New Study Says Maybe Clusters Not All They Are Cracked Up to Be

Just about the time you think you have your future economic development strategy figured out, a couple smart guys from the local university do some research that throws a monkey wrench into your plans. That may be how some UK economic developers are feeling at this time as they review the results of a new London School of Economics study that says that clusters may not be the growth driver that they (we) think they are.

According to a paper this week at the Royal Economic Society conference by Gilles Duranton and Henry Overman, from the London School of Economics, we are far from being able to identify specific clusters of activity and what drives them. According to the researchers, do we not have enough knowledge to assess whether attracting these clusters of industries is good for local economic development.

The researchers tested a simple hypothesis about UK industrial location. Their starting assumption is that industrial firms are essentially randomly located, or they have no particular tendency to cluster anywhere in the UK. They then develop a statistical test that is based on the distance between firms to see if it is possible to reject this hypothesis.

Using data on UK manufacturing, the researchers found that only 51 per cent of industries show any significant departures from randomness - that is, any evidence of clustering in their location patterns. Of these industries, only a very small number are highly clustered. What do these findings suggest? They suggest that much of the concentration of manufacturing that exists in the UK is essentially random and may have nothing to do with concentrations of competing, collaborating and independent companies and institutions that are connected by a system of market and non-market links.

What can we conclude about the industries that show some tendency towards clustering? The study shows that this might be caused by both traditional industry location factors and/or by interaction between firms.

The researchers say that, "given our current level of understanding, we cannot distinguish between these two types of explanations. We certainly do not have enough knowledge to assess whether attracting these types of industries is good for local economic development."

The researchers suggest that maybe the role of government policy should be aimed primarily at removing barriers to cluster formation rather than targeting particular clusters. The worry is that non-government supporters of this policy, in particular those who suggest that we can already identify and map clusters, are ignoring or downplaying these difficulties when they present evidence to the government.

What do I think about this piece of research? I applaud the pair for doing this research and would encourage them to continue. Economic development needs knowledge to succeed. As I review the study paper, it strikes me that the research raises as many questions as it answers, which is not all that bad--it makes us think. I would urge researchers to replicate the study in the United States and other countries to see if any patterns emerge across nations. That would appear to make some sense in light of the role clusters are assumed to play in the global economy--an idea germanated by Michael Porter and other academic researchers.

Does this research say you should stop work on clusters? No, but it might suggest that you should give an equal amount of attention to other economic development strategies and not put all our eggs in the "cluster basket." This is common sense advice that I have been giving my clients for some time.

Can you get a copy of the researchers' paper? Yes indeed. Click here and it's yours for the taking.