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Marisa McNee Last Updated: April 18, 2005

WHAT IS A CLUSTER?

Clusters are geographic concentrations of inter-related (sometimes competing, sometimes collaborating) industries or firms, and their related supplier network. The argument made about the importance of clusters is that “because knowledge is generated, transmitted, and shared more efficiently in close proximity, economic activity based on new knowledge has a high propensity to cluster in a geographic area.” In other words, regions with top industry clusters will have less “innovation leakage” as compared with other regions. One important characteristic of a cluster is that the firms are exporting firms and are driving forces in the state (or regional) economy.

According to the Economic Development Administration in the US Department of Commerce, some examples of Industry Clusters are : North Carolina's Research Triangle; Hartford, Connecticut's insurance and finance markets; Hollywood's film industry; carpets in Dalton, Georgia: tourism in south Florida; technology along Route 128 in Massachusetts and in Silicon Valley, California.

HOW IS CLUSTER ANALYSIS USEFUL?

According to GHK Consulting, “cluster based approaches to economic development have gained ascendancy in recent years due to the changing nature of competition among firms.” The belief is that with technological innovation successful competition requires flexibility, resiliency and shared knowledge.

Many economic development professionals in the top cities in the US agree that “the use of clusters as a descriptive tool for regional economic relationship provides a richer, more meaningful representation of local industry drivers and regional dynamics than do traditional methods.” That being said, however, many professionals also believe that in order for cluster analysis to be used for appropriate decision making purposes, there must be a more standardized and replicable process of analysis. The lack of conventions and difficulty defining “clusters” is one of the major weaknesses in this kind of analysis.

METHODOLOGIES FOR DEFINING CLUSTERS

One of the limitations of cluster analysis is that there not official guidelines or conventional approaches to identifying or defining clusters. More recently, however, economic development professionals have recognized the limitation and started to develop a more standardized approach to cluster analysis. Many of the recent cluster-based analysis studies have used three factors common to all clusters for defining what constitutes a cluster. Those three factors are, generally speaking, some measure of employment concentration, cluster dependency and economic prosperity.

WHAT IS THE BEST WAY TO USE CLUSTER ANALYSIS?

One of the more important things to remember about cluster analysis is not only its limitations, but also its benefits. Cluster analysis is not only a highly effective technical tool, but also as a method of inquiry. In short, cluster analysis is not just crunching numbers, it should also be seen as an effective tool for economic development planning and policy-making.

The most compelling argument regarding the importance of this kind of analysis comes from Harvard Business School Professor Michael Porter, and others, that have suggested that a new approach is necessary to succeed in the global economy. The research done by Porter, and others, regarding the benefits to cluster-based strategies in economic development has pushed economic development professionals and policy makers to use a cluster approach for economic development strategy.

The Morrison Institute for Public Policy provides a good summary of the basic goal of a cluster-based approach, they suggest that economic base analysis should be used to: (1) identify interdependent or related firms that are driving the economy; and (2) assessing resources of the city or region and identifying clusters, and providing these firms with competitive advantage to compete within global economy.

The University of Minnesota State and Local Policy Program has great resources for quantitative and qualitative techniques for identifying key industries and doing a cluster-analysis:

http://www.hhh.umn.edu/centers/slp/economic_development/quantitative_analysis.htm

http://www.hhh.umn.edu/centers/slp/economic_development/qualitative_approaches.htm

OTHER USEFUL LINKS:

http://www.eda.gov/Research/ClusterBased.xml

www.nga.org/cda/files/0602INDUSTRYCLUSTER.PDF

http://www.urban.uiuc.edu/faculty/feser/PUBS/MOI.pdf .

http://www.ghkint.com/services1a.htm

http://www.sandag.cog.ca.us/rta/transfer/cluster_analysis.pdf

http://www.asu.edu/copp/morrison/clusteranalysis.pdf

SOURCES AND WEBSITES REFERENCED

DeVol, Ross, Perry Wong, Junghoon Ki, Armen Bedroussian and Rob Koepp. America 's Biotech

and Life Science Clusters . 2004. Milken Institute.