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Industry Clusters Evolving Role in Location Decisions

As physical location becomes less important in a technologically-advanced, globalized work place, how will industry clusters adapt?

Winter 2011
We tend to hang around people like us. Does the same apply to businesses? The concept of clusters - that similar industries and functions tend to locate near each other - has been with us since Michael Porter's 1998 article, "Clusters and the New Economics of Competition," and even for a time preceding the paper.

But how relevant are clusters in a state of "flat earth" equilibrium? More than half of respondents to Area Development's 2009 Corporate Survey said the presence of activities similar to theirs was a consideration when selecting a site. But have technology and globalization fundamentally changed the need to locate in clusters? And are virtual clusters possible, eliminating the need for physical proximity?

Defining Clusters
Picture the wine industry in California's Napa Valley; biotech in eastern Massachusetts; entertainment in Orlando, Florida; and auto manufacturing in Eastern Michigan and you have clear examples of clusters. A cluster is a geographic concentration of related industries or functions. This includes the core companies that comprise the industry or function, as well as the institutions, suppliers, vendors, government partners, and industry groups that allow the industry to function at its peak.

For instance, the Massachusetts biotech and pharmaceutical cluster includes:
• Key companies such as Biogen, Genzyme, Novartis, and Amgen;
• Research institutions such as Tufts, Harvard, and MIT;
• Colleges and other higher learning institutions that produce talent;
• Teaching and specialized hospitals such as Beth Israel Deaconess Medical Center, Massachusetts General Hospital, Brigham And Women's Hospital, and Children's Hospital Boston;
• Outsourced partners such as clinical research outsourcers, private labs, and clinics; and
• The Massachusetts Medical Device Industry Council, the Massachusetts Biotechnology Council, and related industry groups.

Ask Area Development

The role of industry clusters is evolving as quickly as new technologies emerge. If you have questions about industry clusters, submit them below to Ask Area Development and the article author will respond.
Most importantly, it also includes supporting entities such as a venture capital industry, specialized business services (legal, management, consulting), and a state government that has implemented programs encouraging life sciences development.

These clusters develop because of the intensive interplay of ideas that makes industry work. They begin at key points where talent, raw materials, and other partners are already in place. Over time, the initial companies intentionally or unintentionally foster the development of spin-off or competitor companies. These offshoots still benefit from the influences that spurred the cluster, but specialize, innovate, or exploit a new application of the basic cluster idea.

The cluster continues to function and grow because it becomes a hub for obtaining important inputs, leveraging the strength of partners, and outsourcing providers. Additionally, they provide an opportunity to leverage highly specialized training and talents.

From a competitive perspective, the cluster permits access to specialized information on the market. This includes general market conditions, technical information, and information on the network of providers and partners. It also provides real-time information on one's competition through direct interaction in the local network. This in itself can drive innovation.

Equally important to innovation within clusters is the role of those who become disaffected with the cluster's original companies and strike out on their own. These visionaries move on to innovate through specialization, or by advancing technology, process, or other competitive aspects of the cluster. Silicon Valley and its many startups provide an excellent example of this trend.

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