A business cluster is a geographic concentration of interconnected

business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...

es, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. Accounting is a part of the business cluster. In urban studies, the term agglomeration is used.Porter, M. E. 1998, Clusters and the new economics of competition, Harvard Business Review, Nov/Dec98, Vol. 76 Issue 6, p77, Clusters are also important aspects of

strategic management In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of Resource management, resour ...

Concept

The term business cluster, also known as an industry cluster, competitive cluster, or Porterian cluster, was introduced and popularized by Michael Porter in ''The Competitive Advantage of Nations'' (1990). The importance of economic geography, or more correctly geographical economics, was also brought to attention by Paul Krugman in ''Geography and Trade'' (1991). Cluster development has since become a focus for many government programs. The underlying concept, which economists have referred to as agglomeration economies, dates back to 1890, and the work of

Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...

. Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field. According to Porter, in the modern

global economy The world economy or global economy is the economy of all humans of the world, referring to the global economic system, which includes all economic activities which are conducted both within and between nations, including production, consumption, ...

, comparative advantage—how certain locations have special endowments (i.e., harbor, cheap labor) to overcome heavy input costs—is less relevant. Now, competitive advantage—how companies make productive use of inputs, requiring continual innovation—is more important. Porter argues that economic activities are embedded in social activities; that 'social glue binds clusters together'. This is supported by recent research showing that particularly in regional and rural areas, significantly more innovation takes place in communities which have stronger inter-personal networks. Put in another way, a business cluster is a geographical location where enough resources and competences amass reach a critical threshold, giving it a ''key position'' in a given economic branch of activity, and with a decisive ''

sustainable competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...

'' over other places, or even a world supremacy in that field (e.g. Silicon Valley and Hollywood). A cluster is most of the time the result of initiatives, since it implies to convince current competitors to work jointly. The initiative usually comes from the political sphere (e.g. the different Singaporian clusters ), but it can also come from the industry itself (e.g. the initiative of Bart J. Groot, the director of Dow Olefinverbund GmbH, a major chemicals complex at the intersection of three Eastern German states ( Saxony, Saxony-Anhalt, and Thuringia after the reunification. The goal was to "encourage coordination among political and administrative officials" of Mitteldeutschland.)

Types

By composition

Following development of the concept of interorganizational networks in Germany and practical development of clusters in the United Kingdom; many perceive there to be four methods by which a cluster can be identified: * ''Geographical cluster'' – as stated above e.g. the California wine cluster or the flower cluster between Rotterdam and Amsterdam in the Netherlands. * ''Sectoral clusters'' (a cluster of businesses operating together from within the same commercial sector e.g. marine ( south east England;

Cowes Cowes () is an English seaport town and civil parish on the Isle of Wight. Cowes is located on the west bank of the estuary of the River Medina, facing the smaller town of East Cowes on the east bank. The two towns are linked by the Cowes Floa ...

and now Solent) and photonics ( Aston Science Park, Birmingham)) * ''Horizontal cluster'' (interconnections between businesses at a sharing of resources level e.g. knowledge management) * ''Vertical cluster'' (i.e. a

supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, acti ...

cluster) It is also expected – particularly in the German model of organizational networks – that interconnected businesses must interact and have firm actions within at least two separate levels of the organizations concerned.

By type of comparative advantage

Several types of business clusters, based on different kinds of knowledge, are recognized: * ''High-tech clusters'' – These clusters are high technology-oriented, well adapted to the

knowledge economy The knowledge economy (or the knowledge-based economy) is an economic system in which the production of goods and services is based principally on knowledge-intensive activities that contribute to advancement in technical and scientific inno ...

, and typically have as a core renowned universities and research centers like Silicon Valley, the East London Tech City or Paris-Saclay. An exceptional example of a prominent high-tech cluster that does not include a university is the High Tech Campus Eindhoven, located in the Dutch city of

Eindhoven Eindhoven () is a city and municipality in the Netherlands, located in the southern province of North Brabant of which it is its largest. With a population of 238,326 on 1 January 2022,know-how over the years, and for some of them, over many centuries. They are often industry-specific. An example is London as

financial center A financial centre ( BE), financial center ( AE), or financial hub, is a location with a concentration of participants in banking, asset management, insurance or financial markets with venues and supporting services for these activities to t ...

. * ''Factor endowment clusters'' – They are created because a comparative advantage they might have linked to a geographical position. For example, wine production clusters because of sunny regions surrounded by mountains, where good grapes can grow. This is like certain areas in France such as

Burgundy Burgundy (; french: link=no, Bourgogne ) is a historical territory and former administrative region and province of east-central France. The province was once home to the Dukes of Burgundy from the early 11th until the late 15th century. The c ...

and Champagne, as well as

Lombardy Lombardy ( it, Lombardia, Lombard language, Lombard: ''Lombardia'' or ''Lumbardia' '') is an administrative regions of Italy, region of Italy that covers ; it is located in the northern-central part of the country and has a population of about 10 ...

, Spain, Chile and California. * ''Low-cost manufacturing clusters'' – These clusters have typically emerged in developing countries within particular industries, such as automotive production, electronics, or textiles. Examples include electronics clusters in Mexico (e.g.

Guadalajara Guadalajara ( , ) is a metropolis in western Mexico and the capital of the list of states of Mexico, state of Jalisco. According to the 2020 census, the city has a population of 1,385,629 people, making it the 7th largest city by population in Me ...

) and Argentina (e.g. Córdoba). Cluster firms typically serve clients in developed countries. Drivers of cluster emergence include availability of low-cost labor, geographical proximity to clients (e.g. in the case of Mexico for U.S. clients; Eastern Europe for Western European clients). * ''Knowledge services clusters'' – Like low-cost manufacturing clusters, these clusters have emerged typically in developing countries. They have been characterized by the availability of lower-cost skills and expertise serving a growing global demand for increasingly commoditized (i.e. standardized, less firm-specific) knowledge services, e.g. software development, engineering support, analytical services. Examples include Bangalore, India; Recife, Brazil; Shanghai, China. Multinational corporations have played an important role in "customizing" business conditions in these clusters. One example for this is the establishment of collaborative linkages with local universities to secure the supply of qualified, yet lower-cost engineers.

Process

The process of identifying, defining, and describing a cluster is not standardized. Individual economic consultants and researchers develop their own methodologies. All cluster analysis relies on evaluation of local and regional employment patterns, based on industrial categorizations such as NAICS or the increasingly obsolete

SIC codes The Standard Industrial Classification (SIC) was a system for classifying industries by a four-digit code as a method of standardizing industry classification for statistical purposes across agencies. Established in the United States in 1937, it ...

. Notable databases providing statistical data on clusters and industry agglomeration include: * The Cluster Mapping Project (for the USA), conducted by the Institute for Strategy and Competitiveness at

Harvard Business School Harvard Business School (HBS) is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA p ...

* The European Cluster Observatory (for Europe), managed by the Center for Strategy and Competitiveness at the Stockholm School of Economics An alternative to clusters, reflecting the distributed nature of business operations in the wake of globalization, is

hubs and nodes Hubs and nodes is a geographic model explaining how linked regions can cooperate to fulfill elements of an industry's value chain and collectively gain sufficient mass to drive innovation growth. The model of hubs and nodes builds on Porter's clu ...

The Silicon Valley case

In the mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley in California. This led anyone who wished to create a startup company to do so in Silicon Valley. The surge in the number of Silicon Valley startups led to a number of venture capital firms relocating to or expanding their Valley offices. This in turn encouraged more entrepreneurs to locate their startups there. In other words, venture capitalists (sellers of finance) and

dot-com startup The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Compo ...

s (buyers of finance) "clustered" in and around a geographical area. The cluster effect in the capital market also led to a cluster effect in the labor market. As an increasing number of companies started up in Silicon Valley, programmers, engineers etc. realized that they would find greater job opportunities by moving to Silicon Valley. This concentration of technically skilled people in the valley meant that startups around the country knew that their chances of finding job candidates with the proper skill-sets were higher in the valley, hence giving them added incentive to move there. This in turn led to more high-tech workers moving there. Similar effects have also been found in the Cambridge IT Cluster (UK).

The Digital Media City case

In the late 1990s, the Seoul Metropolitan Government in South Korea developed the Digital Media City (DMC), a 135-acre complex, four miles outside of the city's central business district in the Sangam-dong district. With Seoul's rapidly growing cluster of multi-media, IT, and entertainment industries, the Digital Media City, through its vibrant agglomeration, helped to promote these industries and companies whose core business required use of information, communication, and media technologies. DMC grew and prospered as a global business environment, raising Seoul as an east-Asian hub of commerce. The cluster of its digital media-related, high-tech firms spawned partnerships which in turn leveraged both human and social capital in the area. Eventually, DMC fed the innovation of more than 10,000 small-scale Internet, game, and telecommunication firms located in Seoul. In development of DMC, the Seoul government leveraged initial funding by private technology partners and developers. It is also provided IT broadband and wireless networks to the area as well as needed

infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...

. The Seoul government even provided tax incentives and favorable land prices for ''magnet'' tenants who would attract other firms to the area due to established business relationships and through their presence which would in turn promote DMC as a prime location. With such a concentration of these entities, Seoul has become a major nexus of high-technology and digital media. It is home to digital media R&D firms across a range of types including cultural media creation, digital media technologies, digital broadcasting centers, technology offices, and entertainment firms. Just outside the DMC complex include international firm affiliates, schools, moderate to low income housing, commercial and convention facilities, entertainment zones, and the city's central rail station. The cohesive connection of industry, cultural centers, infrastructure, and human capital has fostered Seoul as a strong metropolitan economy and South Korea, the Miracle on the Han River, as a storied nation transitioning from a manufacturing to an innovation economy.

Cluster effect

The cluster effect can be more easily perceived in any urban agglomeration, as most kinds of commercial establishments will tend to spontaneously group themselves by category. Shoe shops (or cloth shops), for instance, are rarely isolated from their competition. In fact, it is common to find whole streets of them. The cluster effect is similar to (but not the same as) the network effect. It is similar in the sense that the price-independent preferences of both the market and its participants are based on each one's perception of the other rather than the market simply being the sum of all its participants actions as is usually the case. Thus, by being an effect greater than the sum of its causes, and as it occurs spontaneously, the cluster effect is a usually cited example of

emergence In philosophy, systems theory, science, and art, emergence occurs when an entity is observed to have properties its parts do not have on their own, properties or behaviors that emerge only when the parts interact in a wider whole. Emergence ...

. Governments and companies often try to use the cluster effect to promote a particular place as good for a certain type of business. For example, the city of Bangalore, India has utilized the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, Las Vegas has benefited through the cluster effect of the gambling industry. In France, the national industrial policy includes support for a specific form of business clusters, called
Pôles de Compétitivité
, such as

Cap Digital Cap Digital is a business cluster, started in 2006, a French public agency dedicated to the development of the Innovative Economy in the Île-de-France region, and in France. Governance President : Henri Verdier, directeur général MFG-R&D ...

. Another good example is the Nano/Microelectronics and Embedded Systems" or in short "mi-Cluster" that was facilitated by
Corallia Cluster Initiative
in Greece. Corallia introduced a bottom-up, 3-phase programme framework for facilitating cluster development, and was short-listed among the final classification (finalists) for the DG REGIO's RegioStars 2009 Awards in the category "Research, Technological Development and Innovation". Clusters, were proved to boost the innovative activity among firms of the same industry. One of the main causes that might be highlighted is the competition between the companies. Moreover, except of stimulating a favorable conditions for the exchange of ideas, industry-specific regional concentrations, also create a thick labor market input. Hence innovations increase the accumulation of the knowledge in the region which influences on the local internal economies. The cluster effect does not continue forever though. To sustain cluster performance in the long term, clusters need to manage network openness to business outside the cluster while facilitating strong inter-organisational relationships within the cluster. Its relative influence is also dictated by other market factors such as expected revenue, strength of demand, taxes, competition and politics. In the case of Silicon Valley as stated above for example, increased crowding in the valley led to severe shortage of office and residential space which in turn forced many companies to move to alternative locations such as Austin, Texas and

Raleigh-Durham, North Carolina The Research Triangle, or simply The Triangle, are both common nicknames for a metropolitan area in the Piedmont region of North Carolina in the United States, anchored by the cities of Raleigh and Durham and the town of Chapel Hill, home t ...

even though they would have liked to stay in the valley. Sometimes cluster strategies still do not produce enough of a positive impact to be justified in certain industries. For instance, in the case of Builders Square, the home improvement retailer could not compete with industry leaders such as Home Depot when it could not materialize the same low costs and contracts. As a result, it was presented with an option to form a merger with another home improvement retailer,

Hechinger The Hechinger Company was an American chain of home-improvement centers headquartered in Landover, Maryland, on the immediate outskirts of Washington, D.C., from 1911 to 1999. It was also an online retailer owned by Home Decor Products from 2 ...

to better improve their business clusters and compete with Home Depot and other industry leaders. However, when it failed to do so, it slowly began to fail and eventually fell into bankruptcy. Although the merger attempted to create geographic clusters to compete with the low costs of other firms, costs were not lowered enough and eventually the plan failed, forcing Hechinger into

Chapter 7 Chapter 7 may refer to: Albums * ''Chapter Seven'' (album), a 2013 album by Damien Leith. *''Chapter VII'', a 1973 album by drummer Buddy Miles George Allen "Buddy" Miles Jr. (September 5, 1947February 26, 2008) was an American composer, drum ...

liquidation and Builders Square out of the industry. Clusters can also fail if the regional economy does not adapt with the times. In Detroit, when the automotive industry declined, the cluster and the city declined with it. Clusters can fail if they do not use their position to reinvent themselves and move into other industries before the tipping point is reached.

References

{{DEFAULTSORT:Business Cluster Economic geography Strategic management Planned industrial developments Michael Porter Regional economics