Competitive cluster

Business cluster

A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally.

This term industry cluster, also known as a business cluster, competitive cluster, or Porterian cluster, was introduced and the term cluster popularized by Michael Porter in The Competitive Advantage of Nations (1990). The importance of economic geography, or more correctly geographical economics, was also brought to attention by Paul Krugman in Geography and Trade (1991). Cluster development has since become a focus for many government programs. The underlying concept, which economists have referred to has agglomeration economies, dates back to 1890, and the work of Alfred Marshall.

Following development of the concept of interorganizational networks in Germany and practical development of clusters in the UK; many perceive there to be four methods by which a cluster can be identified:

  • The geographical cluster - as stated above
  • Sectoral clusters (a cluster of businesses operating together from within the same commercial sector e.g. marine (south east England; Cowes and now Solent) and photonics (Aston, Birmingham))
  • Horizontal cluster (interconnections between businesses at a sharing of resources level e.g. knowledge management)
  • Vertical cluster (i.e. a supply chain cluster)

It is also expected - particularly in the German model of organizational networks - that interconnected businesses must interact and have firm actions within at least two separate levels of the organizations concerned.


Michael Porter claims that clusters have the potential to affect competition in three ways:

  • by increasing the productivity of the companies in the cluster,
  • by driving innovation in the field
  • by stimulating new businesses in the field


Generally two types of business clusters, based on different kinds of knowledge, are recognized:

  • Techno clusters - These clusters are high technology-oriented, well adapted to the knowledge economy, and typically have as a core renowned universities and research centers like Silicon Valley.
  • Historic knowhow-based clusters - These are based on more traditional activities that maintain their advantage in know-how over the years, and for some of them, over the centuries. They are often industry specific. For example: London as financial center.
  • Factor Endowment clusters - They are created because a comparative advantage they might have linked to a geographical position. For example, wine production clusters because of sunny regions surrounded by mountains, where good grapes can grow. This is like certain areas in France, Spain, Chile or California.

A business cluster is a geographical location where:


The process of identifying, defining, and describing a cluster is not standardized. Individual economic consultants and researchers develop their own methodologies. All cluster analysis relies on evaluation of local and regional employment patterns, based on SIC codes.

An alternative to clusters, reflecting the distributed nature of business operations in the wake of globalization is Hubs and Nodes.

The Silicon Valley case

There is infinite literature about this case. In the mid- to late 1990s, several successful computer technology related companies emerged in Silicon Valley 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 capitalists (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.


The cluster effect can be more easily perceived in any urban agglomeration, as most kind of commercial establishments will tend to spontaneously group themselves by category. Shoe shops (or Cloth shops), for instance, are rarely isolated from their competition. In fact, it is common to find whole streets of them.

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 ones 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 utilized the cluster effect in order to convince a number of high-tech companies to setup shop there. Similarly, the city of Las Vegas has benefited 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, taxes, 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.


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