Economic Cluster Policy Begins to Work

For several years now the Obama administration has actively promoted regional economic cluster initiatives—various growth-driving projects comprising local networks of large and small firms, university researchers, regional economic organizations, investors, and training groups. 

So do they work? Do cluster grants and local initiatives really deliver material benefits to individual firms and regional economies? Let’s review the record.

Led by the Economic Development and Small Business administrations, more than 50 pilot projects have been funded around the country. These projects draw inspiration from the strong body of experience and research Bruce Katz and I summarized here; in doing so they seek to convene diverse resources in regions to accelerate growth. For the most part the buzz has been good though few serious evaluations have been available.

But now there is a systematic evaluation of at least one sub-set of the Obama administration pilots.  Undertaken by the SBA, a new study prepared by Optimal Solutions Group, LLC of College Park, Md. looks closely at the first two years’ experience of that agency’s 10 cluster pilots focused on regional industries and advanced defense technologies. (See an Entrepreneur magazine slideshow on these pilots here). In each of these instances the SBA invested $1 million to bolster a regionally designed initiative for advancing a strategic local cluster.

The evaluation finds that the SBA’s support of this extremely varied array of local and regional initiatives has gone very well in its earliest stages.

What’s especially interesting is the extent to which this ostensibly long-term strategy for promoting regional growth has also delivered near-term impacts, including on growth.

In this respect, work to foster the networking and exchange that goes on within a cluster is usually presumed to be a long-haul strategy for catalyzing more and better local interactions and transactions that then, over perhaps five years, begin to yield quantifiable economic benefit. However, Optimal’s “mixed-methods” analysis documents not only a smooth start-up of the regional initiatives but surprisingly quick and robust impacts.

To the first point, the clusters’ membership and activities grew substantially in the first two years of the program. Small business participation in the 10 clusters nearly quadrupled—from 179 to 859. By the end of the second year of the initiative the 10 clusters included a total of 84 universities and research institutions, 54 business associations, 98 public-sector agencies, and 69 non-profits. Eighty-four percent of the federal money was being used to provide services, rather than administration. During the second year of the initiative the 10 clusters reported a total of 265 training, networking, showcasing, and matchmaking events.

Yet those were the activities. Significant outcomes came rapidly. Half of cluster participants in the 10 pilots reported that cluster participation increased their integration into their industry’s supply chain. Eight percent reported that new cluster activities increased collaborative activity in their region. More than 40 percent of cluster small businesses reported that cluster services had some influence on their access to capital. A like number agreed that cluster exchanges facilitated commercialization and new technology development. And for that matter, small business involved with the SBA-supported clusters reported filing 111 patent applications and receiving 76 patents during the second initiative year (though only some of those firms said the cluster activities contributed directly to the level of patenting).

As to top-line economic contributions of cluster firms, it exceeded regional benchmarks:

  • Total employment in small business participants grew an average of 18 percent across the clusters in two years. This figure includes a 13 percent increase in full-time employment.
  • Nearly all the clusters—nine out of 10—experienced an increase in the average revenue of small business participants, 23 percent across the clusters in two years.
  • The median payroll (total compensation paid to employees) of small business participants increased by nearly 18 percent in two years.

To be sure, these last findings don’t necessarily prove the clusters drove the new growth. The two-year growth may simply owe to the particular industries in which the clusters were funded, which ranged from advanced energy and “green aviation” to defense, geospatial solutions, flexible electronics.

Nonetheless, the initial evidence on SBA’s Regional Cluster Initiative is compelling. Very plainly Optimal’s evaluation suggest that one federal agency has quite effectively administered a modestly-sized competitive grant program; invested in winning projects, and stimulated a significant amount of beneficial cluster activity among small and large businesses in U.S. regions. The outcomes are also suggestive in that they hint that cluster participation was correlated with—if not absolutely linked to—higher than expected levels of economic growth, innovation, and new business formation in their regional industries.

At a minimum, the SBA’s new evaluation of its 10 pilot grants answers powerfully to the call for more experimentation and more evaluation issued recently by scholars Aaron Chatterji, Edward Glaeser, and William Kerr. With more and more tantalizing evidence accumulating, governments and researchers should hurry to assess one of the more promising strategies for improving regional economic outcomes at modest cost.