Cluster effect
Encyclopedia
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.
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 capital
ists (sellers of finance) and dot-com startups (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.
shops (or clothes shops), for instance, are rarely isolated from their competition. Instead, it is much more common to find whole streets of them, even though there is hardly a reason for the grouping in that specific region.
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
.
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 used the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, the city of Las Vegas
has benefitted through the cluster effect of the gambling industry.
The cluster effect does not continue forever though. Its relative influence is also dictated by other market factors such as expected revenue, strength of demand, tax
es, 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, even though they would have liked to stay in the valley. Much work has been done on attempting to identify economic clusters. Statistical methods have been used with a great deal of success. But the underlying problem often faced is the semantics involved in the subject, with many different authors citing numerous characteristics of a cluster.
The Silicon Valley case
For example in the mid- to late 1990s, several successful computer technology related companies emerged in Silicon ValleySilicon 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
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 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.
Generalization
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. ShoeShoe
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 clothes shops), for instance, are rarely isolated from their competition. Instead, it is much more common to find whole streets of them, even though there is hardly a reason for the grouping in that specific region.
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 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
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
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
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 used the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, the city of Las Vegas
Las Vegas, Nevada
Las Vegas is the most populous city in the U.S. state of Nevada and is also the county seat of Clark County, Nevada. Las Vegas is an internationally renowned major resort city for gambling, shopping, and fine dining. The city bills itself as The Entertainment Capital of the World, and is famous...
has benefitted through the cluster effect of the gambling industry.
The cluster effect does not continue forever though. Its relative influence is also dictated by other market factors such as expected revenue, strength of demand, tax
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
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. Much work has been done on attempting to identify economic clusters. Statistical methods have been used with a great deal of success. But the underlying problem often faced is the semantics involved in the subject, with many different authors citing numerous characteristics of a cluster.
Other examples of the cluster effect
- U.S. movie production in Hollywood
- The UK post-production industry in London's SohoSohoSoho is an area of the City of Westminster and part of the West End of London. Long established as an entertainment district, for much of the 20th century Soho had a reputation for sex shops as well as night life and film industry. Since the early 1980s, the area has undergone considerable...
district - The USUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
automobileAutomobileAn automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
production plants concentration in Detroit - The ParisParisParis is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
fashion's industry