Industry clusters and metropolitan economic growth and equality.

AuthorMorgan, Jonathan Q.
PositionReport

Abstract

Despite the recent popularity of industry clusters, we know very little about their influence on regional economic development outcomes. This article advances what we know by examining the extent to which industry clusters are associated with higher levels of economic growth and equality in metropolitan areas. The analysis focuses on the extent to which clusters affect typical economic development outcomes such as growth in employment and per capita income. Indicators of intra-regional economic equality are also included to determine the extent to which clusters can be utilized to achieve a broader set of economic development goals like regional equity and inner city prosperity. The relationship between clusters and economic growth and equality is estimated using bivariate correlation and multiple regression analysis of data for metropolitan statistical areas (MSAs) in the U.S. The findings suggest that the contribution of industry clusters to metropolitan economic performance is not automatic and that all clusters are not created equal in terms of their ability to bring about economic development.

INTRODUCTION

This article examines the potential of industry clusters as an economic development strategy for metropolitan regions and their central cities. The cluster concept has become increasingly popular as a tool for localities and regions to use in understanding their economies and taking actions to become more competitive. According to Rosenfeld (2002), "conceptually, industry clusters have become the sine qua non (1) of economic development policy in many parts of the world" (p. 5). However, it is no new discovery that certain regions tend to specialize in particular industries. Whether it is automobile production in Detroit, software development in Silicon Valley, motion picture production and entertainment in Los Angeles, financial services in New York, or furniture manufacturing in High Point and Hickory, North Carolina, firms in certain industries display a propensity to locate in particular geographic areas. At least that much about industry clusters is obvious. What is less clear is the extent to which clusters make a tangible difference in terms of helping regions achieve desired economic development outcomes.

The beneficial effects of clusters are mostly taken for granted. Policy makers and practitioners assume that the promotion of clusters will result in improved local economic conditions. Empirical evidence demonstrating a strong link between clusters and regional economic performance has been tentative and inconclusive. Still, many jurisdictions continue to embrace and implement cluster-based policies. Given the widespread adoption of the cluster approach, it is important to document how regions can expect to benefit from the clustering phenomenon. As such, this article attempts to provide additional evidence on the association between industry clusters and measurable indicators of economic development.

The research task at hand is complicated by the fact that the industry cluster paradigm suffers from inconsistent definitions, imprecise measurement, lack of empirical testing, and an unclear grounding in theory (Doeringer and Terkla 1995; Feser 1998a; Held 1996; Martin and Sunley 2003). Though to advance what we know about cluster-based development, we must continue trying to verify the theoretical benefits that clusters portend. This article does so by examining how industry clusters contribute to regional economic performance using data on metropolitan areas in the U.S. during the period from 1990-2000. The research contributes to the literature by examining the extent to which the economic performance of metropolitan regions in the U.S. varies in relation to the degree of specialization in certain industry sectors. Additionally, the research informs both theory and policy by identifying the particular industries for which cluster-based policies might be expected to contribute to regional economic development.

Following this introduction, the article reviews the literature pertinent to understanding the relationship between industry clusters and regional economic development. Drawing from the literature and previous research, the next section sets forth the analytical framework used to predict and examine how clusters might affect specific regional economic development outcomes. After explaining the study's research design and methods, I report the results of the statistical analysis. The article ends with a brief summary of the key findings and a discussion of their implications for theory and policy.

LITERATURE REVIEW

Clusters and Competitive Advantage

Hardly a novel idea, the cluster concept has intellectual roots dating back to British economist Alfred Marshall and his writings on industrial districts in the early 1900s. (2) Contemporary scholars and analysts like Michael Porter (1990) and Stuart Rosenfeld (1997) have expanded on Marshall's work to emphasize the importance of having specialized institutions and infrastructure to support the firms in a cluster. Others writers accentuate the supply chain linkages between firms across industry sectors (Feser and Bergman 2000). The socio-institutional, policy, and supply chain linkage dimensions of clusters are important, but only when a critical mass of firms exists in the first place. In other words, having a critical mass of firms is most often a precondition for a cluster to form and develop. (3)

Therefore, in the most basic sense, an industry cluster is a critical mass or geographic agglomeration of firms within a particular industry or group of related industries. Key advantages accrue to firms simply because they are located in close proximity to each other (Porter 2000). By "clustering" firms can enjoy cost savings and efficiencies arising from economies of scale. For example, firms in a cluster can increase their profitability by doing business with nearby firms and customers, thereby reducing transaction costs. Classical agglomeration theory refers to these advantages and cost savings as external localization economies (Malizia and Feser 1999; Feser 1998a; Maki and Lichty 2000). To understand the influence of industry clusters on economic development outcomes in terms of agglomeration requires a focus on these advantages that firms in spatially localized industries enjoy.

According to agglomeration theory, when related firms are in close proximity to each other they generate a competitive advantage from cost savings, productivity gains, knowledge spillovers, and increased access to specialized inputs like labor and technology (Feser 1998b). Over the past decade, a number of quantitative studies have sought to empirically verify the extent to which geographically proximate concentrations of related firms create the kinds of economic advantages suggested by agglomeration theory. These studies vary considerably in terms of the level of geography studied; specification of dependent variables measuring economic performance; indicators of clustering/industrial agglomeration used; and inclusion of other regional factors as control variables (Barkley et al. 1999; Kim 1998). While there is some overlap, the previous quantitative empirical research on the benefits of industry clusters can be divided into studies that examine:

  1. The relative impact of localization economies, competition, and urbanization economies on firm and industry performance.

  2. How industrial structure (e.g., specialization vs. diversity; small vs. large firms) affects the performance (employment growth, innovation level, labor productivity) of individual industries within a region.

  3. How industrial agglomeration affects the performance (employment growth, income, wages) of regions as a whole.

The theoretical proposition that the clustering of economic activity in a place creates certain advantages that benefit firms and industries has been examined extensively in the literature (items one and two above). Much of the previous research on the economic development impacts of industry clusters deals with the relative importance of localization and urbanization economies and local competition in stimulating growth (e.g., Henderson 1997; Glaeser et al. 1992; Henderson et al. 1995; Barkley et al. 1999). These studies examine how industrial agglomeration affects economic performance at the level of individual industries rather than at the aggregate regional level. Localization economies are the static cost savings and dynamic knowledge spillovers that firms within a single industry enjoy as a result of being in close proximity to one another. (4) Urbanization economies are the cost savings and knowledge spillovers that come about from increases in the scale of activity in a region. With urbanization economies, the breadth and diversity of economic activity in a place are the source of the positive externalities. Thus, firms across multiple industries will benefit from urbanization as the scale of economic activity and size of a place increase. (5)

This body of work focuses on industry level growth because it attempts to determine if, and which, industry sectors perform better under conditions of specialization or economic diversity. In these studies, localization effects are captured in measures of industrial concentration or specialization and urbanization effects are measured as the level of industrial diversity within a local economy. The findings from this research are mixed. Some studies confirm the importance of localization economies in enhancing the growth and performance of spatially concentrated industries (e.g., OhUallachain and Satterthwaite 1992; Barkley et al. 1999; Henry et al. 1997; Gabe 2003). Others find that urbanization economies are most critical to industry growth providing support for the Jacobs (1969) diversity hypothesis (e.g., Glaeser et al. 1992; van Soest et al. 2002; Combes 2000). A general pattern in these empirical...

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