organization, strong local competition, and an environment that encourages investment
While the concept of clusters was a supporting theme in The Competitive Advantage of Nations, it
has since taken center stage. In 1998, Porter wrote much more extensively about clusters
themselves, defining them as follows:
- Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agencies, and trade associations) in particular fields that compete but also cooperate.
- Clusters affect competitiveness by enhancing productivity, innovation, and new business formation. The table below summarizes how clusters affect each element. Porter wrote that clusters generate these benefits through personal relationships, face to face communication, and networks.
| Productivity | Innovation | New Business Formation |
| Access to specialized inputs and employees | Some of same benefits as for productivity | Better information about opportunities |
| Access to information | Ability to assess buyer trends and new technologies better | Lower barriers to entry with support infrastructure in place |
| Access to specialized institutions and public goods | Can respond faster and be more flexible | Strong local market |
| Incentives and performance measurement based on competitive and peer pressure | Respond to competitive and peer pressure | Lower barriers to exit |
Policy Implications
Given the importance of clusters to productivity, they are a good way to organize
economic development initiatives. Porter suggests that clusters are better than
traditional industry groupings because they better capture the linkages among firms
that drive competitive advantage and highlight areas for improvement. This understanding
suggests a set of appropriate government policies for developing and upgrading clusters.
Porter offered several examples of useful economic development activities:
- Create specialized education and training programs, establish local university research efforts in cluster-related technologies, support cluster-specific information gathering and compilation, and enhance specialized transportation, communications and other infrastructure;
- Create streamlined, pro-innovation regulatory standards affecting the cluster, sponsor independent testing, product certification, and rating services for cluster products and services, and act as a sophisticated buyer for cluster products and services;
- Sponsor forums to bring together cluster participants, encourage cluster-specific efforts to attract suppliers and service providers from other locations, and establish cluster-oriented free trade zones, industrial parks, or supplier parks; and
- Eliminate barriers to local competition, organize relevant government departments around clusters, and focus export promotion around clusters.
Policy Implementation
The first step policy makers must take is to identify their location's clusters. Cluster
identification generally begins with some type of quantitative or data-driven analysis
using existing sources of industry-based information, such as County Business Patterns
or the Economic Census. Most efforts stress identifying concentrations of firms, measured
by numbers, size, employment, growth patterns, and other measures. Less frequently, studies
will consider input-output tables or value chain analysis to determine trading patterns. The
best studies depict the various elements of the cluster and their relation to each other,
but many simply present lists of industry sectors comprising the various clusters. In some
cases, analysts will supplement their data with case studies, corporate interviews, working
groups, and expert panels to understand more fully the linkages that exist within the cluster
and how they can be leveraged.
The second step is to devise policies to develop and upgrade the clusters. As described above,
Porter offers several specific activities designed to enhance competitive advantage. For example,
Porter recommends offering specialized training programs for cluster businesses, streamlining
regulatory standards related to cluster businesses, sponsoring cluster forums and networks, and
organizing economic development services around clusters.
However, few economic development organizations have truly implemented effective, long-lasting
cluster-based policies. A 2002 study on state based cluster initiatives by the National Governors
Association found that most state economic development efforts continue to be organized around
traditional business retention and incentive-based industry recruitment programs, rather than clusters.
While the study repeats Porter's warning that these traditional economic development programs are
important but no longer sufficient, cluster-based economic development programs still are not the norm.
Conclusions
Economic development organizations across the United States have enthusiastically adopted cluster-based economic
development in the expectation of enhancing growth and development in their communities. However, most economic
development organizations have limited their cluster initiatives to cluster identification. Economic development
organizations continue to be organized around traditional business retention and attraction programs and have
not developed (or sustained) cluster-based policies and initiatives. Until such policies become institutionalized,
it will be difficult to obtain the promised benefits of cluster-based economic development.
Sources
Porter, Michael E. 1998. The Competitive Advantage of Nations. In On Competition. Boston, MA: Harvard Business School Publishing.
___. 1998. Clusters and Competition. In On Competition. Boston, MA: Harvard Business School Publishing.
___. 2000. Location, Competition, and Economic Development: Local Clusters in a Global Economy. Economic Development Quarterly 14, no. 1: 15-34.
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