Cluster-Based Economic Development Strategies

ARTICLE | Mar 29, 2012

Clusters are geographic concentrations of competing and collaborating firms that tend to produce innovation and higher than average wages. Cluster-based economic development strategies are interventions designed to improve a cluster’s performance by addressing the common needs of businesses within the cluster.

Local government managers and other local officials can enhance the success of clusters through interventions that cut across a number of domains, including economic development, education and training, workforce development, and infrastructure provision. This article offers a general introduction to clusters and provides examples of cluster-based economic development strategies.

Cluster is a relatively new term for the activities in which a region has developed specialized competencies that allow it to produce goods and services for sale outside the region. The cluster-based approach has influenced local, regional, state, and national economic development policy worldwide. It has also added significant value as a method of understanding regional economies, as a tool for engaging industries in collective problem solving, and as a tool for organizing service delivery across public sector departments, services, and functions. (1)

Looking at a local economy in terms of clusters has the added benefit of providing a framework for addressing the needs of existing businesses in a way that can also make the community more attractive to new businesses in similar or complementary industries. Addressing the needs of existing businesses is crucial because it is much more efficient to retain existing businesses than to recruit new ones: on a cost-per-job basis, bringing in new jobs can be as much as eight times more costly than preserving existing ones. Cluster strategies permit the integration and targeting of resources in ways that are consistent with the multiple goals of economic development programs: business recruitment, retention, expansion, and new-business creation.

What Are Clusters?
For the purposes of this discussion, clusters will be defined broadly as geographic concentrations of interrelated, competitive firms and related institutions that are of sufficient scale to generate external economies that are not found in regions lacking such concentrations. External economies are the tangible (e.g., reduced costs) and intangible (e.g., faster innovation) benefits generated either by the high relative concentration of a particular kind of economic activity in a region, or through firms’ deliberate decisions to work together to pursue advantages that they cannot achieve on their own (e.g., economies of scale, acquisition of common resources).

The concentrations that characterize clusters typically include competitive firms, cooperating suppliers, service providers, knowledge providers, and associated institutions that do business with each other and share needs for common talent, technology, and infrastructure. Interdependencies that define clusters include supply chains, core technologies, and proximity to natural resources or distribution channels. Because of the many elements that contribute to clusters, they are sometimes referred to as “economic ecosystems.”

Clusters often, but not always, develop in a region where economic activity in a specific industry, sector, or supply chain is concentrated. Examples of such clusters in the United States are the semiconductor cluster in Northern California, the automotive cluster in and around Detroit, and the furniture cluster in northeastern Mississippi. Other clusters are based on process technologies: in the Naugatuck Valley of Connecticut, for example, the largest users of plastics technology and skills are BIC, Schick, and Lego, none of which is classified as a plastics company.

The entrepreneurial process constitutes an important component of cluster growth. The number and scope of businesses in a cluster are typically influenced by the activities of entrepreneurs, who may form new companies as spin-offs or in the wake of layoffs.

Types of Clusters
There are three fundamental reasons that economic development practitioners pay attention to clusters: clusters generate wealth in a region, clusters give a region a competitive advantage, and clusters can provide the basis for cost-effective economic development strategies. In general, clusters may fall into any of the following categories:

  • Emerging (low scale; high growth)
  • Competitive (high scale; growing)
  • Mature (high scale; stable or declining)
  • Stabilizing (diversifying)
  • Strategic (based on the plans and/or needs of public sector actors rather than on current business performance)
  • Potential (pinned on hopes and dreams).

The origins of a cluster and its stage of development will shape the interests and needs of the businesses within it, and will likely determine both public sector priorities and the actions that may be appropriate to support these priorities. This does not mean that economic development practitioners should “pick winners”; rather, it means that they should know as much as possible about an industry’s position before choosing whether or how to intervene.

Cluster-Based Economic Development Strategies
When public or semipublic entities attempt to improve a region’s economic situation by influencing how companies within a cluster use public resources, work together, or do business, they are using cluster-based economic development strategies (“cluster strategies”). Clusters do not need public sector strategies in order to exist; they will exist regardless. But the right public strategies can help the businesses within a cluster become more successful and competitive. And such strategies are always more successful when they are formulated to address companies’ real competitive needs.

The following five types of cluster strategies are commonly used throughout the United States and the world: defensive, offensive, prospective, cluster-based recruitment, and pre-cluster consolidation. (It is important to note that what follows is a typology describing general types of interventions, not a list of actual interventions.)

Defensive Cluster Strategies. Defensive cluster strategies are designed to fix the defects of a region’s economic infrastructure that can affect the performance of a group of existing firms. Such strategies may include

  • Legal or regulatory reforms that make the business environment more friendly to a particular sector
  • The development of new infrastructure (such as intermodal freight facilities or agricultural-goods markets) that will give firms more efficient access to customers or suppliers
  • Changes in the licensing policies at universities that will provide easier access to new technologies or research
  • Programs to provide certain types of capital.

Such strategies typically do not require cooperation between the companies that are part of the cluster, although they are more likely to be used when companies come together to articulate their needs to public officials.

Offensive Cluster Strategies. Offensive cluster strategies are designed to enhance competitiveness by delivering value-adding services to the firms in a cluster—either directly or through investments in new regional institutions or capabilities. An example of an offensive cluster strategy is the establishment of training programs designed to provide workers for specific occupations or industries. For such strategies to work, it is usually necessary for businesses in the cluster to clearly articulate their needs. And because offensive strategies often require the consent and participation of businesses, they tend to be more successful when some type of collective organization—such as a network—is present.

Prospective Cluster Strategies. Prospective cluster strategies, sometimes referred to as “cluster engineering,” are efforts to convert important assets in the regional economic infrastructure into competitive businesses. An example might be establishing a university department or a research institute to spur the growth of technology businesses in related fields. Such efforts often evoke Dr. Frankenstein’s attempt to create a walking, talking monster: while not uniformly dangerous, these strategies are likely, like the monster, to be expensive, unruly, and, in the long term, somewhat risky.

Highly visible commitment from the business community and public sector support usually accompany such initiatives, at least at the beginning. In the longer term, private sector commitment may wither—for example, when it isn’t really in businesses’ economic interest to create competition for workers in their backyard. In other instances, however, businesses will recognize that their competitiveness will be enhanced by the presence of a new or leading-edge industry. In addition, providers of specialized services (accounting firms, real estate developers, lawyers, etc.) may be instrumental in supporting prospective cluster strategies because they recognize the need to bring in new local industries to service.

In some cases, the desire to build a new industry from scratch may facilitate other types of cooperation between the public and private sectors. This was the case in Michigan and in the Kansas City metropolitan area, where efforts have been undertaken to develop life sciences clusters. However, in both of these cases, a single wealthy patron’s philanthropic largesse was a key ingredient and catalyst.

Cluster-Based Business Recruitment Strategies. Cluster-based business recruitment strategies, which are usually led by an economic development agency, are typically marketing efforts aimed at recruiting specific firms, particularly firms with competencies that could enhance the competitive advantage of other businesses in the cluster. These strategies often involve building the local supply chain of an industry in order to keep more of the cluster’s activities within the region and expand the breadth of the cluster.

It is important to understand the distinction between cluster-based business recruitment and a targeted-industry approach to business recruitment. A cluster-based approach starts with the industries and assets that are already present in the region and asks how they can be made better; in the traditional parlance of economic development, this is a “product-improvement strategy.” A targeted-industry approach, in contrast, considers what could be done in the region and identifies strategies for inducing companies to come to the region; this is a “product-marketing strategy.”

It is often hard to tell whether cluster-based recruiting strategies originate in a real understanding of business needs or in wishful thinking and a desire to rely on traditional business recruitment as a means of economic development. However, a cluster-based approach and a targeted-industry approach can be complementary: a cluster-based approach (1) can help improve the product (the regional economic infrastructure) that will be marketed to target industries, and (2) can be used to identify target industries that will support the existing economic base.

Pre-Cluster Consolidation Strategies. Pre-cluster consolidation strategies attempt to gain the advantages associated with offensive cluster strategies by organizing cooperation among groups of firms that might not initially have the scale or prominence of a cluster. Even though there is sufficient geographic concentration in a particular industrial sector or competency, the essential linkages, institutions, or suppliers may be weak or absent.

Consolidation strategies are often deployed in cases where firms are not very aware of other related businesses in the region or of the interdependencies and possibilities for collective action. Sometimes it is more appropriate to think of these as network strategies, since they tend to bring firms together and to require their active participation.

Clusters and cluster strategies cannot be seen as the answer to every economic challenge faced by a community or region. However, they do represent a valuable tool that economic development stakeholders should have at their disposal. A cluster approach may be most useful in helping officials and practitioners to see a community’s economy in a new way—not as a collection of individual firms, but as a system in which interventions can assist companies, industries, and the entire community.


1. Mary Jo Waits, “The Added Value of the Industry Cluster Approach to Economic Analysis, Strategy Development, and Service Delivery,” Economic Development Quarterly 14, no. 1 (2000): 35–50.

Excerpted from ICMA’s IQ Report Cluster-Based Economic Development, published in 2008 and compiled by Phil Psilos, director of economic development, and Dan Broun, director of special projects, Regional Technology Strategies, Inc., of Carrboro, North Carolina. The full report also discusses in detail the nature of clusters and their importance, explains how to identify them, and provides guidance for implementing cluster strategies with an eye to equity—providing opportunities for people, places, and firms that have been historically disadvantaged or excluded from the mainstream of a region’s economy.

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