Starting and Maintaining Clusters

The challenges of creating a cluster of companies in related technologies, both the processes and factors for influencing cluster development, are different than the requirements for maintaining the cluster, concludes "Old Economy" Inputs for "New Economy" Outcomes: Cluster Formation in the New Silicon Valleys. The paper contests cluster development is a combination of elements of both new economic theory focusing on increasing returns and old economic theory, which concentrated on comparative advantage.

In preparing their study, the authors analyzed geographic clusters of information and communication technology (ICT) firms from different parts of the world and stressed the importance of studying clusters in-the-making, not only clusters that were already established. ICT clusters were located in Ireland, Cambridge UK, Israel, Scandinavia, India and Taiwan, present-day Northern Virginia and Silicon Valley in the 1960s.

Additionally, several key factors in the formation of a successful cluster are outlined. First and foremost, entrepreneurs must move away from the established products and technologies and not try to compete directly with them, the authors say. Instead, they should create relationships with these existing industries and concentrate on complementary products and technologies to help companies establish themselves in the short-run. In the long run, these technologies and products may become substitutes and competitive alternatives.

The study also suggests that clusters must be linked with a sizable and growing demand as well as have access to a supply of key factors, such as skilled labor. Other important factors in the formation of clusters involve firm and market building (old economy ideas) and sometimes a little luck, since risk is involved.

No recipe for cluster formation exists, but understanding that a combination of new economics and old economics is imperative for success, the report states. Regularities were evident in the clusters analyzed, including an abundance of highly skilled labor, managerial labor and connection to markets. Another commonality concerns new firm formation and firm building: the growth of companies is just as important as, if not more than, the growth in the number of firms, the authors find. The significant growth of a few businesses can signal the success of the cluster to the outside.

The report offers a few public policy conclusions:

• Top-down public policy or policy aimed at jump-starting clusters is not successful. Innovative activity does not respond well to being directed or organized.
• Government, however, can play a supporting role through investment in critical areas such as education and infrastructure.
• Clusters must be open and receptive to world markets, define their own niches and be export oriented.

Written by Timothy Bresnahan (Stanford University), Alfonso Gambardella (Sant'Anna School of Advanced Studies in Italy) and Annalee Saxenian (University of California, Berkeley), the paper was presented at the 2002 DRUID Summer Conference, "Industrial Dynamics of the New and Old Economy," held in Copenhagen/Elsinore. "Old Economy" Inputs for "New Economy" Outcomes and other papers from the conference can be downloaded at: http://www.druid.dk/druidlit.html?part=conf&request=OK&choice=s02&order=author