An examination of industry clusters
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An examination of industry clusters




Made by: VVu-2 Aleksandra Baloban

Checked by: dr. R.Korsakienė

Vilnius, 2004










Region clustering dimention and cluster types variety in Lithuania 13

Clastering level in different industry brabchesand sectors of Lithuania 14



Clusters are a nebulous concept. It covers a variety of business structures and is used for

different purposes. Industry cluster policies are a current trend in economic development planning. These policies represent a major shift from traditional economic development programs, which focused on individual firm oriented policies. Cluster policies, on the other hand, are based on the recognition that firms and industries are inter-related in both direct and indirect ways.

Given the interest in innovative economic development strategies by both the public and private sectors, industry cluster policies have received significant attention in current literature. However, there is considerable debate regarding the actual definition of an industry cluster, how to identify an industry cluster, or what factors drive the development of an industry cluster. The literature focuses on the different definitions of industry clusters, and much of the literature is case studies illustrating different types of clusters. A second focus in the literature is the identification of industry clusters. Given the many variations in the definitions of clusters, it is not surprising that there are several different approaches to identifying clusters. A third common theme in the literature is cluster policy, and how these policies can be incorporated into economic development programs.

This paper summarize the key literature on the issues mentioned above, focusing specifically on the definition and identification of industry clusters, the factors driving cluster development, and cluster policy in the United States. The last section describes attempts to evaluate industry clusters, as well as criticisms of clusters as an economic development tool. While there is ample literature on industry clusters in Europe, where cluster policy is more advanced, this literature review focuses primarily on the use of the concept in the United States.


Clusters are a nebulous concept. It covers a variety of business structures and is used for

different purposes. Therefore, there are numerous different definitions but almost all of them

share the idea of proximity, networking and specialisation.

The very basic definition of an industry cluster is “geographical concentrations of industries that gain performance advantages through co-location (Doeringer and Terkla 1995, pg.225).” This definition of clusters is similar to that of agglomeration economies, but in fact, it is within industry clusters that agglomeration economies are likely to be observed. Beyond the basic definition, however, there is little consensus on how to define an industry cluster.

Michael Porter popularized the concept of industry clusters in his book The Competitive Advantage of Nations (1990). Porter developed the “Diamond of Advantage,” which is four factors he determined create a competitive advantage for firms. The four corners of the diamond include factor conditions, demand conditions, industry strategy/rivalry, and related and supporting industries.

Michael Porter’s

“Diamond of Advantage”

Porter used this diamond to determine which firms and industries had competitive advantages, and his emphasis of the importance of related and supporting industries encouraged interest in clusters. While his original thesis was applied to nations as a whole, Porter recognized that the majority of economic activity takes place at the regional level. Thus, his ideas are commonly applied to cities and regions.

The bulk of Porter’s thesis deals with the competitive advantages of clustering for industries. This aspect of his work is discussed in the Section III. Porter provides a simple definition of two types of clusters: vertical clusters, and horizontal clusters.

Vertical clusters are made up of industries that are linked through buyer-seller relationships. Horizontal clusters include industries which might share a common market for the end products, use a common technology or labor force skills, or require similar natural resources (Porter 1990).

On the common, the theory of industry clusters of Porter sound like this:

“Clusters are geographically close groups of interconnected companies and associated institutions in a particular field, linked by common technologies and skills. They normally exist within a geographic
area where ease of communication, logistics and personal interaction is possible. Clusters are normally concentrated in regions and sometimes in a single town”.

In FINAL REPORT OF THE EXPERT GROUP ON ENTERPRISE CLUSTERS AND NETWORKS of European commission all expert group members had come to common definition of clusters. They

proposed to use as a working tool for this project the definition of Porter, to which they added

few finer points:

“Clusters are groups of independent companies and associated institutions that are:

_ Collaborating and competing;

_ Geographically concentrated in one or several regions, even though the

cluster may have global extensions;

_ Specialised in a particular field, linked by common technologies and skills;

_ Either science-based or traditional;

_ Clusters can be either institutionalised (they have a proper cluster manager)

or non-institutionalised.

The cluster has a positive influence on:

_ Innovation and competitiveness;

_ Skill formation and information;

_ Growth and long-term business dynamics”.

Jacobs and DeMan (1996) and Rosenfeld (1996,1997) present more in-depth discussions of the different definitions of industry clusters, although these authors also use the definitions of vertical and horizontal clusters as the basis for their definitions. Jacobs and DeMan (1996, pg.425) argue that “there is not one correct definition of the cluster concept…different dimensions are of interest.” They expand from the definitions of the vertical and horizontal industry clusters to identify key dimensions that may be used to define clusters. These include the geographic or spatial clustering of economic activity, horizontal and vertical relationships between industry sectors, use of common technology, the presence of a central actor (i.e., a large firm, research center, etc.), and the quality of the firm network, or firm cooperation (Jacobs and DeMan 1996).

In addition to vertical and horizontal relationships, Rosenfeld (1997) includes criteria for defining a cluster, including the size of the cluster, the economic or strategic importance of the cluster, the range of products produced or services used, and the use of common inputs. He does not encourage defining clusters exclusively by the size of the constituent industries or the scale of employment, pointing out that many effective clusters are located in small inter-related industries which do not necessarily have pronounced employment concentrations. According to Rosenfeld (1997 pg.10), an industry cluster is: “a geographically bounded concentration of similar, related or complementary businesses, with active channels for business transactions, communications and dialogue, that share specialized infrastructure, labor markets and services, and that are faced with common opportunities and threats.” Rosenfeld’s definition clearly emphasizes the importance he places on the role of social interaction and firm cooperation in determining the dynamic nature of a cluster.

As evidenced in the literature cited above, there are several common themes in the definition of an industry cluster. First, it is generally agreed that clusters are a dynamic phenomenon.

Secondly, most of the definitions of industry clusters reference the geographic scope of the cluster, and the importance of spatial proximity. A third common theme in the literature is the importance of looking beyond individual industries and recognizing that individual firms are part of a much larger industrial system. Lastly, the role of social infrastructure in defining industry clusters is a theme prevalent in the literature.


The varying definitions of industry clusters help explain the differing arguments regarding the methodology to identify clusters. One of the common approaches to identifying clusters is based on quantitative techniques, including location quotients and input-output (I-O) analyses (Rosenfeld 1997). These tools help identify relative concentrations of industries in the region, as well as identify the buyer-seller linkages in different industry sectors. Michael Porter relied heavily on this type of analysis to form the basis of his international study of industry clusters. I-O analyses and other quantitative tools were also the basis for identifying clusters in several other studies, including the Twin Cities Industry Cluster Project (State and Local Policy Program 1998) and UNC-Chapel Hill’s study of North Carolina’s industries (Bergman, Feser and Sweeney 1996).

The quantitative approach towards identifying industry clusters is generally regarded as a critical component of a cluster analysis. This type of analysis will provide an initial tool for identifying potential clusters and will indicate the relative presence of different industries in the local region. An I-O analysis is especially useful in the analysis of a vertically-integrated cluster, when the buyer-seller linkages are more obvious. However, the quantitative analysis does not address whether relationships really exist between the individual firms, and it does not account for other factors beyond the product-market relationships, such as industry collaboration and information flow (Doeringer and Terkla 1995, Jacobs and DeMan 1996, Rosenfeld 1996,1997). “Although inter-industry transactions incorporated within production channels can sometimes be detected in
input-output tables, neither the character or relationships among firms nor the benefits of clustering can be discerned in this way (Doeringer and Terkla 1995, pg.228).”

There is a general consensus in the literature that in order to truly identify industry clusters it is necessary to conduct a qualitative analysis in addition to the quantitative analysis. Surveys and interviews of key industry representatives will help expand an understanding of the buyer-supplier relationships, as well as further identifying commonalties between industries (i.e., workforce or infrastructure needs, or technologies used). The use of the qualitative analysis will both confirm the findings of the quantitative analysis, as well as help identify potential industry clusters that may have been overlooked by the conventional data analysis (Doeringer and Terkla 1995, Jacobs and DeMan 1996, Sternberg 1991, State and Local Policy Program 1998).

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