Does A Cluster Strategy Work?

The conventional wisdom in economic development calls for growth strategies that are based on clusters of businesses in the same sector.  Here are just a few examples of the many cluster-based economic plans that I’ve come across from one end of the country to the other:

The problem with this conventional wisdom is that it is increasingly unwise.  


Princeton University Economics Professor Paul Krugman won the 2008 Nobel Prize for his work 20-30 years earlier in identifying the “new economic geography” (the theoretical foundation of the cluster approach).  But in his acceptance speech, he noted changes:

“[Clustering] may describe forces that are waning rather than gathering strength.”

“The data accord with common perception: many of the traditional localizations of industry have declined (think of the Akron rubber industry), and those that have arisen, such as Silicon Valley, don’t seem comparable in scale.”

A European report from 2011 found:

“Business clusters could be less relevant as drivers of innovation than has been commonly assumed. The Stavanger Centre for Innovation Research analysed 1,600 companies with more than 10 employees located in the five largest Norwegian city-regions. Rather than national clusters, international cooperation or global pipelines were identified as the main drivers of innovation.”

For his University of North Carolina Ph.D. thesis research titled, “Cluster Requiem And The Rise Of Cumulative Growth Theory”, Dr. Gary Kunkle tracked the growth and survival of a cohort of more than 300,000 establishments operating in Pennsylvania from 1997-2007.  His findings:

“Industry cluster theory has … an inability to explain economic dispersion and the presence of high-growing firms that thrive in non-clustered industries and locations.”

“Firm characteristics are 10-times more powerful than industry and cluster characteristics, and 50-times more powerful than location characteristics, in explaining and predicting establishment-level growth and survival”

“A sub-set of businesses systematically accumulate a disproportionate share of employment growth. Roughly 1% of establishments created 169% of all net new jobs added in the state over a ten-year period.”

This latter point is one of the reasons that the Economic Gardening movement, led by Chris Gibbons, has arisen as an insurgent force within the economic development world.  It concentrates on the small proportion of enterprises that create the most new jobs.

There is nothing wrong with encouraging any existing local business to grow – again an economic gardening strategy.  But it is foolish to try to build a region’s economic development strategy around a cluster where none exists.  

While many regions try to be more sophisticated in their approach, too often, I’ve heard people say that they have a few web design firms and from that they’re going to invest in building a “high tech cluster”.  Every town has someone who claims to design websites.  Really, that’s not a cluster even in the old industrial era.  And it’s not an effective strategy for economic growth in this era.

The famous economist John Maynard Keynes once said “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”  While some of the economists who developed cluster approaches are not quite defunct yet, the message is the still relevant.

We are in an economy where everyone in the world is connected by information and communications technologies.  For residents of any city or state to flourish economically, they should not be limited to a cluster of business activity which is based on purely local, physical proximity.


© 2015 Norman Jacknis