Rethinking cluster initiatives

Clusters initiatives

Industry clusters—groups of firms that gain a competitive advantage through local proximity and interdependence—offer a compelling framework for local and state leaders to analyze and support their economies. Both theory and academic research suggest that firms and regions benefit from clustering, evidence that has led to widespread adoption of clusters within the economic development field. But there are glaring gaps between the recognition that clusters play an important role in an economy that demands concentration and specialization and the practical ability to develop initiatives that help firms within clusters become more competitive and spur growth.

The purpose of this paper is to help regional leaders focused on economic development confidently and knowledgeably embrace cluster initiatives where they make sense, and, where they do not make sense, recognize that there are potentially equally powerful alternatives. This paper draws on a literature review, interviews with cluster experts, and five in-depth case studies that reflect successful, if not exceptional, cluster initiatives. Specifically, the report covers:

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Why clusters matter

Regional economies grow and decline based on their ability to specialize in high-value industries and then evolve those specializations over time. The practice of cluster-based economic development aims to capture the economic advantages that accrue for firms when they cluster together in place¾what academics call agglomeration. Agglomeration helps firms be more productive through three mechanisms: sharing tailored facilities, infrastructure, and suppliers; matching workers productively through deep labor markets; and learning through dense, knowledge-rich environments that facilitate knowledge exchange and innovation between interdependent firms. Regions grow based on their ability to provide environments where firms want to cluster. While the drivers of agglomeration are not perfectly understood, several factors appear to matter, including the abilities to: spur continuous innovation; develop dynamic entrepreneurship systems that replenish economies with good jobs; and engage strong local academic, civic, and public institutions that can facilitate these processes. However, there are real headwinds in all these areas that leaders must confront. Even as it is becoming more crucial to gain a foothold in advanced technologies and industries, most regions face narrower pathways to success and more limited investment capabilities, only reinforcing the importance of understanding whether cluster dynamics are viable in a regional economy and making investments large enough to counter these headwinds.

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Identifying and prioritizing clusters

Successful cluster initiatives begin with a combination of data and qualitative analysis to identify and prioritize cluster opportunities in service of broader economic development goals. Regional leaders can rarely create clusters from scratch, which means that cluster identification and prioritization must ensure that potential cluster opportunities meet basic criteria. Specifically, clusters contain a critical mass of firms that are geographically proximate and economically interdependent. Of the criteria above, interdependence is the most complex and arguably the most important for understanding how to design interventions. Practitioners can examine at least three sources of interdependency in their regions: industry product and supply chains, occupations, and technological know-how. Moving from identification to prioritization, regional leaders can consider six factors to distinguish between many cluster opportunities:

  1. Specialization;
  2. Composition of firms (e.g., one big firm or many small firms);
  3. Development stage (e.g., potential, emerging, established, declining, etc.);
  4. Intensity of inter-firm dependence;
  5. Reliance on complex knowledge; and
  6. Ability to create inclusive employment opportunities.

This stage of the process may identify that non-cluster interventions are the regions’ best bet (see box).

Non-cluster interventions to support groups of firms
For many U.S. regions, cluster initiatives may not be the most effective strategy to support regional economic development. Therefore, this paper reviews several ways to organize and design interventions for groups of firms beyond clusters (see page x). Some of these strategies focus on groups of companies that share certain challenges and opportunities based on their stage of growth, such as startups or middle-market companies. More broadly, policies and investments related to process and product innovation, training and skills development, and infrastructure are all viable ways to address the shared needs of firms without relying on a cluster framework.

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Cluster interventions

Beyond identification, scaling and strengthening clusters requires additional work to identify cluster constraints and opportunities and subsequently the development of market-oriented responses that are able to draw on the capabilities and resources of the cluster’s firms. We explore five potential areas of intervention that could support clusters, each of which could apply to the economy overall but may be more efficiently pursued by targeting a group of firms with uniquely shared challenges and prospects.

1. Information and networks: Clusters may suffer from information gaps—both internally and externally—that hinder their potential. Internally, cluster initiatives provide information and research to educate firms and other internal stakeholders about opportunities and priorities for shared action. Externally, evidence-based promotion of clusters can address information failures among firms and investors outside the cluster that may benefit from cluster dynamics.

2. Talent development: Cluster-based talent development strategies work with employers to address specific skills and competencies needed in that cluster. Necessarily, these strategies involve universities, community colleges, and even the K-12 system to develop talent pipelines around in-demand occupations in the cluster.

3. Research and commercialization: Firm learning is a foundational aspect of clusters. Research and development activities within universities, other research institutions, and private sector firms may yield more impact if coordinated, which oftentimes requires overcoming different mandates, cultures, and business models between these actors. Cluster intermediaries can help provide this coordination function.

4. Infrastructure and placemaking: Investments in tailored infrastructure or real estate may be warranted for several reasons. First, infrastructure itself may be a critical precondition for cluster growth, such as a logistics facility or high-speed broadband connection. Second, interventions related to research commercialization or talent development may require physical investments, such as applied research labs or training facilities. Finally, an identifiable physical presence can strengthen the cluster’s brand identity.

5. Capital access: The final intervention in this framework is access to capital, or lack of it. Young firms, which research suggests are critical to driving both innovation and net job creation, need capital to grow. Yet, capital providers may suffer from information gaps that limit their ability to invest in particular clusters, which cluster intermediaries seek to overcome through a “broker function” that connects entrepreneurs to sources of growth capital.

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Case studies

Five cluster case studies inform this report:

Case studies

  • Central Indiana – Central Indiana Corporate Partnership: CICP is a CEO-led “holding company” that houses six distinct economic development initiatives, including cluster initiatives such as AgriNovus (agriculture biosciences) and BioCrossroads (life sciences). Download the case study.
  • Milwaukee – Water Technology: Led by The Water Council, Milwaukee’s water cluster has established the region as a top global hub for innovation and solutions to the world’s water challenges. Download the case study.
  • St. Louis – Agriculture Technology: Driven by BioSTL, the Danforth Plant Science Center, and the St. Louis Economic Development Partnership, St. Louis has focused on the agricultural technology cluster to spur dynamism in the region. Download the case study.
  • Syracuse – Unmanned Aerial Systems (UAS or Drones): Drawing on long-standing expertise in radar and sensors, the Central New York region is positioning itself as a leading center for drone testing and innovation. Download the case study.
  • Upstate, South Carolina – CU-ICAR (Automotive): The Clemson University International Center for Automotive Research is a 250-acre research and technology campus that anchors Upstate South Carolina’s thriving automotive cluster. Download the case study.

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Cluster organizational structures

A review of five cluster initiatives offers critical lessons in how best to organize, launch, and sustain cluster-based economic development. Across the five case studies, as well as other cluster efforts, three basic models emerge: cluster hub, in which one organization acts as the clear lead and driver (e.g., The Water Council (Milwaukee)); shared leadership, in which two or three organizations act as highly collaborative joint leads (e.g., Unmanned Aerial Systems (Syracuse) and Agriculture Technology (St. Louis)); and holding company, in which one organization leads multiple cluster initiatives (e.g., Central Indiana Corporate Partnership (Central Indiana)).

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Five traits of successful cluster initiatives

Ultimately, the most successful cluster initiatives have five traits:

1. Focused on establishing a robust ecosystem, not quick job gains
Cluster initiatives must be focused on establishing a robust and regenerating ecosystem that produces the innovation, talent, and economic opportunities that firms need to thrive. These initiatives must be first and foremost about the growth and competitiveness of existing firms in the cluster (as well as the needs of related entities, like academic institutions), and not just on job growth.
2. Industry-driven, university-fueled, government-funded
The strongest cluster initiatives are private sector-driven, with interventions catalyzed by groups of firms that believe they will benefit by working collectively to fill gaps in the cluster ecosystem and staff with industry expertise and a collaborative mentality. Research universities provide needed innovation and talent, and public investment is critical. Federal, state, and local governments have made major investments to support each cluster initiative and give it early credibility.
3. Placing a collective big bet on a unique opportunity
The most successful cluster initiatives are in regions willing to place strategic bets on distinct cluster opportunities. These places have a long-term mindset and are unafraid to “pick winners” from the broad array of potential alternatives. They recognize that resources are scarce and competition is high, and that the only way to distinguish themselves is by funneling their energy and investment into a limited number of truly unique specializations.
4. Championed by passionate, dedicated leaders
Individual leaders have proven invaluable in championing each successful cluster initiative. These leaders typically emerge from businesses operating within the sector, driven by a new vision and clear purpose, and/or as CEOs of the lead cluster organizations. They are thought leaders who recognize a unique opportunity, have crafted a compelling narrative, and are willing to dedicate the time needed to launch and sustain a bold cluster initiative.
5. Anchored by a physical center
Most of the cluster initiatives profiled have created a physical center to serve as visible proof that the region is a major hub for the cluster and to provide a space that facilitates knowledge spillovers between firms, academic researchers, and related enterprises. While companies and assets involved in the cluster are often scattered throughout each region, these centers tie them together. These centers may take the form of a single building, an urban district, or a suburban campus. One note of caution: Though real estate development can play an important role in cementing a cluster that is already robust, it cannot create a cluster.

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