Targeting a Portfolio of Clusters

by Aaron Smith, Economics Research Associates

Since Michael Porter first introduced the idea of industry clusters almost 20 years ago, the concept has gained wide support in economic development practice as a fundamental strategy for targeted business recruitment and retention. However, much of the discourse today focuses on technical (and often academic) discussions about what constitutes a cluster, while practical methodologies for measuring clusters and effectively targeting scarce economic development resources are often lost in the discussion. In a rush to identify clusters, communities often fall into three traps:

• Too little diversification: Some communities are too highly invested in a single industry cluster, which receives all of the organizations’ resources for support. Unfortunately, this approach ties the community’s economic fortunes too closely to a single industry’s ups and downs, and leaves out other clusters that provide needed economic diversification.

• Too much diversification: Some regions focus on too many clusters at once. By not effectively targeting an appropriate mix of industries, regions cannot hope to direct services effectively to the right industries and truly support and develop the clusters.

• Undifferentiated approach: Economic development organizations sometimes treat all clusters equally and do not fully understand cluster types and what services will benefit each most.

An emerging approach to industry cluster development considers a region’s clusters in the context of a portfolio of industries. By understanding clusters in the context of their lifecycle stage and needs for growth, economic developers can overcome the traditional cluster pitfalls and build a solid foundation for their organizations’ strategic plans. Three critical steps in establishing a portfolio-based cluster strategy include identifying, selecting and targeting clusters.

Identifying clusters

The process of identifying clusters has been well covered in many publications over the past 10 years. The analysis for understanding clusters within a region traditionally focuses on two factors: the concentration of the industry within the market and the local economic conditions. Heike Mayer’s article, “Cluster Monitor,” in the Fall 2005 edition of the Economic Development Journal, provides a solid foundation of the various components and steps in evaluating market dynamics, industry concentrations, and the analytic methodologies for evaluating cluster concentrations.

The definitions of industry concentration and local economic (or market) conditions should be considered in terms of inputs and outputs of economic activity. Inputs into industry clusters provide the foundation in the economy that allows a cluster to thrive, while outputs are the resulting economic activity generated by the cluster. Instead of simply looking at economic and demographic conditions, a broader definition of inputs can describe the relative level of drivers supporting the cluster in the regional economy, or “market strength.” Likewise, a broader description of outputs describes the contribution of the cluster to the regional economy, or “market activity.”

A broader notion of market strength should focus on all of the institutional and infrastructure resources in the economy, including such things as highway infrastructure, job training programs, arts and cultural amenities, retail and live-work environments, technology penetration rates, and the cost structure of the real estate market. In addition, this analysis should describe the level of current interaction of a cluster’s firms with each other, which will indicate the likelihood that they will support a cluster program. A complete picture of the local economy is necessary to understand why an industry would choose to locate in the area and what will help that industry thrive.

An expanded definition of “market activity” as outputs that it contributes to the regional economy replaces traditional measures of concentration. To assess a cluster for focused economic development, its number of firms, concentration of employment, level of wages, long-term wage growth, occupation concentrations, new business formation, patent production, and other factors must all be considered to understand the impact the industry has on the local economy.

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