Making Sense of Clusters: Regional Competitiveness and Economic Development

March 1, 2006

Executive Summary

In recent years, “cluster strategies” have become a popular economic development approach among state and local policymakers and economic development practitioners. An industry cluster is a group of firms, and related economic actors and institutions, that are located near one another and that draw productive advantage from their mutual proximity and connections. Cluster analysis can help diagnose a region’s economic strengths and challenges and identify realistic ways to shape the region’s economic future. Yet many policymakers and practitioners have only a limited understanding of what clusters are and how to build economic development strategies around them.

This discussion paper reviews the academic literature on industry clusters. It explains what clusters are, why they matter for regional economic development policy, and how to use cluster analysis as a guide to policy and practice. Overall, the review’s most important findings for policymakers and practitioners are:

  1. Clusters are the key organizational unit for understanding and improving the performance of regional economies. The foundation of a regional economy is a group of clusters, not a collection of unrelated firms. Firms cluster together within a region because each firm benefits from being located near other similar or related firms. The firms in a cluster have common competitive strengths and needs.
  1. Cluster thinking matters because it orients economic development policy and practice toward groups of firms and away from individual firms. It is more important and fruitful to work with groups of firms on common problems (such as training or industrial modernization) than to work with individual firms. The cluster approach leads to little if any reliance on economic development subsidies and recruitment efforts aimed at individual firms; if these individual, firm-based policies are used at all, they should be focused on firms that fit within existing clusters.
  1. Cluster thinking offers important lessons for economic development policy and practice. Cluster thinking teaches policymakers and practitioners to:
    • Build on the unique strengths of their regions rather than try to be like other regions. Different regions have different sets of economic development opportunities. Not every place can or should become another Silicon Valley.
    • Go beyond analysis and engage in dialogue with cluster members. Many policymakers and practitioners treat research on and analysis of clusters as the only elements of a cluster strategy. In fact, they are only a starting point for a cluster strategy. Identifying a cluster’s competitive strengths and needs requires an ongoing dialogue with the firms and other economic actors in the cluster. Although the public sector cannot be the exclusive driver of cluster policy, it can play a central role in convening cluster members and working with private-sector cluster organizations.
    • Develop different strategies for different clusters. Clusters vary from industry to industry and from place to place and operate in many different dimensions. Different clusters have different needs. There is no one set of policies that will make all clusters successful. For example, a technology cluster may require help with research or capital, while a metals industry cluster may require assistance with job training or technology deployment.
    • Foster an environment that helps new clusters emerge rather than creating a specific cluster from scratch. It is difficult for public policy to create new clusters deliberately. Instead, policymakers and practitioners should promote and maintain the economic conditions that enable new clusters to emerge. Such an environment might, for example, support knowledge creation, entrepreneurship, new firm formation, and the availability of capital. Cluster policy is not about “picking winners” or excluding industries.

Much of the research on clusters has been preoccupied with debating the precise definition of a cluster, applying a single methodology, or examining whether clusters are good or bad for various measures of regional economic success. If research is to be more relevant to policy and practice, it should move beyond these concerns. Researchers should accept that clusters are an umbrella concept, not a precisely defined term, and that clusters vary from place to place and across industries. They should work toward a more widely shared, multidimensional approach for characterizing different types of clusters. They should combine quantitative and qualitative methods. Ultimately, cluster research should evolve to become a creative and informative mixture of art and science that helps academics, policymakers, and citizens better understand the varied workings of their regional economies.