We Rise Together: The Benefits of Regional Economic Clustering

Throughout the United States, there exists significant variation in regional economic performance. These variations are known as regional clustering. Clusters, defined as groups of industries with high levels of co-location in terms of employment, have been the impetus for policy coordination between government and private sector leaders as global economic competition continues to intensify. In their working paper, “Clusters, Convergence, and Economic Performance,” Mercedes Delgado, Scott Stern, and Michael Porter provide strong evidence of cluster-driven agglomeration within industries, and show how the rise of interdependence across economic sectors has led to increased economic growth.

The idea behind clustering is simple. An industry benefits when companies within that industry and similar industries exist in close proximity to one another. Silicon Valley’s robust technology industries and New York City’s financial sector are the most well-known examples. Close proximities among clustered firms enable them to lower transaction costs and capture gains in efficiency and productivity. More importantly, clustering acts as a catalyst for the development of human capital. As firms continue to specialize, they train and attract a highly skilled labor force. This encourages the growth of specialized institutions such as educational programs, trade groups, and certification organizations, sustaining and further perpetuating competition among the labor pool in a particular industry.

One of the effects of a region having a highly skilled labor force is the enhancement of knowledge flow. This supports both internal research and development within established firms and economic activity. Researchers find that cluster-based economies generate more patents than other non-clustered economies. Moreover, specialized industry and highly skilled labor pools lead to higher employment rates, higher wages, and greater rates of investment. These benefits create a spillover effect into adjacent economies and into other industries, resulting in an overall economic stimulus.

For policymakers, this study provides support for increasing regional economic development through clustering. The authors make a strong case that the role of policy in this context is to provide the necessary infrastructure to maximize economic cluster growth. However, policies that stymie the growth of complementarities in industries across jurisdictions remain popular. Economic development incentivies designed to lure companies to move from one jurisdiction to another, for example, merely create a “zero sum” scenario for economic cluster growth. Policies seeking to increase cluster growth should be developed through collaboration between state and local governments. In addition, regional policymakers should prioritize those industries that complement pre-existing industries within the region, rather than seeking to lure industries in which the region has little strength. These economic development policies can provide incentives and programs that support industry clusters in key areas of pre-existing comparative advantage and strength.

Feature photo: cc/bagting