This article defines industry clusters and discusses the factors that can make them a successful approach to economic development.

1. When Are Industry Clusters an Appropriate Economic
Development Tool?
By Michael Stumpf, January 2006
I
ndustry clusters may be defined as groupings Silicon Valley still gets the most attention, but
of firms using similar technologies or serving clusters do not need to be high tech or exist in
similar markets, together with closely linked such tightly defined geographic areas. This is
suppliers, a local talent base, and supporting especially true in rural places. The meat pro-
institutions. Economists have noted that these cessing industry, for example, is concentrated in a
clusters tend to stimulate continuous upgrading, broad swath of the western plains, from Texas up
generate spin-offs from larger firms in the cluster, to Nebraska. This example is particularly good at
and encourage innovation and entrepreneurship. demonstrating another fact about clusters. They
The regions in which clusters can be found will can migrate. Proximity to places where large
also exhibit specialized and advanced production number of cattle are raised, improvements to
factors such as talent, capital, and infrastructure. transportation and refrigeration, and high union
wages combined to cause many meat processors to
Cluster initiatives carried on by economic
relocate from places like Iowa, Illinois, and
development organizations seek to encourage and
Wisconsin.
build upon these traits. While this has become a
popular approach to economic development, While most cluster initiatives center around
many of these initiatives are bound to fail either manufacturing, there are exceptions like "creative
because they are not appropriately organized, or in services" in Portland, Oregon or media in Santa
reality, no cluster exists on which to build a Fe, New Mexico. Rural places have similar op-
program. A cluster initiative is not an attempt to portunities for cluster development. Agricultural
create an industry grouping where nothing exists, Industries may come to mind first, but some less
but rather, it is a catalyst to improve the obvious choices include wind energy in the
competitiveness of the region and spur new Dakotas or meteorology in Oklahoma. Regardless
growth. They are most effective when applied to of the industry, the boost provided by an effective
emerging and naturally-occurring clusters. cluster initiative can prove to be a catalyst for
regional economic prosperity.
Place Dynamics
Michael Stumpf is a consultant in community planning, economic development, and
1 market analysis, based in New Berlin, Wisconsin.

2. A new industry cluster is forming around natural 3) innovation and technology;
and organic foods in Colorado, where 130 firms
4) education and training;
have a combined total of over $2.5 billion in
annual sales. The cluster program will work to 5) commercial cooperation; and
brand the region as "the center of the natural foods 6) policy action.
universe." It seeks to expand markets for state
products, encourage new business formation, and These are all issues around which there can
reduce production costs by fostering collaboration typically be some consensus, even among
among businesses. competitors.
Along with manufacturers, the cluster includes Putting theory into practice, the first thing eco-
natural foods distributors and retailers, marketing nomic developers need to do is to determine if
and legal firms catering to the industry, and there truly is a cluster in their territory. If so, does
organic produce growers. As an initiative, it dis- it extend beyond their service limits and should a
plays nearly all of the critical elements for regional effort be considered? The analysis should
success. identify the primary businesses within the cluster
along with clients, suppliers, and service pro-
viders.
The second critical factor is widespread industry
support. If industry is not an active player then
the effort is not likely to take root. In reality, most
successful cluster initiatives get their leadership
from within the industry, rather than from a
public agency.
Once it has been determined that the elements
necessary to pursue an industry cluster initiative
are in place, there is a need to develop strategic
plan. Again, this must be industry-driven.
Economic developers need to take a back seat at
this point, and realize that the effort is all about
creating a better business environment. It is not
about business attraction.
So what are the factors that contribute to a sound As an economic development tool, industry
cluster strategy? Recent analysis of cluster in- cluster initiatives are long-term programs to
itiatives has pointed to a number of shared char- develop regional competitiveness. Where
acteristics. To begin with, the initiative is not appropriate, they can have a profound impact on
viewed as an economic development plan in the local or regional economy. But they may not
itself, but as part of a broader strategy to improve be the right strategy for every place. Communities
the business climate. It is a partnership of firms, should be cautious about expending the resources
government, and academic and research institu- on cluster approaches if they do not support the
tions, usually led by a champion from the right conditions or if they are looking for different
business community. Finally, it is based on a true results. O
assessment of the current profile and competi-
tiveness of the cluster.
© 2006 Place Dynamics
Cluster initiatives are remarkably consistent in
focusing on six areas of concern:
1) research and networking;
2) cluster expansion;
Place Dynamics
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