| I. Introduction
Industry cluster policies are a current trend in economic development planning.
These policies represent a major shift from traditional economic development programs,
which focused on individual firm oriented policies. Cluster policies, on the other
hand, are based on the recognition that firms and industries are inter-related in both
direct and indirect ways.
Given the interest in innovative economic development strategies by both the public and
private sectors, industry cluster policies have received significant attention in current
literature. However, there is considerable debate regarding the actual definition of
an industry cluster, how to identify an industry cluster, or what factors drive the
development of an industry cluster. The literature focuses on the different
definitions of industry clusters, and much of the literature is case studies illustrating
different types of clusters. Examples of industry clusters range from the small
hosiery cluster in rural North Carolina, or the apparel/hosiery cluster in Northern Italy,
to Silicon Valley, an entire region of computer and related electronics firms. A
second focus in the literature is the identification of industry clusters. Given the
many variations in the definitions of clusters, it is not suprising that there are several
different approaches to identifying clusters. A third common theme in the literature
is cluster policy, and how these policies can be incorporated into economic development
programs. This paper summarizes the key literature on the issues mentioned above,
focusing specifically on the definition and identification of industry clusters, the
factors driving cluster development, and cluster policy in the United States. The
last section describes attempts to evaluate industry clusters, as well as criticisms of
clusters as an economic development tool. While there is ample literature on
industry clusters in Europe, where cluster policy is more advanced, this literature review
focuses primarily on the use of the concept in the United States.
II. Definition and Identification
of Industry Cluster
Industry Cluster Definition
The majority of the literature on industry clusters is focused on
the actual definition of a cluster. The very basic definition of an industry cluster
is “geographical concentrations of industries that gain performance advantages
through co-location (Doeringer and Terkla 1995, pg.225).” This definition of
clusters is similar to that of agglomeration economies, but in fact, it is within industry
clusters that agglomeration economies are likely to be observed. Beyond the basic
definition, however, there is little consensus on how to define an industry cluster.
Michael Porter popularized the concept of industry clusters is his book
The Competitive Advantage of Nations (1990). Porter developed the “Diamond of
Advantage,” which is four factors he determined create a competitive advantage for
firms. The four corners of the diamond include factor conditions, demand conditions,
industry strategy/rivalry, and related and supporting industries. Porter used this
diamond to determine which firms and industries had competitive advantages, and his
emphasis of the importance of related and supporting industries encouraged interest in
clusters. While his original thesis was applied to nations as a whole, Porter
recognized that the majority of economic activity takes place at the regional level.
Thus, his ideas are commonly applied to cities and regions.
The bulk of Porter’s thesis deals with the competitive advantages of clustering for
industries. This aspect of his work is discussed in the Section III. Porter
provides a simple definition of two types of clusters: vertical clusters, and horizontal
clusters. Vertical clusters are made up of industries that are linked through
buyer-seller relationships. Horizontal clusters include industries which might share
a common market for the end products, use a common technology or labor force skills, or
require similar natural resources (Porter 1990).
Jacobs and DeMan (1996) and Rosenfeld (1996,1997) present more in-depth
discussions of the different definitions of industry clusters, although these authors also
use the definitions of vertical and horizontal clusters as the basis for their
definitions. Jacobs and DeMan (1996, pg.425) argue that “there is not one
correct definition of the cluster concept…different dimensions are of
interest.” They expand from the definitions of the vertical and horizontal
industry clusters to identify key dimensions that may be used to define clusters.
These include the geographic or spatial clustering of economic activity, horizontal and
vertical relationships between industry sectors, use of common technology, the presence of
a central actor (i.e., a large firm, research center, etc.), and the quality of the firm
network, or firm cooperation (Jacobs and DeMan 1996).
In addition to vertical and horizontal relationships, Rosenfeld (1997) includes criteria
for defining a cluster, including the size of the cluster, the economic or strategic
importance of the cluster, the range of products produced or services used, and the use of
common inputs. He does not encourage defining clusters exclusively by the size of
the constituent industries or the scale of employment, pointing out that many effective
clusters are located in small inter-related industries which do not necessarily have
pronounced employment concentrations. According to Rosenfeld (1997 pg.10), an
industry cluster is: “a geographically bounded concentration of similar,
related or complementary businesses, with active channels for business transactions,
communications and dialogue, that share specialized infrastructure, labor markets and
services, and that are faced with common opportunities and threats.”
Rosenfeld’s definition clearly emphasizes the importance he places on the role of
social interaction and firm cooperation in determining the dynamic nature of a
cluster.
As evidenced in the literature cited above, there are several common
themes in the definition of an industry cluster. First, it is generally agreed that
clusters are a dynamic phenomenon. It is the interaction and functional
relationships between firms and industries that characterize a cluster (Doeringer and
Terkla 1995). Secondly, most of the definitions of industry clusters reference the
geographic scope of the cluster, and the importance of spatial proximity. However,
while geographic scope is important in defining clusters, every cluster has different
geographic requirements, so there is no uniform definition of the appropriate geographic
scope of a cluster (Rosenfeld 1996, Jacobs and DeMan 1996, Jacobs and DeJong 1992).
A third common theme in the literature is the importance of looking beyond individual
industries and recognizing that individual firms are part of a much larger industrial
system. Most authors argue for a broader definition of clusters that are defined by
both horizontal and vertical relationships, and include both direct and indirect
linkages. In reality, many practitioners have relied on simply defining industry
clusters as a concentration of employment in a single industry. The literature
argues that this simply represents an industry concentration, and ignores the functional
relationships between industries and the interdependent and dynamic relationships that
characterize clusters (Doeringer and Terkla 1995, Rosenfeld 1997).
Lastly, the role of social infrastructure in defining industry clusters
is a theme prevalent in the literature. Rosenfeld (1996), in particular, argues that
information flow is critical in an effective industry cluster, and, in order to facilitate
information exchange, a social infrastructure is required. He points out that while
the characteristics of a cluster may be present, it is not necessarily an effective
cluster; an effective cluster must also include social interaction, trust, and a shared
vision in order to create the dynamic nature of a cluster. The importance of social
interaction is supported by the cluster definition developed by Jacobs and DeMan (1996),
as well as by Saxenian (1994) in her discussion of Silicon Valley. The role of
social infrastructure is important in the discussion of identifying industry clusters
presented in the following section.
Identification of Industry Clusters
The varying definitions of industry clusters helps explain the
differing arguments regarding the methodology to identify clusters. One of the
common approaches to identifying clusters is based on quantitative techniques, including
location quotients and input-output (I-O) analyses (Rosenfeld 1997). These tools
help identify relative concentrations of industries in the region, as well as identify the
buyer-seller linkages in different industry sectors. Michael Porter relied heavily on this
type of analysis to form the basis of his international study of industry clusters.
I-O analyses and other quantitative tools were also the basis for identifying clusters in
several other studies, including the Twin Cities Industry Cluster Project (State and Local
Policy Program 1998) and UNC-Chapel Hill’s study of North Carolina’s industries
(Bergman, Feser and Sweeney 1996).
The quantitative approach towards identifying industry clusters is
generally regarded as a critical component of a cluster analysis. This type of
analysis will provide an initial tool for identifying potential clusters and will indicate
the relative presence of different industries in the local region. An I-O analysis
is especially useful in the analysis of a vertically-integrated cluster, when the
buyer-seller linkages are more obvious. However, the quantitative analysis does not
address whether relationships really exist between the individual firms, and it does not
account for other factors beyond the product-market relationships, such as industry
collaboration and information flow (Doeringer and Terkla 1995, Jacobs and DeMan 1996,
Rosenfeld 1996,1997). “Although inter-industry transactions incorporated within
production channels can sometimes be detected in input-output tables, neither the
character or relationships among firms nor the benefits of clustering can be discerned in
this way (Doeringer and Terkla 1995, pg.228).”
There is a general consensus in the literature that in order to truly
identify industry clusters it is necessary to conduct a qualitative analysis in addition
to the quantitative analysis. Surveys and interviews of key industry representatives will
help expand an understanding of the buyer-supplier relationships, as well as further
identifying commonalties between industries (i.e., workforce or infrastructure needs, or
technologies used). The use of the qualitative analysis will both confirm the
findings of the quantitative analysis, as well as help identify potential industry
clusters that may have been overlooked by the conventional data analysis (Doeringer and
Terkla 1995, Jacobs and DeMan 1996, Sternberg 1991, State and Local Policy Program
1998).
III. Factors Driving Industry Cluster
Growth and Development
The factors which drive industry cluster development and growth are
also the subject of debate in the literature. In general, businesses locate where it
makes the greatest economic sense, either in terms of accessing the market for their
product, the labor pool, or required resources. The basic factors that drive
industry clustering are very similar to the factors that encourage urban or locational
agglomeration economies. As stated by Doeringer and Terkla, “The presence of
positive externalities explains the clustering process, whereas specific location sites
for each cluster depend on either ‘historical accident’ or the cost advantages
provided by immobile factors that attracted the firms anchoring the cluster (Doeringer and
Terkla 1995, pg.226).” While there is consensus among the researchers that
firms will cluster because they receive some type of benefit, the factors that create
those benefits are debated.
Michael Porter (1990) argues competition is a driving force behind
cluster development. Clustering is a dynamic process, and as one competitive firm
grows, it generates demand for other related industries. As the cluster develops it
becomes a mutually reinforcing system where benefits flow backwards and forwards
throughout the industries in the cluster. Porter argues that it is the competition
between rival firms in the cluster that drives growth because it forces firms to be
innovative and to improve and create new technology. This, in turn, leads to new
business spin-offs, stimulates R&D, and forces the introduction of new skills and
services. Because many of the industries within the cluster employ a similar labor
force, the labor force can freely move to other related firms within the cluster, thus
transferring knowledge to new firms, and continuing to promote competition and therefore
growth. This growth can either lead to increasing the vertical integration of the
cluster, or it can lead to the horizontal integration of the sector. Increased
vertical integration occurs as the division of labor gets more specialized, and new firms
are able to fill the new niche markets. Horizontal clustering occurs as the new
technology and labor skills are applied to related industries in different sectors.
Porter points to Silicon Valley as an example of how competition has spurred the
horizontal clustering process.
There are several other key factors that are discussed in the
literature that contribute to cluster development. Doeringer and Terkla (1995) cite the
benefits of agglomeration economies observed in industry clusters as one factor leading to
cluster development. Firms locating in close spatial proximity benefit from lower
transportation and transaction costs, as well as access to a skilled labor force.
Agglomeration economies can also spur competition, which encourages information,
knowledge, and technology transfer among related firms. The transfer of knowledge
and technology among firms can lead to new industry growth, and therefore helps drive the
overall growth of the cluster.
Face-to-face interaction is also cited in several of the sources as a
critical factor in cluster development (Doeringer and Terkla 1995, Rosenfeld 1997).
This interaction is most beneficial to small, specialized firms which have the flexibility
to fill emerging niche markets as final demand or technology changes (Doeringer and Terkla
1995). Local proximity to firms in all aspects of the production process, such as
the suppliers, machine builders, assemblers, distributors, and final customers allows the
cooperating firms to adopt new technology and innovations rapidly, therefore increasing
the overall efficiency of the production process. The firms collaborate to provide
specialized services; through this collaboration, clusters develop (Rosenfeld 1997).
The social infrastructure within the cluster helps facilitate technology and knowledge
transfer, which strengthens the cluster and promotes future growth. The importance
of face-to-face interaction is cited in Rosenfeld’s case studies of the furniture
industry in Mississippi and the apparel/hosiery industry in Northern Italy (Rosenfeld
1997). Saxenian also discusses the importance of this interaction in the growth of
Silicon Valley, and attributes much of the early success of the area to the social
infrastructure (Saxenian 1994).
In summary, cluster development is attributable to several key factors,
including technology transfer, knowledge transfer, development of a skilled labor force in
related industries, the benefits of agglomeration economies, and social
infrastructure. However, researchers differ on how these factors promote cluster
growth. On the one hand, Porter attributes cluster development and growth to
competition, and focuses on how these key factors drive competition (Porter 1990). On the
other hand, the other authors cited above, say cluster development is promoted by
collaboration among related firms that is encouraged by face to face contact.
Through social interaction, technology and knowledge transfer occurs, therefore leading to
the development and growth of clusters.
IV. Industry Cluster Policies
Traditional economic development policy has focused on the
individual needs of specific firms and industries. Cluster policies deal with firms
and industries as a system. Proponents of cluster policies focus on developing a
strategy that will encourage an efficient allocation of limited resources available for
urban and regional economic development, provide a tool for industry recruitment, and
encourage diversification of the industry base. Given limited resources available
for economic development, it is critical that planners allocate these resources in the
most efficient way possible in order meet the needs of established and growing
industries. By identifying clusters, and understanding specific needs (i.e.,
infrastructure or work force needs) of the industries within the clusters, planners can
build on the existing strengths in the region and provide more appropriate assistance to
businesses. This is in contrast to many current policies, which direct resources at
the industries the region hopes to attract, regardless of whether the existing environment
is conducive to the development of these industries (Doeringer and Terkla 1995).
Industry cluster polices can also serve as a tool for industry
targeting and recruitment. When an industry cluster is identified, gaps in the
entire production process become apparent. Local planners can use this knowledge to
target industry recruitment to fill these gaps, and complete the overall production
process. Cluster policies are also encouraged, as they are believed to stimulate
competition, which in turn leads to economic growth. Clusters can also help
diversify an economic base, by developing the supplier networks or related support
services needed to serve the larger firms in the cluster. Lastly, proponents of
industry clusters claim that the clusters that include industries across several sectors
are more adaptable to change, and can better withstand downturns in the economic cycle
(Doeringer and Terkla 1995, Henton, Melville, Walesh 1997, Rosenfeld 1997).
While the benefits of cluster policies have been recognized, there are
few examples of industry cluster policies currently in place in the United States.
For the most part, industry clusters have been used to help identify current economic
activity in a region, but few policies have been operationalized based on this
identification. Currently, several states are attempting to incorporate industry
clusters into their economic development planning. Specifically, both Oregon and
Arizona have worked to identify key industry clusters within the states, and have focused
their economic development efforts on identifying the needs of and promoting growth in
these clusters (Rosenfeld 1996). Beyond the limited examples of state policies and
several regional initiatives, industry clusters have not yet been incorporated into public
policy efforts in the United States.
Porter (1997) has proposed incorporating industry cluster policy into
inner city economic development. He claimed that there are certain industries that
are likely to locate in inner city areas, and will receive a competitive advantage from
the location. Porter suggests that economic developers should identify these firms,
and encourage their development in central cities. As clusters develop, they can be
used to target industry recruitment, as well as to direct job training programs to fill
the skill needs of these clusters.
V. Evaluation and Critique
of Industry Cluster Policies
To date, there is little research on the effectiveness of industry
cluster policy in generating economic development in cities or regions. The
traditional measures of economic development are the number of new jobs created and tax
revenue generated. In terms of these measures, there is no relevant literature
available. However, Rosenfeld (1997) presents several criteria that could be used
for evaluating the overall efficiency of industry clusters. These include the number
of new spin-off businesses firms in the cluster have generated, the development of new
technology and increased R&D capacity, the improvement of labor force skills, and the
intensity and quality of firm networks created.
While there are very few industry cluster policies currently in place
in the United States, the potential adoption of such policies has been criticized.
Rosenfeld (1995,1997) provides a discussion of some of the general criticisms of cluster
policies. The biggest concern is that cluster policies encourage over-specialization
in the economy. If the industries in the cluster fail, then the economy in the
entire region is damaged. Many leaders chose to encourage the diversification of the
economy, and fear that the use of a cluster policy will run counter to this effort.
Secondly, industry cluster policies are criticized for being more applicable to small,
specialized firms, particularly because of the level of trust and cooperation required for
a successful cluster. Critics claim that in reality, large, multi-national companies
dominate the current economy, and these companies will undermine the trust that is
required for a cluster to be effective. A third criticism of industry cluster
policies is that it only applies to urban areas, and that rural areas lack the necessary
scale for a cluster. Lastly, critics claim that new telecommunications technology is
replacing the need for spatial clustering. Therefore, firms will no longer receive a
competitive advantage from close geographic proximity.
Harrison and Glasmeier (1997) critiqued cluster policy specifically in
regards to Porter’s application of cluster policy to inner-city economic
development. However, several of their criticisms could be appropriate to cluster
policy at all geographic levels. First, they claim that cluster development is more
appropriate in areas where there is already an existing, diverse economic base, which can
support new markets and diversification. A second criticism is that industry
clusters are only capable of responding to small, incremental changes in technology and
market demand. However with larger changes, Harrison and Glasmeier claim that
clusters can be resistant to new information because it may introduce changes that are
drastically different from the processes used for previous successes. As discussed
earlier, information flow is critical for innovation, which is in turn necessary for a
cluster to continue growth.
VI. Conclusion
Given the current restructuring of the global economy, and the
changing nature of production functions, it appears that cluster policies could be an
effective economic development strategy. Economic development policies that target
individual firms or industries are not longer the most viable option for regions.
Production functions are becoming more decentralized, and more operations are being
contracted to outside firms. This, in turn, is opening up new niche markets and
creating opportunities for smaller producers, which functioning as a cluster, can help
improve the economic development of a region. It will be necessary to address the
needs of the different producers across industry sectors in order to help these clusters
fill the new market demands. However, given the current infancy of cluster policies
in this country, more research will be required to determine exactly what constitutes
effective cluster policy, and what role these policies should play in a comprehensive
economic development strategy.
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