Cluster Economics
Cluster economics is the understanding of how cities, countries, and other developed regions can essentially create a competitive advantage through the creation and development of a cluster. A cluster is essentially a geographic area, usually within a larger metropolitan region, in which businesses and other entities are grouped together and encouraged to do business in close proximity. This theory proposes that by clustering businesses and other entities, it is possible to maximize the resources of all parties involved, increase efficiency due to proximity, and encourage further economic growth.
The concept of cluster economics is not a new one, but rather an idea that has been discussed for some time. In fact, many communities and economies have benefited from the development of clusters. As an example, the Silicon Valley region of California has long been a hub for technological companies. By clustering together and cross-sharing resources, ideas, and personnel, this region was able to out-perform its peers in terms of innovation, growth, and success.
At its core, cluster economics is based on the concept of economies of scale. This statement is essentially an understanding that when any given resource is spread out, it is usually less efficient than when it is concentrated. In an economic sense, this means when businesses are geographically grouped together, they are able to save on costs due to the fact that they are able to provide one another with services and materials more efficiently.
Additionally, cluster economics can be beneficial to businesses in terms of cost savings and efficiency due to the ability to attract the best talent and resources to the area. By clustering together, businesses can draw from the local talent base and are able to find the best candidates faster and cheaper than if they were to search for them outside of the defined area. In addition, businesses can also benefit from technological advances, shared resources, and collaboration that are all possible due to the synergy of the cluster’s constituents.
Cluster economics is not without its downsides, however. Many cities and regions that have pursued this strategy have become extremely dependent on their clusters, to the point where if one of their key business entities left the area, it could cripple their economy. Additionally, there are often economic, racial, and social divides that can occur as a result of clustering. Finally, clustering businesses can also limit competition, which can be seen as a negative.
Despite the drawbacks, cluster economics has become increasingly popular as countries, states, and cities seek to attract businesses, retain talent, and maximize their resources. By understanding how clusters work, a region can leverage its existing businesses, resources, and talent to build a competitive advantage. This can lead to greater efficiency, innovation, growth, and greater wealth, all of which can be beneficial not only to businesses, but to the region as a whole.
