Business cluster
A business cluster is a geographic concentration of interconnected business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

es, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. In urban studies, the term agglomeration
In the study of human settlements, an urban agglomeration is an extended city or town area comprising the built-up area of a central place and any suburbs linked by continuous urban area. In France, INSEE the French Statistical Institute, translate it as "Unité urbaine" which means continuous...

 is used. Clusters are also very important aspects of strategic management
Strategic management
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...



This term business cluster, also known as an industry cluster, competitive cluster, or Porterian cluster, was introduced and popularized by Michael Porter
Michael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...

 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
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 in Geography and Trade (1991). Cluster development
Cluster development
Cluster development is the economic development of business clusters. The cluster concept has rapidly attracted attention from governments, consultants, and academics since it was first proposed in 1990 by Michael Porter...

 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
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...


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, comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

, 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
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...

, is more important.

Put in another way, a business cluster is a geographical location where enough resources and competences amass and reach a critical threshold, giving it a key position in a given economic branch of activity, and with a decisive sustainable competitive advantage
Sustainable competitive advantage
Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment....

over other places, or even a world supremacy in that field (i.e. Silicon Valley and Hollywood).

By Development

Following development of the concept of interorganizational networks in Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

 and practical development of clusters in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

; many perceive there to be four methods by which a cluster can be identified:
  • Geographical cluster - as stated above
  • Sectoral clusters (a cluster of businesses operating together from within the same commercial sector e.g. marine (south east England
    South East England
    South East England is one of the nine official regions of England, designated in 1994 and adopted for statistical purposes in 1999. It consists of Berkshire, Buckinghamshire, East Sussex, Hampshire, Isle of Wight, Kent, Oxfordshire, Surrey and West Sussex...

    ; 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...

     and now Solent
    The Solent is a strait separating the Isle of Wight from the mainland of England.The Solent is a major shipping route for passengers, freight and military vessels. It is an important recreational area for water sports, particularly yachting, hosting the Cowes Week sailing event annually...

    ) and photonics (Aston Science Park
    Aston Science Park
    Aston Science Park is a science park located in Birmingham City Centre, United Kingdom. It is located alongside the A4540 road, on a site adjacent to Aston University and the Eastside area...

    , Birmingham
    Birmingham is a city and metropolitan borough in the West Midlands of England. It is the most populous British city outside the capital London, with a population of 1,036,900 , and lies at the heart of the West Midlands conurbation, the second most populous urban area in the United Kingdom with a...

  • Horizontal cluster (interconnections between businesses at a sharing of resources level e.g. knowledge management)
  • Vertical cluster (i.e. a supply chain
    Supply chain
    A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...


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 Knowledge

Several types of business clusters can, based on different kinds of knowledge, are recognized:
  • High-tech clusters - These clusters are high technology-oriented, well adapted to the knowledge economy
    Knowledge economy
    The knowledge economy is a term that refers either to an economy of knowledge focused on the production and management of knowledge in the frame of economic constraints, or to a knowledge-based economy. In the second meaning, more frequently used, it refers to the use of knowledge technologies to...

    , and typically have as a core renowned universities and research centers like Silicon Valley
    Silicon Valley
    Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...

  • Historic know-how-based clusters - These are based on more traditional activities that maintain their advantage in know-how over the years, and for some of them, over the centuries. They are often industry specific. For example: London as financial center.
  • 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, Spain, Chile or 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) and Argentina (e.g. Cordoba). 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.


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
The North American Industry Classification System or NAICS is used by business and government to classify business establishments according to type of economic activity in Canada, Mexico and the United States...

 or the increasingly obsolete SIC codes. 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
    Harvard Business School is the graduate business school of Harvard University in Boston, Massachusetts, United States and is widely recognized as one of the top business schools in the world. The school offers the world's largest full-time MBA program, doctoral programs, and many executive...

  • The European Cluster Observatory (for Europe), managed by the Center for Strategy and Competitiveness at the Stockholm School of Economics
    Stockholm School of Economics
    The Stockholm School of Economics or Handelshögskolan i Stockholm is one of Northern Europe's leading business schools. Its Masters in Management program is ranked no. 2 in Northern Europe and no. 13 in Europe by the Financial Times...

An alternative to clusters, reflecting the distributed nature of business operations in the wake of globalization is Hubs and Nodes
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 Silicon Valley case

In the mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...

 in California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

. 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
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

 firms relocating to or expanding their Valley offices. This in turn encouraged more entrepreneurs to locate their startups there.

In other words venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

ists (sellers of finance) and dot-com startups (buyers of finance) "clustered" in and around a geographical area.

The cluster effect
Cluster effect
The cluster effect is the effect of buyers and sellers of a particular good or service congregating in a certain place and hence inducing other buyers and sellers to relocate there as well.- The Silicon Valley case :...

 in the capital market also led to a cluster effect
Cluster effect
The cluster effect is the effect of buyers and sellers of a particular good or service congregating in a certain place and hence inducing other buyers and sellers to relocate there as well.- The Silicon Valley case :...

 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
Seoul , officially the Seoul Special City, is the capital and largest metropolis of South Korea. A megacity with a population of over 10 million, it is the largest city proper in the OECD developed world...

 Metropolitan Government in South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

 developed the Digital Media City
Digital Media City
Digital Media City is the first high-tech complex in the world for digital technologies, housing ubiquitous networked offices, apartments, exhibitions, conference halls and cultural centers in Seoul, South Korea. It was constructed in 2002 across and approximately 1.7 times the size of the Canary...

 (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
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...

The term broadband refers to a telecommunications signal or device of greater bandwidth, in some sense, than another standard or usual signal or device . Different criteria for "broad" have been applied in different contexts and at different times...

 and wireless networks to the area as well as needed infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...

. The Seoul government even provided tax incentive
Tax incentive
A tax incentive is an aspect of the tax code designed to incentivize, or encourage, a certain type of behavior. This may be accomplished through means including tax holidays, tax deductions, or tax abatements...

s 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
Metropolitan economy
A metropolitan economy refers to the cohesive, naturally evolving concentration of industries, commerce, markets, firms, housing, human capital, infrastructure and other economic elements that are comprised in a particular metropolitan area...

 and South Korea, the Miracle on the Han River
Miracle on the Han River
Miracle on the Han River refers to South Korea's highly accelerated export-fueled economic growth, including rapid industrialization, technological achievement, education boom, exponential rise in living standards, rapid urbanization, skyscraper boom, modernization, successful hosting of the 1988...

, as a storied nation transitioning from a manufacturing to an innovation economy.

Cluster Effect

The cluster effect
Cluster effect
The cluster effect is the effect of buyers and sellers of a particular good or service congregating in a certain place and hence inducing other buyers and sellers to relocate there as well.- The Silicon Valley case :...

 can be more easily perceived in any urban agglomeration, as most kinds of commercial establishments will tend to spontaneously group themselves by category. Shoe
A shoe is an item of footwear intended to protect and comfort the human foot while doing various activities. Shoes are also used as an item of decoration. The design of shoes has varied enormously through time and from culture to culture, with appearance originally being tied to function...

 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
Network effect
In economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.The classic example is the telephone...

. It is similar in the sense that the price-independent preferences of both the market and its participants are based on each ones 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 is the way complex systems and patterns arise out of a multiplicity of relatively simple interactions. Emergence is central to the theories of integrative levels and of complex systems....


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
Bengaluru , formerly called Bengaluru is the capital of the Indian state of Karnataka. Bangalore is nicknamed the Garden City and was once called a pensioner's paradise. Located on the Deccan Plateau in the south-eastern part of Karnataka, Bangalore is India's third most populous city and...

, India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

 has utilized the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, Las Vegas
Las Vegas metropolitan area
The Las Vegas Valley is the heart of the Las Vegas-Paradise, NV MSA also known as the Las Vegas–Paradise–Henderson MSA which includes all of Clark County, Nevada, and is a metropolitan area in the southern part of the U.S. state of Nevada. The Valley is defined by the Las Vegas Valley landform, a ...

 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
Created in 2006, Cap Digital is a Business cluster |Pôle de compétitivité ]]), a French public agency dedicated to the development of the Innovative Economy in the Île-de-France region, and in France...

. 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".

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, tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es, competition and politics
Politics is a process by which groups of people make collective decisions. The term is generally applied to the art or science of running governmental or state affairs, including behavior within civil governments, but also applies to institutions, fields, and special interest groups such as the...

. 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
Austin, Texas
Austin is the capital city of the U.S. state of :Texas and the seat of Travis County. Located in Central Texas on the eastern edge of the American Southwest, it is the fourth-largest city in Texas and the 14th most populous city in the United States. It was the third-fastest-growing large city in...

 and Raleigh-Durham, North Carolina even though they would have liked to stay in the valley.

See also

  • Economies of agglomeration
    Economies of agglomeration
    The term economies of agglomeration is used in urban economics to describe the benefits that firms obtain when locating near each other . This concept relates to the idea of economies of scale and network effects...

  • Entrepreneurial ecosystem
    Entrepreneurial ecosystem
    An entrepreneurial ecosystem, in a broader sense refers to the environment affecting the local/regional entrepreneurship.But it can also be a group of companies, including start-ups, and one or more coordination entities, which share similar goals and decide to form a network or organization in...

  • Economic restructuring
    Economic restructuring
    Economic restructuring refers to the phenomenon of Western urban areas shifting from a manufacturing to a service sector economic base. This transformation has affected demographics including income distribution, employment, and social hierarchy; institutional arrangements including the growth of...

  • Metropolitan economy
    Metropolitan economy
    A metropolitan economy refers to the cohesive, naturally evolving concentration of industries, commerce, markets, firms, housing, human capital, infrastructure and other economic elements that are comprised in a particular metropolitan area...

External links

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