Economic Clusters

October 2022 | Dr Jason Frost

Are economic clusters the answer to good green growth?

The benefits and drawbacks of economic clusters by Dr Jason Frost

Internationally, clustering is a tried and tested method, with examples of success in countries such as Singapore, Taiwan, Israel, as well as regions such as Hamburg, or Silicon Valley and even Hollywood.

A recent report (2021) by the Confederation of British Industry has identified at least 50 potential economic cluster opportunities in the UK, with some already operating in key growth sectors e.g. low carbon transition.

The cluster model of economic development is an approach which is gaining increasing interest as a policy-response by local and national government.

For all of us engaged in place-making and economic regeneration, this is a development opportunity that we cannot, indeed must not, ignore.

What is a ‘cluster’?

Clusters are geographically located concentrations of interconnected companies and institutions in a particular field; this could be in a specific industry, e.g. hydrogen, or across a broader sector, e.g. low carbon industries. Contained within a cluster are an array of linked industries and other elements important to fostering a competitive environment. These include, for example, sector specific supply-line inputs such as component manufacturers, machinery, services, and specialised infrastructure providers. The Ruhr and the Champaign region are both high-profile examples of economic clusters.

Why establish a ‘cluster’?

The main driver for the development of a cluster is the potential to stretch and shape the spaces in which the participating activities might prosper. Through the building of new alliances across the ‘triple helix’ (industry, academy and government), participants can operationalise new partnership agreements and collaborations. They are able to reshuffle and reorganise the economic spaces of engagement in order to scale-up their activities.

However, much of the current economic development literature points to the importance of understanding clustering as being more than just another vehicle for industrial development and/or economic regeneration more broadly. It is a medium through which to build a new socio-economic eco-system. When building a cluster, it is not enough to consider just the agglomeration of existing activities. To yield the genuinely transformational benefits of a cluster, it is necessary to think about the potential impacts (positive and negative) on the people who live and work in the location. It’s more than just jobs; it’s about being part of a liveable area – a place.

What are the potential benefits of a ‘cluster’?

  • Education and Training: 

A key barrier to growth in many sectors is the lack of skills in the locally available workforce. Through the inclusion of education and training providers as a foundational partner within the cluster, there is the potential for better integration and alignment of curriculum (or specific training modules) which meet the required needs of the sector.

  • Deployment:They provide a deployment platform for companies seeking to trial and commercialise their technologies at a municipal or regional scale. Research has shown that this can have greater diffusion of innovation through the spillover effect. Studies suggest that the share of firms introducing innovations within each area is always statistically significant and positively relayed to the probability of adopting these innovations. The higher the share of those engaged in this activity, the higher the probability for each firm of adopting these approaches, e.g. use of hydrogen vehicles.
  • International outreach:

Through the membership of and engagement with other clusters (and associations e.g. the European Cluster Collaboration Platform), participants gain access to an exchange of knowledge, can find partners for local companies, and develop linkages. It provides a gateway for established and emerging companies to gain exposure to potential investors, new markets, influential networks and technological best practice.

What are the potential draw-backs to clusters?

  • Risk of developing an economic monoculture:

Inevitably, companies working in the same sector will have the most to share in terms of knowledge, technological best practice and transferable skill sets. However, there is a danger that the culture of innovation can become stifled as cluster participants become better established and less inclined to risk-taking. In a similar vein, the cluster’s spillover impact in the wider local economy leads to dependence on the continued economic success of the cluster, further deterring innovation and the promotion of greater economic diversity.

  • Obsolescence:The decline of a cluster’s willingness to accommodate innovation and breakthrough technologies in favour of a tried and trusted approach can lead to the simultaneous neutralisation of the advantages associated with this model. A cluster’s assets—market information, employees’ skills, scientific and technical expertise, and supplier bases—may all become irrelevant.
  • Collapse of Internal Dynamism:

Over consolidation, mutual understandings, cartels, and other restraints to competition undermine local rivalry. Regulatory inflexibility or the introduction of restrictive rules slows productivity improvement. The quality of institutions such as training providers and universities can stagnate.

Both nationally and internationally, traditional growth orthodoxies are becoming increasingly challenged by the demands for greater commitments to the environmental, social and governance (ESG) agenda.

Leaving aside the many other examples of economic clustering, as a vehicle for aiding the delivery of the green revolution, as well as facilitating a ‘just transition,’ I believe that this model represents one of the most interesting and exciting development and place-making opportunities currently in operation.

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