Are Clusters or cluster initiatives really adding any tangible value to firms? Are they obsolete? Maybe not yet, but I believe if the present policy tools and institutional frameworks are not reformed they may very well soon become so. In the following blog I would like to focus on three areas that have not been given enough importance by policy makers: focus beyond geographies, new clusters and cluster performance.

‘Clusters are geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated organisations (such as universities, standard agencies, trade associations) in a particular field linked by commonalities and complementarities. There is competition as well as cooperation.’ This is how Michael Porter defined clusters in the 80’s making them fashionable.

Others talked about them long before Prof. Porter. For example Marshall in 1920’s defined clusters as a concentration of a large number of similar businesses in a locality. The geographical aspect hasn’t really changed until now. Guiliani (2005) defines clusters as a ’geographical agglomeration of firms operating in the same industry. A lot has been said about how this agglomeration impacts economic growth. Nonetheless subscribing to Martin and Sunley’s critique of clusters (2003); I would argue there exists no direct causality.

Today however in practice, focus is more on innovation and for the same reasons on knowledge intensive industries in the policy making and academic circles. Clusters should, it is argued, help strengthen the Research and Innovation System of countries and regions (European Commission’s project Innova for example).  The fact remains however, that in the age where globalisation and technology has virtually made spatial concentration irrelevant, policy makers are still clinging to the cluster tune in its old form. I would argue that policy makers have to set different priorities in order to benefit their regions or countries more; enabling firms that actually drive innovation, appropriate value from these programs in terms of real radical or disruptive ideas. There are three main focus areas which are presently not given ample importance in the present discussion and action on clusters in the policy circles:

  1. Forget geographies- think bigger!
  2. Tracking new clusters is as important as encouraging old ones!
  3. What about cluster performance?

In the following, I would like to elaborate on the above.

1. Forget geographies- think bigger!

In a cluster, there exist subclusters prior to any institutional allignment based on the relationships intrinsic to the value chain. A subcluster that is a network of suppliers, customers, research organisations, media agencies and sometimes even competitors. The interconnections are based on the strategic intent, value expectations determined by complementarities, knowledge, power, size and position on the value chain; as well as trust. Trust in fact lubricates any network, reducing transaction costs. Countries that lack governance and institutional frameworks; family conglomerates with interests in various industries try to compensate for the same. Trust takes time to develop. Especially in terms of innovation that lies to the core of many firms; companies are not usually ready to open their doors easily. Hence, cluster institutional frameworks should act (and hopefully they also act) to connect these ’trust agglomerates’ or subclusters inside a cluster in a region.

Networking, matchmaking sessions or research seminars should at least in principle increase the probability for firms outside one’s subcluster to connect. We know however from social network theory that networks where there exist no structural holes (where if A knows B and also all nodes B knows are networks of strong ties), enhance the qualitative aspect of interconnectedness and frequency of contact in these networks and you increase the so called density of ties. In such networks, cognitive distance fades away and potential for exploratory or radical innovation is substantially lower as compared to that of incremental innovation (which is higher). That implies in fact that in any cluster the potential for radical innovation is limited and should further reduce with time as well as activities performed by cluster managers. Research also confirms that substantial radical ideas are produced on the boundaries of the industries rather than inside industries themselves.

This means focus should be rather laid on connecting what I call spatially and facultively distant clusters (firms in those clusters!). Policy should enable institutional frameworks enabling information sharing on not only geographically distant clusters and their firms of the same industry (Cluster of Clusters- a spatial Mega cluster); but also in faculty distance (Cluster of Clusters- an inter industry Mega cluster). We need to look at the cutting edge industries that lie on the fuzzy cross roads of different industries and build large ‘knowledge clusters’  transgressing different geographies and industries. That’s where in practice most of the radical innovation is happening anyway. This requires considerable political and institutional capital as local interests always tend to converge in building ‘local innovation engines’. It is archaic for companies today not to embrace collaboration as Brahmanical ivory towers of innovation are already history.

2. Tracking new clusters is as important as encouraging old ones!

In defining clusters, we talk of economic agglomeration. Usually for designing policy tools to enable economic growth; the importance of employment data is overplayed. What about capital intensive industries or creative industries? An animation studio might employ a handful of people but may require a billion dollars of investment. Spin offs, divestments by large or small corporations or investment flows usually set the scene to establish a value network.

The pace of innovation is significant as the base is low and the network is not ‘set’.  It is usually the start of an era of a creative destruction and it is also the time when the firms in such a nascent network require most of the assistance- distribution partners, knowledge partners, development partners- partners of all kinds. However, they don’t usually get assistance as the cluster institutional frameworks fail to track or recognise such clusters at a very early stage.

We need to establish policy tools and evolve present frameworks in order to enable the same.

3. What about cluster performance?

Do we really measure performance of a cluster in a way that acts as a feedback to the policy tools increasing innovation productivity? How many radical innovations could be attributed to the cluster framework? How many incremental innovations could be attributed to the same? What constitutes performance of a cluster manager? How do the activities performed by a cluster manager link directly to the policy goals (hopefully they do!) of increased innovation output?

We talk of regions in Europe whose innovation output is high. Well, innovation output was high in these regions probably even before they were labelled as ‘clusters’. In practice, companies search partners to collaborate -eventually hoping to innovate. Capability information arbitrage is necessary but does not need an elaborate institutional mechanism (and investment) in this age of digital connectivity.

It is argued that the investors invest in regions that drive innovation and hence one needs to assess the innovation productivity of a region. I believe investors primarily invest in opportunities or companies with specific technological or market capabilities. Even if the argument is true, we don’t observe any comparable and credible innovation capability assessment or innovation performance assessment performed at a regional/sectoral level that might be of interest to potential investors.

We need an inside out perspective on expectations of individual firms (potential firms and firms that already exist in the cluster)  to define the innovation agenda set by clusters but a perspective that’s democratic in nature. If we stake political capital in getting perspectives from firms, we might end up asking only the large and powerful ones. Essentially those who have failed radical innovation almost for a decade and not those who are the torchbearers of Schumpeter- the SME’s of today!

Are clusters obsolete? – probably no but in their present form they will be!

About the author

Gunjan Bhardwaj is senior editor and a member of the review team at Innovation Management. Gunjan is presently with the Boston Consulting Group and just prior to this he was the leader of the Global Business Performance Think-tank of Ernst&Young. Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences. Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. The views and ideas expressed by Gunjan on are strictly personal and have no bearing on BCG.