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A Governor's Guide to Cluster-Based Economic Development

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Founded in 1908, the National Governors Association (NGA) is the collective voice of the nation’s governors and one
of Washington, D.C.’s most respected public policy organizations. Its members are the governors of the 50 states, three
territories and two commonwealths. NGA provides governors and their senior staff members with services that range from
representing states on Capitol Hill and before the Administration on key federal issues to developing and implementing
innovative solutions to public policy challenges through the NGA Center for Best Practices. For more information, visit
www.nga.org.

The Council on Competitiveness is a nonpartisan, nongovernmental action think tank located in Washington D.C.
The mission of the Council is to set an action agenda to drive U.S. competitiveness, productivity and leadership in world
markets to raise the standard of living for all Americans. The Council is the only group of corporate CEOs, university
presidents and labor leaders committed to the future prosperity of all Americans and enhanced U.S. competitiveness in the
global economy through the creation of high-value economic activity in the United States. For more information, visit
www.compete.org.
 Cluster-Based Strategies for Growing State Economies

Foreword
The National Governors Association’s Innovation America initiative focuses on strengthening our competitive position in
the global economy by improving our capacity to innovate. The goal is to give governors the tools they need to encour-
age entrepreneurship, improve math and science education, better align post-secondary education systems with local eco-
nomic growth, and develop regional innovation strategies.
To guide the Innovation America initiative, we have assembled a bipartisan task force of governors and members of the
academic and business communities. Working with the NGA Center for Best Practices, the task force is developing innova-
tion-based education and economic strategies. Through a variety of forums and publications we will collect and share best
practice information to ensure every state — and the nation — is equipped to excel in the global economy.

Governor Janet Napolitano, Arizona Governor Tim Pawlenty, Minnesota

Co-Chair, Innovation America Task Force Co-Chair, Innovation America Task Force

Innovation America Task Force

Governors: Business and Academic Leaders:
Gov. Janet Napolitano, Arizona — Co-Chair Dr. Craig R. Barrett, Chairman of the Board, Intel Corporation
Gov. Tim Pawlenty, Minnesota — Co-Chair Dr. G. Wayne Clough, President, Georgia Institute of Technology
Gov. Kathleen Sebelius, Kansas Dr. Michael M. Crow, President, Arizona State University
Gov. Matt Blunt, Missouri Jamie Dimon, CEO, JPMorganChase
Gov. Edward G. Rendell, Pennsylvania Charles O. Holliday, Jr., Chairman and CEO, DuPont
Gov. Jon Huntsman, Jr., Utah Dr. Shirley Ann Jackson, President, Rensselaer Polytechnic Institute
Dr. Judith A. Ramaley, President, Winona State University
Dr. Mary Spangler, Chancellor, Oakland Community College
John Thompson, Chairman of the Board and CEO, Symantec
Kevin Turner, COO, Microsoft
Margaret C. Whitman, President and CEO, eBay

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 Cluster-Based Strategies for Growing State Economies

Acknowledgements
The author of this guide is Dr. Stuart Rosenfeld, the president of Regional Technology Strategies, Inc., a 501 (c) 3 non-profit corporation in
Carrboro, North Carolina. The co-editors are Stephen Crawford, director of the Social, Economic and Workforce Programs Division at the
NGA Center for Best Practices, and Randall Kempner, vice president, Regional Innovation, at the Council on Competitiveness. The follow-
ing individuals read one or more drafts and provided valuable advice: Dr. Robert Atkinson (President, Information Technology and
Innovation Foundation), Chris Hayter, Director, Economic Development Program, NGA Center for Best Practices, Dr. Maryann Feldman
(Professor, University of Georgia), Kurt Dassel (Monitor Group), Douglas Henton (President, Collaborative Economics), Jim Samuels
(President, Capitol Integrity Group), Dr. Mary Jo Waits (Director, Pew Center on the States), and John Thomasian (Director, NGA Center
for Best Practices). Angelyn Shapiro of the NGA Office of Communications assisted in the editing, design and layout of the guide.

This guide is co-published by the NGA Center for Best Practices and the Council on Competitiveness. It is one of a series of publications
being produced under the 2006–2006 NGA Chair’s Initiative, Innovation America. The NGA Center wishes to thank the Ewing Marion
Kauffman Foundation for the generous grant that made possible the research, editing and production of the guide.

iii
 Cluster-Based Strategies for Growing State Economies

Preface
The Council on Competitiveness and the National Governors Association (NGA) collaborated on a cluster-based economic develop-
ment initiative in 2002. Since then, the world has grown flatter, creative talent has become more mobile, and global outsourcing
has become more common. As a result, firms in emerging nations today can quickly enter markets by integrating themselves in
global value chains — combining investments from around the world with their own low-cost and increasingly high-skilled labor
force.

The United States cannot compete with such high skill — low wage economies on the basis of costs. It must compete on the basis
of innovation — the development and application of new ideas that create value. It is innovation that will enable the U.S. economy
to continue growing and American families to enjoy a rising standard of living.

Recognizing the critical role innovation will play in driving America’s future prosperity, Arizona Governor and NGA Chair Janet
Napolitano has focused her Chair’s Initiative on innovation and reached out to the Council on Competitiveness to once again work
with the NGA . The Council welcomes this partnership and the vital role that governors play in addressing the country’s innovation
and competitiveness challenges.

The Council on Competitiveness has long championed regional and cluster strategies for economic development.Yet the nature of
clusters must evolve in response to the changing and challenging global economy.This new publication offers a fresh examination
of what cluster strategies work best in this new context as well as builds on the lessons of recent experience. We are pleased to join
with NGA in publishing it.

Deborah Wince-Smith
President, Council on Competitiveness

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 Cluster-Based Strategies for Growing State Economies

Table of Contents
Executive Summary ........................................................................................................................................................................1

Chapter 1 — Introduction ...........................................................................................................................................................2

A. Clusters: A Confluence of Private Decisions and Public Policies .......................................................................................2
B. Clusters and Competitiveness in the Global Economy........................................................................................................2
C. Why Clusters Are Important to Governors ............................................................................................................................3
D. Policy Tools for Cluster Development....................................................................................................................................3

Chapter 2 — Understanding Clusters and How They Form ........................................................................................5

A. Defining Clusters ......................................................................................................................................................................5
B. Common Characteristics ..........................................................................................................................................................5
C. Forming Clusters: Serendipity and Strategy.........................................................................................................................6

Chapter 3 — Identifying a State’s Clusters..........................................................................................................................7

A. Clusters by the Numbers .........................................................................................................................................................7
B. Clusters by Searching and Scanning......................................................................................................................................8
C. Under the Radar ........................................................................................................................................................................9

Chapter 4 — Initiatives to Grow and Sustain Clusters ................................................................................................11

A. Establish a Solid Foundation ................................................................................................................................................11
B. Build Relationships .................................................................................................................................................................11
Initiative: Convene Cluster Leadership Council ....................................................................................................................12
Initiative: Support Cluster Organizations ..............................................................................................................................12
Initiative: Provide Opportunities for Collaboration ...............................................................................................................14
C. Deepen Skills and Talent........................................................................................................................................................14
Initiative: Establish a Cluster-Based Workplace Learning System ..........................................................................................15
Initiative: Create Cluster Hubs at Community Colleges........................................................................................................16
Initiative: Encourage Training Consortia ...............................................................................................................................17
Initiative: Engage with Community-Based Organizations .....................................................................................................17
Initiative: Find and Recruit Talent.........................................................................................................................................18
Initiative: Promote Cluster Career Advancement Paths..........................................................................................................18
D. Align Innovation Investments...............................................................................................................................................18
Initiative: Invest in Cluster-Based Innovation Centers...........................................................................................................20
Initiative: Direct R&D Funds to Clusters..............................................................................................................................20
Initiative: Encourage Collaborative and Multidisciplinary R&D ...........................................................................................21
Initiative: Support Incremental Innovations ..........................................................................................................................21
Initiative: Segment Expertise in Manufacturing Extension Services .......................................................................................21
Initiative: Increase Prominence of Design as an Innovation Strategy .....................................................................................21
Initiative: Mobilize Investment Capital for High-Tech Startups.............................................................................................22
E. Accelerate Entrepreneurship.................................................................................................................................................22
Initiative: Support Entrepreneurial Networks ........................................................................................................................23
Initiative: Create Specialized Incubator Space ........................................................................................................................23
Initiative: Organize Cluster Expertise Across Small Business Centers.....................................................................................24
Initiative: Educate for Entrepreneurship ................................................................................................................................24

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 Cluster-Based Strategies for Growing State Economies

F. Open Global Priorities ............................................................................................................................................................24

Initiative: Support International Participation in Events and Study Tours .............................................................................25
Initiative: Support and Assist Export and Export Networks...................................................................................................25
Initiative: Establish Cluster-Based International Learning Exchanges for Students ................................................................25

Chapter 5—Value Found and Lessons Learned ..............................................................................................................27

A. Case Studies Continue to Suggest Advantages of Clusters..............................................................................................27
B. Final Thoughts .........................................................................................................................................................................27

Glossary of Terms ..........................................................................................................................................................................28

Selected Policy-Relevant Resources .....................................................................................................................................29

Endnotes ............................................................................................................................................................................................30

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 Cluster-Based Strategies for Growing State Economies

Executive Summary tional assets, physical infrastructure, attractiveness to creative

talent, and capacity for aligning the efforts of regional educa-
Cluster strategies have the potential to accelerate regional econom-
tional, workforce, and economic institutions. Governors are
ic growth, but only if they are properly understood and applied.
already doing much to promote improvements in these areas,
This Governor’s Guide examines the changing economic environ-
but cluster-strategy development offers additional opportuni-
ment in which clusters function, summarizes the lessons learned
ties to focus the attention of key constituencies on the impor-
from recent experience, and offers practical recommendations for
tance of these building blocks.
cluster initiatives that governors can take to strengthen their states’
economies. • Build relationships: Inter-firm collaboration facilitates learn-
ing and the aggregation of intangible assets, especially the tacit
A cluster is a group of firms, related economic actors, and institu-
knowledge that resides within company employees and prac-
tions that are located near one another and that draw productive
tices. State leaders can help by convening a cluster leadership
advantage from their mutual proximity and connections. They
council and supporting cluster associations.
may be connected by functional relationship (e.g., suppliers and
purchasers, producers and distributors) or by competition for simi- • Deepen skills and talent: By nature, clusters attract and
lar markets. The most successful clusters are typically found in enhance talent, but government can reinforce this tendency by
multi-county regions where participants can easily interact and creating cluster hubs at community colleges, fostering cluster-
leverage the same pool of labor and training assets. Firms that are focused professional science masters programs at nearby uni-
part of robust clusters are in a stronger position to compete suc- versities, encouraging cluster-training consortia, and encourag-
cessfully in the global economy and thus to contribute to regional ing cluster-based career advancement paths.
prosperity. Consequently, governors are keenly interested in strate-
• Align innovation investments: States can realize higher
gies for promoting the emergence and growth of clusters, especially
returns on their investments in research and development
in high-wage, high-growth industries. The challenge is to develop
(R&D), centers of excellence, and business innovation by
effective strategies — ones that reflect an understanding of the
focusing on clusters. In the process, they should keep in mind
complexities of cluster dynamics in a changing world.
that innovation is about more than breakthroughs in science
Clusters are defined by relationships, not memberships, and spatial and technology; it also is about incremental improvements in
boundaries are variable and porous. Clusters are often interdepend- products, services, and the processes for producing and mar-
ent and overlapping, with some companies being part of more keting them — improvements that are often the result of new
than one. Their formation is usually serendipitous rather than product designs and business models.
engineered by government. Still, clusters are more likely to develop
• Accelerate entrepreneurship: Talent and research are necessary,
in regions that offer the needed human, intellectual, financial, and
but it takes entrepreneurship to translate good ideas into success-
social capital and that nourish their growth through supportive
ful products and services. Governors can promote entrepreneur-
public policies and programs.
ship by supporting entrepreneurial networks, creating cluster-
Determining the regional location of the state’s clusters is the start- focused incubators, organizing small business centers around
ing point of any cluster-based strategy. Identifying clusters is still as cluster expertise, and encouraging entrepreneurship education
much art as science, but a useful picture of clusters can be drawn programs at high schools and postsecondary institutions.
by combining analyses of business sectors, employment, and wage
• Open global priorities: Successful clusters extend their net-
data with regional observation and interviewing key business lead-
works to distant competitors, vendors, and institutions.
ers. In doing so, however, it is important to avoid creating defini-
Government can help by supporting participation in interna-
tions and boundaries that are too narrow, that cannot adjust to
tional conferences, trade shows, and study tours; by providing
constant change, or that discourage collaboration among clusters.
export assistance; and by establishing cluster-based learning
Once clusters are identified, there are at least five kinds of initia- exchanges.
tives that policymakers can take to support their growth:
Cluster strategies are not silver bullets, but properly designed and
• Establish a solid foundation: Every cluster has some funda- applied, they offer a promising way to promote innovation, entre-
mental needs that are not cluster specific but that affect the preneurship, and economic growth.
ability of clusters to succeed. These include the region’s educa-

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Cluster-Based Strategies for Growing State Economies

Chapter 1 — Introduction 19th century, manufacturers clustered in large cities networked

and learned from one another — apparel in Philadelphia; plastics
The concept of industry clusters has dominated economic develop-
in Massachusetts; furniture in Grand Rapids, Michigan; jewelry in
ment policy over the past two decades. Even before the term “clus-
Providence, Rhode Island; and industrial machinery in Cincinnati,
ter” entered the public policy vernacular, states targeted resources
Ohio. By the first half of the 20th century, the film industry had
and investments to fortify their strongest sectors or to develop
concentrated in the Los Angeles area, finance in New York, insur-
potentially competitive sectors. States directed funds to research
ance in Hartford, and automotive in Detroit. More recently,
centers, education and training programs, incubators, and industri-
Silicon Valley has epitomized an environment that supports con-
al parks that focused on specific sets of industries.
verging and overlapping clusters of high-technology companies.
In the late 1980s, however, states began to notice the competitive
Today, globalization is changing the geography of markets, compe-
advantages and economic value added by “clustering” and “net-
tition, and cooperation. Yet companies continue to cluster and
working” among companies, and they began to support and
remain remarkably place based.
encourage these interdependencies. A series of reports in 1989–90
for Florida by SRI International may have been the first official
application of cluster analysis and use of the term “cluster” by a B. Clusters and Competitiveness in the
state.1 The publication of Michael Porter’s path-breaking book on Global Economy
competitive advantage in 1990 provided a model that tied the vari-
Cluster strategies take on new significance in today’s global econo-
ous pieces together in a neat system. By the end of 1992, both
my. Trade agreements and major advances in communications and
Arizona and Oregon had formal cluster strategies in place. Before
transportation have reduced trade barriers and created an extreme-
long, specialization rather than diversification became the sine qua
ly competitive global economy. Although competition in this glob-
non of regional economic prosperity, and clusters became the new
al economy is sometimes viewed as between nations, it really is
organizing framework for economic development.2
between high-performing economic regions. Exporting firms in
This guide reviews what has been learned about clusters and clus- Phoenix are as apt to be competing with firms in Bangalore, India;
ter initiatives to date, suggests ways that governors can influence Guang Zhou, China; or Dublin, Ireland as with firms around
cluster growth and sustainability, highlights some of the changes Boston, Austin, or northern Virginia. These innovation hot spots
associated with globalization, and describes some proven or prom- with fast- growing, high-wage companies and strong regional assets
ising cluster initiatives. It begins with a brief discussion of why — such as quality educational institutions and a robust R&D
firms have clusters and how changing global conditions affect the environment — are the catalysts for growth in the world economy.
structure of and reasons for clustering. Then it turns to why clus- The relative competitiveness of a nation’s innovative regions that
ters are important economic units for governors to target and trade international goods and services will determine the relative
describes the tools with which they can affect their shape and wealth of that nation over time.
growth.
Because the United States is a high-wage nation, its ability to com-
pete through low-cost production of internationally traded mer-
A. Clusters: A Confluence of Private chandise is limited. Scores of regions around the world now are
Decisions and Public Policies able to acquire and use advanced equipment and have a workforce
skilled to use it. Overnight deliveries combined with the Internet
An industry cluster is a group of firms, related economic actors,
have elongated and extended supply chains. Information is accessi-
and institutions that are located near one another and that draw
ble and shared on the Web in milliseconds, and virtual Web-based
productive advantage from their mutual proximity and connec-
social networks crisscross countries and cultures. Technology and
tions. It is the key to understanding the performance of regional
capital are highly mobile. Even some of the research and develop-
economies and the competitiveness of individual firms.3
ment that the United States once thought was its core strength is
One reason clusters are receiving so much attention is that they are being outsourced.
based on observations of business behavior. Businesses have clus-
The result is a shift of certain traditional advantages to new clus-
tered for decades, indeed for centuries. Metal-working companies
ters in emerging Asian and Eastern European economies that are
serving the Springfield Armory clustered along the Connecticut
capturing increasing shares of U.S. markets. In China each year,
River valley as early as the 18th century, and by the end of the
Datang produces 9 billion pairs of socks, Chaozhou makes 510

2
 Cluster-Based Strategies for Growing State Economies

million wedding and evening gowns, and Shengzhou manufactures Clusters improve employment opportunities. Where firms are
300 million neckties.4 Even high-tech development and produc- clustered, employers tend to attract and compete for similar talent.
tion, once thought to be safely ensconced in the United States, As a result, pipelines for employment often develop between local
where most of the engineers and scientists were working, is being schools and businesses, and community- and school-based
outsourced. Taiwan designs and assembles 65 percent of the “grapevines” quickly circulate information about job openings,
world’s notebook PCs.5 A recent survey of 186 of the world’s career opportunities, and workplace conditions.
largest corporations found that 77 percent will build new R&D
Clusters stimulate regional entrepreneurship. Joe Cortright
centers over the next 3 years in India or China.6
notes in a 2006 study that “more than 80 percent of the scientists
Place still matters to companies, but the reasons have changed. in California research institutions that went on to start their own
Supply chains now often span the globe, particularly in situations biotechnology firms did so in California.”11 Pharmaceutical firms
where little face-to-face interaction with suppliers is needed and have been found to benefit twice as much from research produced
where the tasks involved can be codified and the work product locally as they do from research produced elsewhere. Opportunities
digitalized.7 Intangible factors, such as access to tacit knowledge, are more transparent, role models more visible, and opportunities
experienced workers, sources of design and innovation, and oppor- — to supply, compete, or complement — more available in clus-
tunities to network and collaborate, have become a more impor- tered economies.
tant reason for clustering than the tangible factors associated with
Clusters aid diversification and improve regional sustainability.
the proximity of suppliers and customers. Innovation still contin-
Clusters often lead to new industry development, driven by people
ues to thrive best in the hot-house environment of clusters and is
who shift their knowledge, skills, technologies, and/or talents to
more important than ever.
different products or services or new markets. New York City’s
fashion apparel cluster generated an industrial and graphic design
C. Why Clusters Are Important to cluster, and the polishing skills needed for central Minnesota’s
Governors granite industry cluster led to the development of an emerging
prescription lens cluster.
Clusters are of interest to governors because they can help power a
regional economy by boosting innovation, wages, employment
opportunities, entrepreneurship, and business diversification. D. Policy Tools for Cluster Development
Clusters boost innovation. The increased competition and coop- It is important to recognize that states rarely, if ever, have the abili-
eration among firms in clusters drives innovation. The presence of ty to create clusters out of whole cloth. However, governors and
local competitors keeps leading firms from becoming complacent. state policies can play a significant role in facilitating the develop-
The existence of local suppliers, research institutions, and related ment of clusters and aiding their sustainability. In particular, gov-
firms allows firms to innovative more effectively. A Council on ernors can do much to aid clusters by exercising their role as con-
Competitiveness survey found that three-fourths of companies col- vener and using the bully pulpit. Governors also can drive clusters
laborate with their suppliers and customers to innovate, three in through tax policy, education and training, research investments,
eight collaborate with similar companies and industries, and regulatory streamlining, and encouraging access to seed and ven-
almost a third collaborate with university faculty.8 ture capital.

Clusters lead to higher wages and productivity. A 1997 study Convening. A major element of cluster growth is bringing private
conducted at the United States Department of Agriculture sector leaders together with public leaders, including elected offi-
(USDA) Economic Research Service found that average earnings cials, education leaders, and even nongovernmental entities. The
in rural counties that have high shares of particular industry classi- governor’s office is the most effective entity to ensure that all the
fications, defined as clusters, were higher than in rural counties key organizations are brought to the table, and it can be instru-
without clusters.9 A 2006 study across Canada found that between mental in brokering partnerships and networks. Governors also
1998 and 2005, both employment and average income in clus- can appoint special liaisons to work with clusters, thus building
tered industries in “city-regions” grew more than twice as fast as in the capacity to understand their needs and challenges.
non-clustered industries.10 Using the bully pulpit. By talking up clusters in public forums
locally and when conducting trade and business development

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Cluster-Based Strategies for Growing State Economies

visits, governors can play a major role in convincing businesses, Moreover, to demonstrate a long-term commitment to cluster
investors, and skilled workers that their states are serious about development, many states have created large, multiyear “innova-
supporting their strategic growth industries. Governors who are tion” funds directed at supporting research in targeted areas funda-
knowledgeable about their clusters show investors they care about mental to a region’s clusters.
nurturing these emerging and growing sectors and can help bring
Streamlining regulations. To support clusters, states can employ a
capital and talent to the regions. Using the bully pulpit also means
streamlined regulatory policy that is tailored, flexible, and respon-
aggregating economic information in a way that captures clusters
sive. The use of technology such as on-line filing can simplify the
so that the state can track and report on cluster performance.
administrative burden of regulations; such streamlining can be par-
Implementing tax policy. Tax policy can be used to encourage ticularly helpful to small and start-up firms. Occasionally, regulato-
and support cluster activities. For example, R&D tax credits can ry choices can directly spur industry creation. In Delaware, the
reward clusters that are R&D intensive. Likewise, tax incentives deregulation of interest rates charged by lenders led to the growth
that reward businesses for providing industry-specific worker train- of the financial services (and particularly credit card) sector in
ing or for creating high-wage jobs also can be effective. Designing Wilmington. In California, strict environmental regulations and
tax policy around clusters is important because many clusters may incentives have helped catalyze a significant concentration of envi-
not be able to take advantage of tax incentives that focus only on ronmental technology firms.
capital purchases (many clusters involve service industries, require
Improving access to seed and venture capital. Most private seed
highly skilled talent, and are not capital intensive).
and venture capital is concentrated in just a few areas of the coun-
Funding education and workforce training. Education and try. To counter this, many states have improved access to such
training are among the largest of state expenditures and are per- loans by starting their own funds or investing state dollars in a
haps the most powerful tools at the disposal of a governor for larger fund that serves the area. Although most state programs do
shaping industrial policy. The quality of K–12 education is one of not target clusters, venture capital funds can be specialized. For
the most important factors that people and companies evaluate in example, 40 percent of all investments in 2005 went to biotech-
their location decisions, and the type and quality of higher educa- nology or software companies, and two-thirds went to just six
tion is critical in producing and attracting the skilled talent that high-tech industries.
high-tech businesses need in the region. Moreover, a flexible and
Purchasing local goods and services. The state can choose to
responsive community college system is key to providing the type
support clusters in its role as purchaser. The state typically is the
of workforce training needed for fast-growing clusters.
largest purchaser of certain goods and services, and choosing to
Encouraging research investments. Governors can support clus- buy from regional clusters, such as office supplies, alternative ener-
ters by investing in related research in state universities and in the gy, and processed foods, rather than from outside the region cre-
private sector through direct state investments or challenge grants. ates a market and sends a message to others to buy locally where
Governors also can provide matching dollars to federal research possible. Kentucky and Montana, for example, purchase furnish-
grants in areas considered important to the states’ clusters. ings from their wood products cluster for their state park systems.

4
 Cluster-Based Strategies for Growing State Economies

Chapter 2 — Understanding a set of products, such as optics and imaging or composites.

None is easily identified through existing industry classifica-
Clusters and How They Form tions. Companies also could be connected by a common
Although clusters are now fully integrated into the conventional dominant production process. Many plastics clusters include
economic development vernacular, there is still no general agree- large members that are primary users of plastics technologies
ment on what constitutes a cluster. Nevertheless, sufficient guid- but that also are classified under consumer electronics (e.g.,
ance exists to allow most states and regions to recognize and BIC) or toys (e.g., Lego). Some of the biggest Web-design
understand their clusters so that they can design strategies to nur- firms are listed as advertising companies (e.g., DoubleClick),
ture and sustain them. not information technology. Clusters also form around com-
mon functions, such as logistics and warehousing, transporta-
A. Defining Clusters tion, design, R&D, or administrative headquarters. In north-
A cluster can be defined as a group of interdependent companies, west Arkansas, for example, Wal-Mart, Tyson’s, J.B. Hunt,
organizations, and institutions in a geographic region with com- and Arkansas Best anchor a prolific supply-chain logistics
mon or complementary interests that have reached sufficient scale cluster that includes the offices of more than 1,000 suppliers.
to develop specialized expertise, services, resources, suppliers, and
2. Clusters may be interdependent and overlapping.
labor.
Companies can be in more than one cluster, depending on
Rural areas often worry that they can not support legitimate clus- whether the relationships are similarities, commonalities, or
ters because of their lack of industrial density. The scale necessary complementarities. The ongoing convergence of technologies
to be considered a cluster, however, depends on size of place and is making it even more difficult to pigeonhole a particular
degree of specialization. In less populated areas, smaller numbers company. An advertising company could be considered part
of similar companies constitute a significant local cluster, such as of design, multimedia, and information technology (IT) clus-
the 11 houseboat builders around Lake Cumberland, Kentucky, ters (only about 10 percent of the IT companies in most IT
that dominate the high-end boat market. clusters have IT industry classifications). A winery could be
included in food processing, tourism, or biotech clusters.
Overlapping memberships add to the synergy but also the
Texas’s Clusters complexity of clusters.
Governor Perry of Texas defined an industry cluster in
3. Spatial boundaries of clusters are variable and porous.
SB275, Government Code, Section 481.001 (6) as “a con-
Cluster geography, in the loosest sense, is defined by the dis-
centration of businesses and industries in a geographic region
tance and time that people are willing to travel for employ-
that are interconnected by the markets they serve, the prod-
ment and that employees and owners of companies consider
ucts they produce, their suppliers, the trade associations to
reasonable for meeting and networking. Geography is influ-
which their employees belong, and the educational institu-
enced by factors such as travel conditions, cultural identity,
tions from which their employees or prospective employees
and personal preferences. For example, officers of metals com-
receive training.” The same code directs his office to cooper-
panies in western Minnesota and eastern North and South
ate on developing strategies that strengthen all clusters and to
Dakota drive up to 100 miles to attend meetings of the Tri-
specifically target six types: semiconductors, ICT, microelec-
State Manufacturing Association. In places where rugged
tronics, energy, nanotechnology, and biotechnology.
mountains or forests divide towns, making travel times
longer, as is the case in many parts of Appalachia, people may
only be willing to regularly travel 15 or 20 miles. In densely
B. Common Characteristics populated neighborhoods with strong cultural identities and
invisible boundaries, distances may be measured in city
Clusters also demonstrate the following characteristics:
blocks. Silicon Alley is concentrated in Manhattan, mainly
1. Clusters are often connected by common resource needs, south of 41st Street. Whatever their boundaries, virtually all
technologies, or interests as well as by products. Companies clusters include more distant companies that have special rela-
may cluster around many types of needs and interests. The tionships with, and are treated by, members as insiders.
glue could be a critical core technology or process that defines

5
Cluster-Based Strategies for Growing State Economies

4. Clusters depend on talent. Three-fourths of human resources may see and seize opportunities to convert the skills they’ve honed
managers recently surveyed said that “attracting and retaining” on the job into new businesses that fill gaps in the cluster’s value
talent was their number one priority.12 In today’s global econo- chain, create new and innovative applications, manufacture com-
my, companies depend more than ever before on highly educat- plementary or even competitive products, or simply find and com-
ed and/or creative employees who are problem solvers and idea pete in niche markets. After enough companies form, a support
generators, sometimes called the “creative class. Talented people, structure begins to take shape, and a local buzz develops that
be they scientists, managers, artists, or designers, tend to choose attracts companies and services from other places. The cluster
to be near others with common interests and lifestyles and embarks on a trajectory in which future growth comes from an
where cultural and recreational amenities are plentiful. Although accumulation of experiences, competencies, and innovations — a
researchers and the press focus on the creative classes in large type of “path dependency.”14
cities, some small cities and towns have been able to attract tal-
Once a core cluster activity begins to generate economies of scale
ented workers, especially those starting families. Places with cul-
and demonstrate growth potential, public policies become even
tural and recreational caches without the high costs of living
more important, priming the pump and easing the nascent cluster
associated with cities, such as Kalispell, Montana; Asheville,
along. Rates and trajectories of growth can be influenced by public
North Carolina; Northampton, Massachusetts; and Brattleboro,
policies. In almost every cluster success story, public policy played a
Vermont, are becoming meccas for entrepreneurs and innovators.
key role by filling gaps or overcoming weaknesses in critical factors,
recruiting new members, and providing incentives for innovation.
C. Forming Clusters: Serendipity and
California’s investment in biotechnology research and its commu-
Strategy nity college-based training programs for biotechnology technicians
Clusters don’t happen overnight. It takes considerable time, usually have been critical to the growth of that cluster. Alabama’s cus-
decades, for clusters to develop and evolve. Case studies of clusters tomized training, technology centers, and sizable tax incentives
show that their origins generally have been serendipitous events were primary catalysts for the growth of an automotive cluster.
rather than consciously designed policies. However, their forma- New York’s ceramics cluster got a boost from the state’s investment
tion often is aided by their business environment, which can in the Center for Advanced Ceramic Technology, its Ceramics
include supportive public policies, attractive local resources, a tal- Corridor Innovation Centers, and the Appalachian Regional
ented and creative labor pool, strong educational assets, and first- Commission’s entrepreneurship programs. Business decisions gen-
class research and development institutions. erate clusters, but the public sector can seed, encourage, and sup-
port their growth.
Stanford University’s research and entrepreneurial culture was
important to the development of a semiconductor cluster and
Silicon Valley, North Carolina’s Research Triangle Park to the Mississippi’s Furniture Cluster
development of its biotechnology cluster, Minnesota’s health care
The furniture cluster in northeastern Mississippi was founded
system to the development of its medical devices cluster, Santa Fe’s
in the late 1940s when Morris Futorian, an immigrant artisan
landscape to the development of its arts cluster, Alabama’s steel and
in Chicago, was looking for a place where he could apply
metals industries and training programs to the development of its
Fordist mass production principles to the manufacture of fur-
automotive cluster, and Chicago’s multimodal transportation system
niture. He found Mississippi more welcoming than places
for agriculture to the development of its food-processing cluster.
where furnituremaking was still very much a craft and also
The prime movers of cluster growth are entrepreneurs. As clusters found an endowment of raw materials and surplus labor. A
form, entrepreneurial firms provide information about new oppor- cadre of entrepreneurial employees — who referred to them-
tunities, become role models for yet more start-ups, and generate selves as graduates of “Futorian University” — did the rest.
spillover knowledge about technologies, markets, and customers, The cluster got a boost, however, from a supportive and inno-
all of which help reduce the risks of starting a new business.13 vative community development foundation, an advanced tech-
Employees — often from a small number of founding firms — nology upholstery center at Itawamba Community College,
and business assistance from Mississippi State University.

6
 Cluster-Based Strategies for Growing State Economies

Chapter 3 — Identifying a State’s ent enough to collectively represent and, for policy purposes
define, a “cluster.” Just how similar or interdependent sectors must
Clusters be to be grouped into a cluster and the size of the geographic
The starting point in any cluster-based strategy is determining region are critical decisions that affect size and concentration. A
what and where a state’s clusters are. Identifying clusters is still as recent book on the new media clusters had eight definitions for a
much art as science. It requires decisions based on imperfect data, new media cluster.16 Once those decisions are made, establishment
local knowledge, informed but subjective choices, and political and/or employment data are aggregated and compared with other
considerations. In Europe, no data analysis is needed to identify places in terms of totals, concentrations, and growth.
industrial districts; evidence of the cluster’s presence pervades the
community and tourist literature. In Udine, Italy, a province that Most analyses set threshold levels of size and concentration to be
produces half the chairs sold in Europe, a giant chair graces the considered a “cluster,” and they favor “traded clusters,” which
front of the provincial exhibition hall. The streets of Sassuolo are export products or services out of their region — although con-
lined with tile designers, tile showrooms, and displays.15 sumption-based clusters that divert expenditures from other places
to local purchases also add value.17 Including many sectors in a
In contrast, in America as well as in many other developed nations cluster, which is a common tendency, increases the scale of the
pursuing cluster strategies, clusters are more dispersed and con- cluster and strengthens political support but weakens relationships
cealed within larger, more diversified economies. Further, in among members who have less in common and reduces advantages
America, companies and workers are more foot loose than their of specialization. Companies in clusters such as business services,
European counterparts, and clusters develop around less easily advanced manufacturing, or knowledge industries have less in
identifiable assets, such as core technologies, similar production common than companies in biotech, furniture, or multimedia
processes, critical natural resources, or cultural factors. clusters but exist in larger numbers. When the criteria are more
As a result, there exist two general processes for identifying clus- restrictive, clusters become less common and more specialized.
ters. The first is the algorithmic approach, based on the economic Once standard sectors are aggregated into clusters, it opens the
data that are available by place and type of business. It uses avail- door to a variety of other quantitative measures of cluster strength
able data to measure the scale, concentration, and changes in pre- and impact. One common extension of the core cluster firms is the
selected combinations of sectors. The second is a heuristic number of regional companies in its value chains, the companies
approach, a discovery method that relies on case studies, self-iden- downstream that supply them, and the companies upstream that
tification by businesses and associations, the news media, business add further value. These numbers are generally based on the
directories, and local knowledge to identify regional areas of eco- national input-output tables that estimate the value of inputs from
nomic specialization and interdependencies. The former works contributing sectors to products and the contribution of the prod-
well for traditional, product-based clusters, but the latter is uct to other sectors of the economy. The presence of companies
required to find most of the clusters that are beginning to develop. that match the value chains in a region is a valuable approximation
Comprehensive cluster identification efforts will employ both of the total scale of a cluster because clusters include value chains.
approaches. It should be used as a wish list rather than an indication of actual
supplier relationships; local firms with supply chain NAICS codes
A. Clusters by the Numbers may not have the right qualifications or competencies.

Most analyses of clusters begin with an analysis of the numbers Another important measure is the scale of and trends in exports.
and relative (to state or national) concentrations of establishments Clusters with large export markets have greater impact on the
and employees for specified sets of industries within designated wealth of a regional economy. Other measures used to estimate the
geographic boundaries. The primary source of this information is potential and value of a cluster are rates of innovation — generally
generally the federal employment and wage data required for by using patents as a rough proxy, wages, and productivity.
unemployment compensation (ES-202), which is sorted by estab-
The power of the use of algorithms lies in the ease of use and
lishments, counties, and the North American Industrial
replication over time and across regions. One drawback to relying
Classification System (NAICS)
on databases is that each company is assigned a single industry
The most important, and most subjective, step in all algorithmic classification when many firms actually have more than one.
methods is to determine which sectors are similar or interdepend-

7
 Cluster-Based Strategies for Growing State Economies

Table 1: Examples of Quantitative Sources of Information Table 2: Heuristic Methods

Source Data • Rely on local knowledge to identify economic strengths

and assets
ES 202 database Establishments, employment, wages
by county • Interview companies

County Business Establishments by size, employment, • Review recent regional plans

Patterns wages by county
• Consider secondary industry classifications

Dunn & Bradstreet Establishments, employment • Identify sources of greatest demands for workers and training

• Look for business networks, interest groups

Bureau of Labor Wages by occupation, location quo-
Statistics tients for counties small, may bridge political boundaries, or may be based on unrec-
ognized businesses or unrecorded interdependencies to fit data-
State manufacturing Products, location, number of
driven methods. It also allows groups of companies with common
directories employees, industry codes
interests that have developed a collective identity to demonstrate
that they have the attributes of a “cluster.” The technology-based
Bureau of Economic Demographics, employment by
optics and imaging cluster in and near Rochester, New York, for
Analysis industry, incomes
example, covers a wide range of industry codes and is held together
by professional relationships, the historical presence of Kodak and
B. Clusters by Searching and Scanning Xerox, and university research.

Albert Einstein had a sign hanging in his Princeton office that

A heuristic approach layered on data analysis can be used to make
read, “Not everything that can be counted counts, and not every-
modifications — often large enough to alter the significance of a
thing that counts can be counted.”
cluster. For example, many companies do not have industry classi-
An alternative — and frequent supplement — to the quantitative fications that match their relationships to a cluster. DoubleClick in
approach is the heuristic approach. It relies on observation, case New York City is classified as “media representative” although its
studies, and local experience to identify clusters that may be too specialization in digital advertising places it in the information
technology cluster. In Connecticut, Lego,
Chart 1: Example Cluster Chart: Atlanta Regional which produces plastics parts and has been a
Information Technology Cluster key member of the state’s plastics cluster, is
classified as a toy manufacturer. In western
Massachusetts, Yankee Candle, the largest
employer in the region’s creative enterprise clus-
ter, is classified as “all other miscellaneous man-
ufacturing.” Leading employers in Oregon’s
strong sports apparel cluster that manufacture
overseas, such as Nike and Adidas, are classified
under distribution, not production industry
codes. (See Chart 1 for an example of a cluster
map that incorporates qualitative and quantita-
tive data.)

8
 Cluster-Based Strategies for Growing State Economies

Table 3: Examples of Emerging Clusters that Lack site 62,680 employees in its software and computer systems subto-
Descriptive NAICS Codes tal — but misses more than 18,000 who are self-employed, which
would boost the number by almost 30 percent. Nationally, 53 per-
• Alternative energy cent of multimedia artists, 60 percent of photographers, 32 per-
cent of designers, and 22 percent of architects are self-employed.
• Composites
Further, self-employment numbers may be quite conservative. A
• Complementary and alternative health recent national survey estimated that a “business without employ-
ees actually has, on average, more than 1.7 employees (e.g., family
• Motorsports members, helpers, apprentices).”19

• Design enterprises The creative cluster includes companies that take their principal
competitive advantage from a distinctive appearance, form, con-
• Mining services tent, or sound embedded or embodied in their products or servic-
es. It includes artists and artisans; digital, media, and graphic arts;
• Fine furniture
architectural, landscape, and graphic design; advertising; interior
The heuristic approach is almost essential to finding micro-clus- decorating; fashion apparel; and fine furniture as well as all the sec-
ters. Rural clusters often depend more on a sense of how local tors that supply, support, reproduce, distribute, and market their
businesses relate to one another than on comparative concentra- products.
tions or scale. In rural areas, clusters may need larger areas, more Montana’s creative enterprise clusters in 2004 employed about 5
diverse membership, and more active cooperation to be called a percent of the work force — nearly as much as manufacturing.
cluster. Some groups of companies in more densely populated rural New York City has 11,671 businesses in the creative core, account-
areas may function as satellites of stronger clusters in nearby met- ing for more than 8 percent of employment and 5.7 percent of all
ropolitan centers. Heavy lift helicopters in southern Oregon; wind employers.20 Some have called the creative cluster a “keystone
sports in Hood River, Oregon; renewable energy in southwestern species” because its impact on a region is disproportionate to its
Minnesota; and houseboats on Lake Cumberland in Kentucky are size; it influences overall quality of life, residential desirability, and
distinctive and dominant micro-clusters that would not easily be creative and innovative milieu.
found by analyzing data. Gathering this knowledge requires going
directly into communities.18 Table 4: Comparison of Data-Driven and Knowledge-
Driven Methods

C. Under the Radar Algorithmic Heuristic Approach

Approach
Even careful heuristic approaches miss many important but per-
haps unorthodox clusters — especially if they represent newly
Strengths Standardized and Flexible
emerging industries that lack classifications or are dominated by
comparable
self-employed workers, freelancers, misclassified workers, or part- Depth of understanding
time companies. The large and growing alternative and comple- Inexpensive
Uncovers unconven-
mentary health cluster around Asheville, North Carolina; maple
Compatible with tional clusters
syrup in Vermont, and alternative energy in southwestern
national value chains
Minnesota are significant local clusters that lack industry classifica- Identifies rural
tions and defy easy measurement. clusters

Perhaps the most common oversight in cluster analysis is the grow-

ing numbers of micro-enterprises and entrepreneurial businesses Weaknesses Inflexible Imprecise
that represent large proportions of some key clusters. Some num- Limited to NAICS Difficult to aggregate
bers are available in national self-employment databases but are codes, political
either not included in cluster analysis or are not available at a suffi- Labor intensive
boundaries
ciently specific level of industry classification. Florida’s information
technology industry cluster, for example, lists on its cluster Web Ill-suited to creative
sectors

9
 Cluster-Based Strategies for Growing State Economies

Because clusters are regional systems, not aggregations of firms,

they include an array of supporting institutions, associations, and Arkansas’s Creative Northwest
organizations, and clusters can only be understood by including The northwestern corner of Arkansas, from Fayetteville north
those members not classified by industry codes and by mapping to the Missouri state border, has been for decades a poor, iso-
the connections among the elements. The specialized institutions lated rural region heavily dependent on agriculture and tradi-
and services that support the clusters are generally found through a tional manufacturing. It also was known for its rich endow-
mapping process using focus groups of and interviews with people ment of arts and culture, but this was not viewed as an
from leading companies and other organizations that know and amenity and was not an economic driver. Eureka Springs in
understand the cluster. The inventory of members and forms of Carroll County has been its hidden gem, a draw for artists,
relationships are generally refined and expanded in the first stages writers, and artisans and an attraction for tourists; it was rec-
of cluster mobilization. ognized as one of the “100 Best Arts Towns in North
The focus groups and interviews also should reveal the leading America.” Today, the rapid growth of the region energized by
innovators and exporters in the cluster, strengths and weaknesses in the logistics needs of Wal-Mart, Tyson, J.B. Hunt, and
the support structure, and external linkages. A short survey can Arkansas Best is creating a concomitant growth of the creative
provide basic information about supply chains and relationships economy to support the cultural base that attracts talent. The
among firms and institutions to estimate the relative mix among region has about 5,500 employed or self-employed full time
regional, state, national, and international linkages. in its creative sectors. The growth centers of the region’s
economy in addition to Eureka Springs are Fayetteville,
One product of such an analysis is giving a subjective value to key through the efforts of the Fayetteville Downtown Partners to
factors, such as the analysis used in Montana, which was created transform the downtown into a cultural arts district, and of
by a contracting firm but was based on regional input and subject the Walton family to build the world-class Crystal Bridges
to cluster review (Table 5). Museum of American Art, which, when it opens in 2009, will
herald a new arts era in the region.

Table 5: Montana Wood Products Competitiveness Factors

Factor Rating Comments

Skills and labor 7 Labor in short supply, few educational programs target sector. Most learning informal or
through private trainers.

Relationships and social 5 Strong associations and some informal networking, but companies still view each other
capital mainly as competitors.

Suppliers and services 7 Even though reductions in lumber supply and mills cause consolidation, cluster has strong
supply chains.

Marketing and 2 Very high cost, difficult to transport logs out of forests and to customers.
transportation

Technology and innovation 8 Adoption of new technologies by firms, strong support from Montana manufacturing
extension and cooperative extension.

Entrepreneurship 4 Becoming more costly with mechanization, and support from banking industry more com-
mon at high value-added end of market.

Equity and opportunities 7 Lack of formal education not a limitation and good paying jobs available to anyone willing
to do the work.

10
 Cluster-Based Strategies for Growing State Economies

Chapter 4 — Initiatives to Grow and from firm to firm as if knowledge was ‘in the air.’”22 Even in the
21st century, wired America, with clusters and people more dis-
Sustain Clusters persed within regions, local buzz keeps ideas flowing and compa-
Once clusters have been identified, mapped, and named, the real nies innovating. In more diversified modern economies, the
challenge begins. What can governors do with this knowledge that knowledge that was once simply something in the air still is more
advances the growth, competitiveness, and sustainability of their likely to be confined to cafes, coffee shops, and conference hall-
states’ clusters? How can deeper understanding be converted into ways. Thus, clusters depend much more on formal organizational
effective actions and successful outcomes? The rubber meets the frameworks to facilitate the sharing of knowledge as well as for
road in formulating and launching “cluster initiatives,” the name working together toward common goals and solidifying their col-
given to projects, resources, and investments that benefit a specific lective presence.
set of industries and region.
Therefore, almost every cluster program begins with a mobilization
The sections that follow explain a variety of promising cluster ini- strategy. Clusters have become virtually synonymous with mem-
tiatives that have been used in various forms. Each is either a cur- bership organizations designated to represent them, variously
rent or recent cluster initiative in some region, an initiative not called councils, associations, partnerships, or networks. These
intended as cluster-specific but typically implemented by clusters, organizations have become powerful voices for their members,
or a general initiative that could be more effective if targeted to mechanisms for engaging industry and aggregating needs and
clusters. demands, pipelines for getting information to members and to
government, platforms for networking and learning, and, in some
A. Establish a Solid Foundation cases, pathways of obtaining public monies into the cluster. As
such, they have become important to the success of some clusters.
Every cluster has some fundamental needs that are not cluster spe-
cific but affect its ability to compete with other regions and other
nations. The nation’s earliest cluster strategies, which were
designed by SRI International in the late 1980s, listed seven eco- Florida’s Technology Coast
nomic foundations: a competitive tax and regulatory environment,
Manufacturing and Engineering
skilled human resources, accessible technology, capital availability,
physical infrastructure, quality of life, and economic development In 1991, a group of defense contractors in Florida’s panhandle
programs. As the understanding of clusters has improved, it has was invited to a conference about Italy’s industrial districts
become clear that some of those foundations are of more value and the value of collaboration held at Okaloosa-Walton
when they are more specialized. Some aspects of skills, technolo- Community College. Based on what they learned about net-
gies, tax and regulatory environments, and economic development works in Italy’s industrial districts, about 30 companies
programs, for example, are specific to certain clusters. Three areas formed the Technology Coast Manufacturing and
that continue to undergird — and undermine, where deficient — Engineering Network (TeCMEN). With initial support from
most if not all clusters are the creative milieu, which is an element the state and foundations, members of the network hired a
of quality of life; basic education; and physical infrastructure. For director, solidified their relationships with regular meetings
more on these, especially education, see the companion documents and events, collaborated on training, jointly bid on contracts,
being simultaneously published under the NGA Innovation and visited federal labs together to find research that could be
America initiative: The 2007 State New Economy Index and commercialized. Networks formed, and members made deals
Building a Science, Technology, Engineering, and Math Agenda. following meetings or over coffee. Now managed by the
Economic Development Council of Okaloosa at the college,
TeCMEN’s current official mission statement is “to promote
B. Build Relationships
the economic and technological growth within Okaloosa’s
The real strength of clusters lies in their intangible assets, particu- defense community through the association, collaboration,
larly the tacit knowledge that resides within the employees and and contract-teaming of its manufacturing and engineering-
routines of companies in the cluster and the mechanisms for shar- based companies.”
ing it across companies and institutions. A century ago, Alfred
Marshall described clusters as places where “ideas moved easily

11
 Cluster-Based Strategies for Growing State Economies

Although Arizona and Oregon were the first states to support clus- Initiative: Convene a Cluster Leadership
ter associations, in other regions, associations were forming sponta-
Council
neously. In some places, the catalyst was isolation from sources of
innovation and markets; in others, it was real or perceived external States should look first to the business leaders from within the
threats to an industry. A small group of metalworking companies cluster to help better understand the cluster’s assets, needs, and
in western Minnesota formed the Tri-State Manufacturers challenges and to lend their support, often the first step in a mobi-
Association to discuss common concerns and soon attracted more lization process. Governors can play a critical role in getting the
than 100 member companies, reaching into eastern North and right leaders to the table. Leadership councils generally represent
South Dakota to companies that had similar needs. The the sub-sectors in the cluster: executives of leading large and small
Technology Coast Manufacturing and Engineering Network companies; associations and nonprofits serving the cluster; major
formed in 1991 with support from the Florida legislature, partly in providers of services, capital, education, and training; and, in the
anticipation of reductions in defense spending, after learning about case of interdependent clusters that have already formed, other
the Italian artisan associations and networks at a local conference. cluster leadership groups. The councils, staffed by people intimate-
ly familiar with the industry, can either have an indefinite life span
In recent years, a new generation of cluster associations is emerging
or be organized with a finite life span, turning over responsibilities
that focuses more on industry leadership than on extensive broad-
to whichever organization steps up to represent the cluster.
based membership. These leadership or innovation councils, which
are limited in size, are charged with setting priorities and generat- The leadership council typically begins with some sort of diagnos-
ing resources for the cluster and often are held accountable for a tics, such as identifying the most pressing needs — including
cluster’s activities. Cluster leadership councils have roles to play social issues that affect the cluster’s region, work force, and quality
but are not the same as the more inclusive associations that create of life — and recommending strategies and setting priorities. It
the conditions necessary for networking, learning, and innovation helps to involve public sector officials at levels roughly equivalent
throughout the cluster. with the business executives and to maintain a high level of visibil-
ity within the business community. The kinds of activities of clus-
Cluster associations, in contrast to leadership groups, are intended
ter-oriented leadership organizations, such as those formed for San
to build trust among members to work collectively toward com-
Diego and Silicon Valley in California, in Connecticut, and in
mon goals, share nonproprietary knowledge, and network. A
South Carolina have been neatly defined by the California
membership roster, however, does not define a cluster.
Regional Economies Project down to levels of detail as minute as
Nonmembers miss out on the access to services provided by and
how to arrange meeting rooms.23
relationships developed within the associations, but they can still
benefit as “free riders” from specialized public and private services,
labor pools, and local knowledge. In some places, the strength of Initiative: Support Cluster Organizations
social foundations precludes the need for an organization. A cluster organization, unlike a leadership council, is not appoint-
Northeast Mississippi’s furniture cluster is a case in point; its high ed. It is membership driven, service oriented, and open. The most
concentration and strong community connections obviate the need successful organizations are associations that provide a menu of key
for an industry organization. services, useful information, and frequent networking venues.
The experiences of cluster organizations over almost two decades Cluster organizations are easy to start, generate considerable excite-
have produced useful lessons for what to do and not to do in ment in their early stages, and brand the cluster. Cluster organiza-
building cluster organizations (Table 6). Many cluster organiza- tions have proven difficult to sustain, especially if they are the
tions face the same obstacles that networks did a decade earlier: result of external stimuli and have short-term funding support.
inability to show early returns to time invested; lack of company Failure rates of cluster organizations may be as high as success rates.
leadership; and formation in response to incentives or exhortation Causes include organizations that do not represent the cluster, over-
rather than need. The early stages of organizational development reliance on dues without commensurate services and value, lack of
often get press coverage and bring a sense of excitement. But after leadership, and competition with existing trade associations.
meetings become routine, only the associations that meet immedi-
ate needs or provide real services survive. Having a designated
facilitator or cluster manager often helps provide continuity and
supports sustainability.

12
 Cluster-Based Strategies for Growing State Economies

Table 6: Examples of Effective Cluster Organization Table 7: Do’s and Don’ts of Successful Cluster
Organizations
Name State Reason for Web Site
forming Elements of successful Elements of unsuccessful
organizations organizations

Arizona Optics AZ Leadership, http:// Strong industry leadership Club-like exclusivity

Industry recognition www.aoia.org
Association
Staff to organize and manage Compete with existing
Life Sciences Alley MN Common needs http://www.med activities industry associations
icalalley.org Provide needed services Measure success in terms of
funding
Tri-State MN Overcome http://tsma.com Support for collective projects Dominance by public sector
Manufacturers isolation
Associations
Facilitate networking Too broad a set of industries
Oregon OR Collective http://oan.org
Association of services
Nurseries
Minneapolis’s Device Cluster
CIT.ms MS Recognition, http://www.CIT
(Communications support .ms Minnesota’s Twin Cities are known as the leader of the medical
& Info Tech) device industry. Initially labeled “Medical Alley,” the area has all
the elements of a successful cluster — industry leaders, young
New York NY Networking http://nysia.com growing companies and entrepreneurs, education and training
Software Industry at the university and community college, established medical
Association centers that are early adopters, venture capitalists that know the
industry, and a strong association. The cluster employs only
about 1 percent of Minnesota’s work force, but its jobs are high
Cluster organizations are most successful in emerging sectors that
wage and market growing. The association has played a key role
depend heavily on new contacts, networking, and knowledge and
in providing services such as education and training, network-
in mature sectors that are under threat or seeking solutions to
ing, and early stage capital as well as in building the image of
common problems. The most successful cluster associations have
the cluster. In 2006, the association merged with the bio-
been those that build on existing relationships, extend the services
sciences cluster, which has similar markets, and changed its
and competencies of existing business associations, or offer imme-
name from Medical Alley to Life Sciences Alley. The advantage
diate cost savings. If organizations form that speak for a group of
is more members (about 500), giving it more clout and
companies, the needs expressed have to be taken seriously, which
resources.
means there must be resources available to meet the most com-
pelling and well-documented needs.

13
 Cluster-Based Strategies for Growing State Economies

Initiative: Provide Opportunities for researchers; mid-level technical, clerical, and support staff; and
entry-level workers. The most highly educated and specialized are
Collaboration
recruited globally as well as drawn from local universities.
Government initiatives in the early 1990s to encourage interfirm
The biggest bang for the human resource buck of a regional cluster
collaboration were ostensibly replaced by cluster initiatives. But
comes from access to the pool of employees who comprise the
what goes around comes around, and networks are now seen as an
middle of the work force. These workers tend to be regionally
essential outcome of clusters and source of synergy. The social
bound and less importable or exportable than almost any other
structure of clusters enables small companies to more easily find
production factor. There is no easy substitute for a skilled local
the partners they need to expand their capabilities into more com-
labor force and the know-how it possesses.
plex products, reach new markets, share expensive equipment, or
find solutions to problems. The process happens where social capi- Companies depend on an uninterrupted flow of workers with the
tal is strong, levels of trust are high, and opportunities are trans- necessary skills and knowledge of the industry and the ability to
parent. apply them to both routine and unanticipated situations.
Emerging clusters need a pipeline of employees to support antici-
The ability of firms to form networks is hampered by time and
pated growth; mature clusters need replacements for retirees and
resource constraints on small firms and lack of a coordinator or
new skills as technologies change; and transforming clusters need
broker. The lessons from the government network programs that
retraining for transferability. All clusters require continual upgrad-
took place in the 1990s have shown what works and why. Past
ing of skills as technologies and processes change — an area in
efforts highlighted the importance of a cluster infrastructure, the
which U.S. companies have lagged behind their international com-
intangible outcomes that companies valued, and sufficient dura-
petitors. U.S. employers invest less per employee in training than
tion of support. Networks remain the heart and soul of clusters.
any of the six other major industrialized countries and less than
They also have been shown to be particularly effective in less pop-
two-fifths of what China invests.
ulated and poor areas, allowing microenterprises to achieve scale
economies and reach new markets. The community colleges have assumed the primary responsibilities
for preparing and retraining the mid-level workforce. Over the past
Table 8: Policies to Catalyze Networks Used by States* 20 years, they have done an impressive job of responding quickly
to the needs of new and expanding companies with customized
• Legal advice and contract training, of small and mid-sized enterprises (SMEs)
with their advanced technology centers and occupational pro-
• Consultants grams; and of entrepreneurs with business centers and incubators.
At the same time, they serve their communities by providing access
• Network facilitation training
to higher education for all, including new immigrants, students
• Incentives to plan networks with families and/or with full-time jobs, and those with little
preparation or few resources. Community colleges have demon-
• Matching funds to implement strated they can successfully juggle a variety of missions, serve all
populations, and meet their goals.
• Matching funds for multifirm activity
Many four-year colleges and second-tier universities also serve local
* For example, Arkansas, Connecticut, Kentucky, Oregon, labor markets and add value as a source of interns and summer
Massachusetts, Washington employees, as a means for students and companies to explore
future employment, and as a career path for the advancement of
C. Deepen Skills and Talent incumbent workers and baccalaureate education of community
college students. Most clusters appreciate both the individual and
Of all the factors that motivate and grow clusters, none is more
complementary strengths of the two-year and four-year institutions.
universally important than human resources. In almost any clus-
ter’s plan, the availability of pools of experienced and skilled labor Until recently, states did little to align education with their clus-
and the customized and specialized education and training that ters. They paid scant attention to the value of developing special
produce, upgrade, and deepen the skills and knowledge are two of expertise — and even less to international experiences. Special
its highest priorities. Companies need talented managers and cluster centers and programs were developed sporadically as a

14
 Cluster-Based Strategies for Growing State Economies

result of scale of demand, influential employers, entrepreneurial based programs in institutions of secondary or higher education.
college presidents or deans, or funding opportunities. To address Few U.S. employers are willing to devote the time and resources to
the unmet needs, the National Science Foundation through its mentoring students or have shown much interest in creating sys-
Advanced Technological Education Centers, for example, has tems that could provide real learning opportunities for students,
invested in 32 industry- and technology-dedicated centers as of whether as part of a semester course offered at an educational insti-
2006. Many are multi-institutional centers with locations in the tution, as after-school jobs, or as summer programs.
hearts of closely related industry clusters. The new Workforce
Cluster associations represent a structure for collectively creating a
Innovation in Regional Economic Development (WIRED) pro-
comprehensive workplace learning system, reducing individual
gram launched by the U.S. Department of Labor is also targeting
costs, and improving the pipeline of qualified students into the
improved integration of education and workforce programs with
cluster, particularly if the costs are shared between the private and
regional clusters.
public sector. Employers gain from contributions made by student
One positive development has been the establishment of profes- employees and have the opportunity to evaluate future employees.
sional science master’s (PSM) degree programs to meet growing Employees gain by receiving real life work experience and by mak-
industry needs for applied scientists and mathematicians. Created ing valuable career connections, both to employers and to future
in 1997 with the support of the Alfred P. Sloan Foundation, the employees.
PSM degree is designed to be a better, faster, and cheaper alterna-
Faculty also gain from workplace learning programs by upgrading
tive to traditional graduate degrees in science. PSM programs typi-
their own skills as they teach the programs needed by employers
cally require two years of study and feature cross-training in more
and by making their instruction more current and relevant. For
than one academic discipline. Many of the programs include
example, Mission College, a community college in a Silicon Valley
internships and training in business, technology transfer, regulato-
area, had summer internships with National Semiconductor and
ry affairs, information technology, and communications. Today
Intel for all faculty members, even those not teaching in technical
there are more than 100 PSM programs at 51 universities in 20
programs.
states, but there could be many more and they could be more clus-
ter-focused. Although governors do not institute degree programs
Table 9: Establishing Workplace Learning Models
in higher education, there are several ways that they can encourage
the formation of PSM degree programs. For details, see the NGA
Center issue brief on this subject.24
• Develop framework for program with schools through the
As more is learned about clusters, clustering, and globalization, cluster association
more states are planning and developing specialized programs,
• Design course requirements, wage rates, and business
expertise, and services that align their college systems with cluster-
obligations
based economic development strategies, as in Alabama,
Connecticut, North Carolina, South Carolina, Washington, and • Identify company sponsors/student employers
Wisconsin. Only by making hard choices and practicing institu-
tional and system-wide cooperation can colleges develop specific
• Conduct training workshop for participating businesses
expertise while at the same time addressing the breadth of regional
and mentors
needs and individual interests.
• Select students and prepare them for cluster workplace

Initiative: Establish a Cluster-Based

Workplace Learning System • Establish cluster-based learning network for students to
share experiences
The contributions of work experience to learning are well docu-
mented; in many European nations, apprenticeships are the core of • Find resources for incentives to share costs with participat-
their educational programs and are supplemented by classroom ing businesses, as reimbursements or tax credits
instruction — both supported by public dollars The United States, • Monitor and assess outcomes
however, has had only limited success in creating widespread work-

15
 Cluster-Based Strategies for Growing State Economies

Initiative: Create Cluster Hubs at Table 10: Examples of Community College Cluster Hubs

Community Colleges Community Cluster Location Focus

The cluster hub is a new breed of industry-driven technology cen- College
ter that concentrates on the distinctive nature of work in a set of
Catawba Hosiery Hickory, NC Technology,
related industries (Table 10).25 It is a resource that industry can rely
Valley testing, and
upon to understand its particular needs and interests, solve prob-
Community design
lems, assure a continuing flow of qualified entrants, and serve as a
College
source of skill upgrading for the incumbent work force.

Specialization allows community colleges to achieve true excel- College of Fine Furniture Eureka, CA Design, quali-
lence, be relevant to their regional economy, and use their Redwoods ty, business
resources more cost efficiently. It allows students access to better skills
and deeper programs (“know what”), better employment informa-
Guilford Entertainment Greensboro, Recoding,
tion and more rungs on career ladders (“know who”), deeper
Technical and technologies NC staging, sound,
understanding of industry context (know why), and more informal
Community business skills
learning opportunities (“know how”). Cluster hubs give businesses
College
access to a more specialized labor pool, a greater array of programs
and courses, and more opportunities for training networks.
Indian Hills Bioagriculture Ottumba, IA Fermentation,
The following characteristics distinguish effective state-wide cluster Community pilot facility
hub programs. College

1. Recognize the importance of context in education and training

Walla Walla Wine Walla Walla, Enology,
and the value of skills and knowledge that can be directly
Community WA viticulture,
applied to a particular business environment. Industrial mainte-
College culinary arts,
nance, for instance, has generic skill requirements, but different
entrepreneur-
knowledge is necessary to maintain equipment in a biotech
ship
company, a defense contractor, an auto supplier, and a food
processor. Lamar Chemical Beaumont, Process
2. Depend on broad collaboration within a state community col- Institute of TX technologies
lege system. The college within a state given the responsibility Technology
and resources to develop cluster expertise must ensure that its
expertise and resources are accessible and available to companies
Source: Industry Cluster Hubs at Community Colleges, Data base
across the state through other educational institutions as well.
developed by RTS with support from the Alfred P. Sloan
3. Establish partnerships and articulation agreements with second- Foundation, http://www.rtsinc.org/clusterhubs/.
ary systems to encourage new enrollments and with universities
to design career pathways and collaborate on research and
development.

4. Seek ideas from other institutions specializing in the same clus-

ter to enhance its programs and expertise. Some cluster hubs
have formed international learning networks to broaden their
exposure, such as CraftNet, Automobile Manufacturing
Technical Education Collaborative, EntreNet, Media Arts
Alliance, and the Medical Device Industry Education
Consortium.

16
 Cluster-Based Strategies for Growing State Economies

Table 11: Examples of Connecticut’s Training Networks

North Carolina’s BioNetwork
North Carolina uses a cluster hub model to support its large • Metal Manufacturers Training and Education Alliance
and growing biotechnology cluster. Started in 2003 with a grant (META)
of $7.1 million from the GoldenLeaf Foundation, BioNetwork • Housatonic Education for Advanced Technology (HEAT)
funds link its colleges together and with North Carolina State
and North Carolina Central Universities through a central
office headquartered at the state’s community college system • Automotive Training Collaborative
office. Most BioNetwork activity occurs at centers at five com-
munity colleges specializing in different aspects of biotech: bio- • Fairfield County Information Technology Consortium
processing, pharma, bio-ag, noncredit programs, and business
support services. BioNetwork staff at colleges do not teach class-
es on their own campus, freeing their time to develop curricula • Connecticut Association of Metal Finishers
and services and train instructors at their own colleges and else-
where. BioNetwork also operates a mobile lab to take training
to companies and colleges, to create new curricula, and to spon-
sor seminars and job fairs. All colleges are eligible for grants Oregon’s Wind Energy Training
from an innovation fund and an equipment and facilities
Consortium
fund.26
A partnership of wind energy businesses, the Workforce
Response Team, Columbia Gorge Community College, and
Initiative: Encourage Training Consortia
Mid-Columbia Council of Governments, is working with a
Training networks are one of the most widely used cluster-specific consortium of wind energy companies to train technicians. No
resources. Offering company training through consortia (also training program for wind turbine maintenance technicians cur-
called skills alliances) rather than to one company at a time makes rently exists on the west coast. Focusing first on the wind
programs more affordable to smaller firms and encourages them to industry, the consortia also will identify skill sets common to
invest in training. For training that is both expensive and essential, technicians in other renewable fields such as hydro, biofuel, and
companies have been quick to network, especially to provide train- solar. Columbia Gorge Community College will develop curric-
ing in lean manufacturing, ISO 900, CAD, and English as a sec- ula; identify alternative training delivery systems including on-
ond language. Training consortia follow three basic formats: train- line offerings, evening classes, shortened schedules, and sequen-
ing networks, skills alliances, and sector strategies. tial modules versus academic schedules; and create strategic
partnerships with other community colleges, universities, and
Training networks were initiated in earnest under the many state
other training entities. Region 9 Workforce Investment Board,
programs to encourage business networking during the 1990s.
with input from business and economic development, will serve
States offered grants to networks of three or more companies. In
as advisor for the project.
1998, Pennsylvania’s department of community and economic
development enacted industry consortia training for networks,
naming five clusters as the targets of the training. Connecticut Initiative: Engage with Community-Based
introduced a full-blown business training program in 1999 that by
2002 had funded 11 cluster-based networks, including a metal-
Organizations
working training network in Bridgeport that became the core of Clusters depend on a supply of educated, reliable, entry-level
the state’s metals cluster. Oregon is currently using its governor’s employees but face shortages of these types of workers. In some
Workforce Investment Act set-aside funds for training consortia places, those shortages are caused by large numbers of unemployed
and is training its economic and workforce developers in network- and underemployed people who are disconnected from conven-
ing techniques linked to its clusters. For more information on tional hiring processes. One effective way to reach those popula-
regional skills alliances and sector strategies, see the NGA Center tions is to work through intermediary community-based organiza-
Issue Brief: State Sector Strategies: Regional Solutions to Worker tions. Some of the most effective cluster programs operate under
and Employer Needs, 2006. the rubric of “sectoral skills strategies,” many of which operate
similarly to cluster strategies.
17
 Cluster-Based Strategies for Growing State Economies

Most foundation-supported community-based intermediaries that It is important to recognize that educational credentials are not the
work with underemployed, unemployed, hard-to-employ, and only measure of creativity — and in some cases, it is not the best.
immigrant populations lack meaningful employer engagement. Many regions are home to people whose talents are not identified
The intermediaries have stronger ties to the people who need help by either degrees or test scores. These talents, if nurtured, could fit
or to the educational institutions than to businesses. Assessments many of the emerging clusters that thrive on unconventional ideas,
of successful intermediaries have shown that typical factors include such as media arts, design, and entertainment.
acting like a business, employing staff with sufficient industry
experience to speak the language of the cluster, and developing real Initiative: Promote Cluster Career
relationships with the cluster’s leaders. Adding employees with
cluster experience to intermediaries and bringing the intermedi-
Advancement Paths
aries to the table with cluster members to discuss needs and to Career pathways are a way to connect education and training pro-
design strategies would benefit both employers and potential grams with support services to help people — especially those who
employees. The Jane Addams Resource Corporation in Chicago, are most disconnected and disadvantaged — gain employment
staffed by former metal workers, has been effectively working with and/or advance within an occupational or industry sector.29
companies to identify and train low-income Chicagoans for the Cluster-based career paths pay more attention to industry know-
industry since 1985. how acquired along the way and to informal grapevines among
students to identify opportunities. Paths move vertically within
Initiative: Find and Recruit Talent clusters and horizontally across clusters with similar work environ-
ments and contextual requirements. Career paths depend upon
If clusters want to attract talent — especially young talent — they information about the cluster, connections between education and
have to understand what influences young people’s decisions. training programs and employers, curricula that are defined by job
Because creative young people seem to avoid suburbs and prefer competencies, and articulation of community colleges’ programs
central cities, clusters need city neighborhoods where they can with higher education requirements to ensure continuity along the
afford to live. Therefore, the quality and real estate costs of down- paths.
town neighborhoods are important considerations. Some — in fact
many — cities and towns are looking to their creative sectors to be
the magnets for young talent and are establishing cultural quarters,
D. Align Innovation Investments
an idea originating in Europe, and arts districts to ensure their Behind every strong cluster is a set of innovative companies that
growth. These are urban neighborhoods with low rent living and are never satisfied with the status quo, companies that are continu-
working space for artists and designers along with galleries, music ally looking for improved products or practices or searching for the
and theatre venues, coffee shops, and boutiques. Carytown in next new big breakthrough.30 The importance of innovation can-
Richmond, Virginia; Culver City in Los Angeles; and the Pearl not be overstressed. It is how new value in a business and economy
District in Portland, Oregon, are examples of arts districts. Small is created, regardless of source. In a 2005 survey by the Council on
and mid-sized cities also are competing for young talent by recreat- Competitiveness, executives attributed 42 percent of their produc-
ing themselves as creative and entrepreneurial places.27 tivity gains to innovation, three times more than any other single
factor.31 Clusters need creative and innovative people as well as
Talent also is recruited from other states and from sources outside
implementers and users to create commercial value, and they need
the United States. Today, three of every eight residents of Silicon
imitators to keep innovations flowing.32
Valley are foreign born,28 and in 2000, half the engineers and sci-
entists in Silicon Valley clusters were foreign born. Without this There are three major sources of innovation: research and develop-
population, Silicon Valley would not be as competitive. Clusters ment that is commercialized; functional improvements in prod-
need to be proactive in making sure their environments are wel- ucts, services, and production processes that come from inside or
coming and supportive of immigrant talent, for example, by pro- outside a firm; and design improvements that enhance a product’s
viding educational and cultural programs for employees and their aesthetic appeal and make it distinctive.
families and offering social networks. Some states are offering spe-
Universities are vital sources of R&D-based innovation and assets
cial incentives for engineers, teachers and medical professionals to
to research-intensive clusters. The importance of MIT’s research to
take jobs in their states.
Boston’s high-tech clusters, Stanford’s research to Silicon Valley’s,

18
 Cluster-Based Strategies for Growing State Economies

or the Research Triangle’s three flagship universities to the biotech innovation requires the right brain thinking associated with the
cluster is undeniable. The patents they produce are only the tip of arts as much or more than the left brain thinking associated with
the iceberg in terms of value to their related clusters. Research that science and technology.
is not commercialized can influence corporate research and prac-
tice, and faculty consultants and graduate students can affect cor- Arizona Biosciences
porate strategy. Federal research dollars also are important catalysts
for cluster development — in the case of Silicon Valley and Arizona, after carefully assessing its assets, saw niche opportuni-
Boston, one of the two most important factors in both the devel- ties to convert its institutional and industry strengths in health
opment and growth of their technology clusters.33 care and medical research into a biotechnology cluster. In 1997,
the Arizona bioindustry cluster was formed. Three years later,
Innovation, however, is difficult to quantify. Common measures voters approved a sales tax increase, part of which was used to
such as investments in R&D, concentrations of high-tech compa- build the bioindustry research centers at Arizona State
nies, IPOs, and numbers of patents per capita, however, miss most University, Northern Arizona University, and the University of
of what occurs in companies without internal R&D departments Arizona, followed a year later by a large investment in the bio-
or dedicated expenditures — a group of companies that are almost sciences by the Flinn Foundation to create and implement the
all SMEs. Further, few patents are actually commercialized; for Arizona’s Biosciences Roadmap. The governor appointed the
example, a study of the biotech industry in 2002 found that of an Arizona BioInitiative Task Force to attract additional key bio
average of 5,500 biotechnology patents that had been filed each organizations, and a few months later, the BioIndustry
year, about 400 were in development and only 100 had reached Organization of Southern Arizona was formed. After a series of
the market in the past 30 years.34 key investments in biosciences research, education, institutes,
Other innovations are unpublicized improvements or inventions and companies under the leadership of Governors Hull and
that occur on the job when, for instance, an employee creatively Napolitano — including attracting the International Genomics
retrofits a machine to a new use, finds a way to reduce waste, or Consortium and founding the Translational Genomics Research
suggests a better office management system. Innovations also fre- Institute — a 35-percent tax credit for investors in bioscience
quently come from outside of the conventional innovation infra- companies, a collaborative evaluation agreement among eight
structure. As the Alliance for Regional Stewardship stated last year, pharmaceutical firms, the emerging cluster is well positioned for
“In the old economy, hierarchy ruled and R&D departments were further growth.
responsible for generating a predictable flow of new improvements.
In today’s innovation economy, anyone with a good idea can
Table 12: Innovation Sources
potentially become innovation leaders.”35 In a survey of executives
in 2005 conducted by the Council on Competitiveness, the high- Form of Innovation Examples of Institutional
est response for frequency of collaboration in the innovation Sources
process was suppliers/customers, followed by innovations flowing
from internal experts, external experts, other companies, university Research and development University research
faculty, and, at the very bottom, labs and research institutions.
Private and federal research
The most overlooked source of effective innovation involves prod- labs
uct design changes that influence consumption choices — the cre-
Product and process improve- Community colleges
ative content or appeal of goods and services that distinguishes
ments
them from competitors and causes customers to pay a premium. University extension services
According to Business Week magazine, “when people talked about
Small business centers
innovation in the ‘90s they invariably meant technology. When
people speak about innovation today, it is more likely they mean
design. Consumers, who are choking on choice, look at design as Design and differentiation Colleges of arts and design
the new differentiator.”36 A survey of chief executive officers con- Private design companies
ducted in 2006 found that 72.7 percent believed that “design is a
key competitive weapon against low-cost imports” and 86.6 per-
cent thought it could provide a lasting advantage.37 This type of

19
 Cluster-Based Strategies for Growing State Economies

Initiative: Invest in Cluster-Based Initiative: Direct R&D Funds to Clusters

Innovation Centers The tendency at universities is to conduct basic research that
States and federal agencies have been investing in science and tech- reflects the interests and expertise of faculty members and/or agen-
nology innovation centers since the early 1980s. Oklahoma’s cies providing funds. If that research happens to match local needs,
Center for Science and Technology, Texas’s Regional Centers for then so much the better. But local demand is not typically the
Innovation and Commercialization, Ohio’s Edison Centers, and driving force; universities serve larger regions and global customers.
New York’s Centers for Advanced Technology are but a few exam- There are, of course, many exceptions, and a certain proportion of
ples. Most have been established to do applied scientific research the research has local relevance because farsighted leaders have
and development with an emphasis on technology transfer, com- invested wisely. Much of the research focuses on the best-known
mercialization, and regional economic impact but also to attract high-tech regions in the United States — Boston, Research
funding from federal agencies and corporate partners or customers. Triangle Park, and Silicon Valley — but many smaller clusters have
made effective use of R&D. Many states have strengthened their
A cluster-based innovation center, in contrast, is a bottom-up insti- clusters considerably by investing in research, even if the clusters
tution driven more by members’ interests, including assistance in never reach the scale of the global leaders. Oregon State University,
applying for small business innovation research (SBIR) grants, Penn State University, and Mississippi State University all conduct
finding research partners or capital, and dealing with intellectual research on wood products, and all three states have high concen-
property issues. The North Carolina Biotechnology Center is a trations of wood products companies. The Ceramics Corridor
preeminent model, bringing together researchers, businesses, seed Innovation Centers in Alfred, New York, combine research and
capital, and entrepreneurial support in one place. Research and development for the ceramics, glass, and materials science tech-
development centers at the University of Alabama, University of nologies as well as provide incubator space and technical assistance.
Michigan, and Clemson University are all linked to their respective
regional automotive clusters. The Center for Electronic Imaging Table 13: Suggestions for Allocating R&D Funds
Systems at the University of Rochester supports the area’s optics and
imaging cluster. Each center has close ties to the industry, sending a • Use cluster information as a criterion in awarding R&D
stream of students to intern and graduates to work. Although the grants
final producers tend to keep their research in-house, centers con-
duct research and development for suppliers and customers. • Require applicants to project expected benefits to cluster and
regional economy

South Carolina’s International Center • Assist cluster members in identifying and applying for federal
for Automotive Research (ICAR) grants

Clemson University established ICAR in 2002 for its automo- • Set aside funds for applications involving three or more
tive cluster, hoping to make it the world’s premier automotive partners
and motorsports research and educational facility. It is anchored
by BMW but includes about 120 suppliers in the Greenville- • Create a simplified format for mini-grants to small businesses
Spartanburg area as well as a growing number of jobs associated
with motorsports. ICAR was based on market research revealing
a need for research on system integration, testing, assembly, and
supplier management and on BMW’s commitment to invest in
its first R&D center outside of Munich. BMW, Michelin, and
Timkin have endowed faculty chairs, and the state committed
$209 million over three years. Still a work in process, one goal
is to create an interactive environment, with a mix of uses and
activities that fosters collaborative partnerships that appeal to
the creative class of technology researchers.

20
 Cluster-Based Strategies for Growing State Economies

Initiative: Encourage Collaborative and Initiative: Segment Expertise in

Multidisciplinary R&D Manufacturing Extension
It is now generally accepted that innovation is a consequence of Services
iterative and interactive processes across disciplines and is rarely The design of the U.S. national program to accelerate technology
the fruit of a solitary inventor in the proverbial garage. The need transfer and diffusion to small and mid-sized businesses initially
for cooperation, of course, must be balanced by the need for confi- assumed a cluster focus. A study for the Cleveland Advanced
dentiality, because partners may be competing for financial Manufacturing Program in 1991 recommended targeting 12
rewards. If the research is to develop a new product, there may be regional clusters.38 When the centers and parallel state programs
only one winner; if the research is a process or core technologies merged into the current Manufacturing Extension Partnership
that many can use, there can be multiple winners. (MEP), specialized support was replaced by generic services. In
About 20 hosiery companies in North Carolina invested in devel- many states, there is an informal compartmentalization of expertise
oping an automated boarding machine that would make the entire depending on the industry experience of the extension engineers
cluster more competitive against low-cost competitors. Large cor- and the locations to which they are assigned that may address clus-
porations are able to build research networks within their organiza- ter needs. The extension engineer assigned to the Hickory, North
tional structure, and they have the international connections to Carolina, area has special knowledge of the hosiery cluster. Cluster-
readily find partners to complement their in-house competencies. based staffing is not systematic, however. Where it happens, it is a
Small and mid-sized firms are more isolated and need assistance in response to well-organized and persistent demand or internal
finding partner companies, nearby and abroad. One strategy expertise selected for a particular assignment. Clusters could be
would be to promote collaborative proposals to SBIR grants. better served by access to specific people who are familiar with
their operations. As major co-investors in the country’s 59 MEP
centers, state governments are in a strong position to influence
Initiative: Support Incremental MEP practices in their states.
Innovations
Although many programs support university and corporate R&D, Initiative: Increase Attention to Design as
there are few programs for incremental innovations and little sup- an Innovation Strategy
port for small firms or groups of small firms to solve problems and
improve processes. The continuous improvement user groups A lead article in Business Week in March 2005 called “‘Design
funded by the state of Michigan in the 1990s proved to be an thinking . . . the key to earnings growth and an edge that out-
effective way for networks of small companies to collectively learn sourcing can’t beat.” Neither state nor federal economic develop-
from each other and innovate. Most SBIR grants support R&D ment or innovation programs have paid sufficient attention to the
that is expected to be commercialized, and most of the grantees are aspect of design that adds new value to products and induces cus-
high-tech companies. Fewer grants are made to small firms in tra- tomers to pay for appearance or style, the kind more likely to
ditional sectors for ideas to increase their competitiveness. Very come from artists than engineers. In departments of commerce,
small grants might be enough to set free creative instincts and design is defined in terms of functionality and manufacturability.
leverage significant improvements. Yet markets for specialty goods are growing, and states have an
opportunity to strengthen design capabilities in their educational
systems, design sectors, and companies. Designers themselves clus-
ter and represent a growth industry, but most are in large cities —
New York, Boston, Seattle, and Portland in the United States;
Milan, London, and Copenhagen, and Singapore abroad. Four
examples of initiatives states can take to support design are listed
in Table 14.

21
 Cluster-Based Strategies for Growing State Economies

Table 14: Actions for Improving Design and Creativity The inaccessibility of venture capital to so many businesses has led
some states to use tax revenues or pension funds to fill gaps and
• Form a state-wide design extension service: Small firms that
other states to act as brokers, attracting capital, making loans, and
produce for end markets would benefit from assistance in
providing information about capital sources to applicants. The
using art and design more effectively to differentiate and add
New Mexico Investment Council, Michigan Strategic Fund,
value to their products, packaging, and company brand.
Mississippi’s Magnolia Fund, and Finance Authority of Maine are
just a few state initiatives. Although few of these programs have
• Support design networks: The smallest companies can’t afford been cluster-based, a cluster focus would increase effectiveness and
to employ full-time designers but might be able to share ideas lower risks because program managers would be more knowledge-
and design artistry if networked. The network also would give able and experienced in a particular industry, it could attract ven-
small firms opportunities to explore new ways of adding value ture capital companies that specialized in certain industries, and it
through design. would produce greater synergy among the startups. States also
could do more to target the growing number of angel investment
• Establish a design internship or artists’ residency program: programs and tax credits to specific clusters.
Some of the most successful corporations rely on art to stimu-
late creative thinking and new products. Kohler Corporation Table 15: State Support that Could Be Targeted
has had a successful artists’ residency program for years. • Pre-seed or seed capital
Artists working inside companies and with cluster organiza-
tions could result in better solutions to problems, new prod- • Investments in privately managed funds
ucts, and new markets. Some leading business schools are
using integrative thinking to spark creativity by getting man- • Tax credit incentives
agers and researchers to use “abductive” reasoning as well as
inductive and deductive reasoning, asking “what could be.” • Bridge funding for SBIR grants

• Support interdisciplinary research: In the United States, some • Matchmaking services

of the top business schools are beginning to promote integra-
tive thinking, taught by teams of business people, scientists,
and artists. The European Union is in the forefront of public
E. Accelerate Entrepreneurship
support, funding programs at universities and research centers Clusters are carefully woven into a complex tapestry by cadres of
across Europe that require teams of artists, scientists, and enterprising entrepreneurs and innovators who see and seize
engineers. The United Kingdom has made 700 awards from opportunities to add value to an existing set of regional competen-
national lottery funds for such research cies. The addition might be a new element of an existing value
chain, a way to be more competitive in existing markets or supply
chains, a new compatible niche product, or a new application of
some cluster technology. Many of the entrepreneurs are already
Initiative: Mobilize Investment Capital employed within clusters, fewer come directly through the educa-
for High-Tech Startups tional system, and some are attracted from other places.
Venture capital in the United States has not recovered to its highs States and federal agencies have been supporting entrepreneurship
of the late 1990s, and what does exist is highly concentrated in a at least since 1979 when the publication of David Birch’s book
few places. In Silicon Valley, venture capitalists are very aware of a The Job Generation Process surprised the nation by showing the
potential investment’s physical distance from them. Venture capi- extent to which small businesses accounted for economic growth.39
talists prefer their investment companies to be close so that they Many regions have pinned their hopes for growth and targeted
can better support and monitor their investment’s operations. The their venture capital on the “gazelles,” the high-tech companies
high concentration and tough requirements leave many strong considered capable of rapid growth. But focusing only on gazelles
candidates in less populated or less wealthy areas unable to get misses many emerging creative clusters dominated by the self-
good ideas off the ground. employed and microenterprises. Between 1997 and 2004, U.S.

22
 Cluster-Based Strategies for Growing State Economies

employment grew about 7 percent while self-employment numbers Many incubators have a particular focus, generally on areas such as
grew 26 percent. high tech or manufacturing, and most look for businesses that
bring new wealth into the community. According to the National
How do clusters influence entrepreneurship? Most entrepreneurial
Business Incubation Association, about 47 percent of all incuba-
skills programs focus on such aspects of the entrepreneurial process
tors are for mixed use, and 37 percent limit tenants to technology
as doing market research, writing a business plan, raising capital,
companies. Incubators that target companies in specific clusters,
and creating an organization. They assume these are generic
however, have the added advantage of being able to offer even
processes, but the truth is that the cluster into which they fit
more highly specialized services and expertise and create more
shapes the skills that are needed. Although many skills apply to
opportunities for networking and learning. Some of the most suc-
any types of business, there are skills that are specific to a certain
cessful cluster-based incubators target biotechnology or food pro-
kind of industry. Starting a new bed and breakfast, a metal-form-
cessing, which require special equipment that can be shared, and
ing business, or a parts distributor require knowledge of different
software or the arts, both of which thrive on creative environ-
kinds of businesses. Knowledge of cluster-specific skills, relation-
ments. A few are described below.
ships, and language can make the difference between success and
failure. State policies that adapt initiatives to specific clusters have • The New York Software Association manages an incubator in
the potential be more effective.40 New York City with support from the Empire State
Development Corporation.
Initiative: Support Entrepreneurial • The North Carolina Central Carolina Community College’s
Networks Small Business Center created an arts incubator in 11 historic
buildings in Siler City, revitalizing a depressed downtown.
Entrepreneurs thrive on networking. They may have a great idea
but have only some of the knowledge necessary to convert it into a • Appalachian Center for Economic Networks in Appalachian
business. Networks give entrepreneurs opportunities to meet other Ohio created a kitchen incubator for the local high-end food
entrepreneurs with complementary knowledge, different connec- processing cluster that assists clients with label design, market-
tions, and common concerns. If the entrepreneurs are in somewhat ing, distribution, processing, and capital.
similar or complementary businesses, the knowledge and contacts
• The Environmental Business Cluster in San Jose, California, is
that develop are bound to be more relevant. The National
a 12-year old clean energy and environmental technology
Commission on Entrepreneurship mapped out a process for build-
commercialization center that provides business assistance pro-
ing networks that highlighted the importance of ensuring leader-
grams to resident and nonresident companies and helps form
ship, allowing for failure, networking the networks into strategic
technology partnerships and networks.
alliances, and letting go after they achieve their purposes.41 Of spe-
cial interest to innovative entrepreneurs are networks that link
them to leading researchers at universities. One model for doing Ohio’s ACEnet
this electronically is the iBridge Network, a program of the
Appalachian Ohio has been a persistently depressed rural area
Kauffman Innovation Network, Inc., and its Web site:
that successfully used a food cluster-based entrepreneurial strat-
http://www.iBridgeNetwork.org.
egy combined with creative marketing and branding to add
wealth and create jobs. The Appalachian Center for Economic
Initiative: Create Specialized Incubator Networks (ACEnet) worked with farmers selling commodities
Space to move up the value chain. With foundation and Appalachian
Regional Commission (ARC) support, ACEnet established the
Business incubators, according to the National Business Incubator food ventures center, a shared-use fully equipped food manufac-
Association, are “a business support process that accelerates the turing facility with a retail store; taught entrepreneurial skills;
successful development of start-up and fledgling companies by and found artists to write stories about the products and create
providing entrepreneurs with an array of targeted resources and innovative labels and packaging. ACEnet networks producers
services . . . usually developed or orchestrated by incubator man- and assists with marketing, distribution, processing, and capital.
agement.” The public sector has invested heavily in incubators over “Networking occurs in the quick deals, crucial tips, market
the past two decades to spur R&D commercialization at universi- information and resource-sharing moments that happen hun-
ties and to create opportunity in poor rural communities. dreds of times a day across ‘the network.’”42

23
 Cluster-Based Strategies for Growing State Economies

Initiative: Organize Cluster Expertise Viticulture at Walla Walla Community College in Washington
have established four new wineries.
Across Small Business Centers
State governments could do more to support entrepreneurship
Small business centers are available in most regions of states to
education in general as well as in cluster-specific forms. At present,
assist small enterprises in getting started, raising capital, expand-
most universities, if they offer entrepreneurship courses at all, offer
ing, marketing, or improving specific business competencies. Each
them only to students in the business or engineering school. They
office is expected to have a broad set of business skills to serve a
could follow the example of the Ewing Marion Kauffman
wide variety of customers but not necessarily any deep understand-
Foundation, the National Science Foundation, and other such
ing of a particular type of business, and they provide generic types
organizations in assisting universities, community colleges and
of support. Most customers are in or are looking to start local serv-
even high schools to teach entrepreneurship skills to students in all
ice or retail operations. Small businesses and entrepreneurs could
disciplines and facilitating student experience through such pro-
be better served by centers that have deeper knowledge of their
grams as L-SITES, Learning through Simulated Information
customers. Because most centers have tight budgets, in-house
Technology Enterprises. States can also support such non-school
expertise is only possible in a few areas. If a state system is organ-
entrepreneurship training programs as FastTrac.
ized so that each cluster has an advisor or set of advisors some-
where in the state, people could receive more useful advice and
more directly applicable answers to questions. F. Open Global Priorities
Isolation is the biggest barrier to cluster growth. To be competitive
Initiative: Educate for Entrepreneurship and innovative, clusters have to be globally aware and globally
engaged. Despite globalization, many parts of America are still
Entrepreneurial education has been an educational goal for decades
geographically and linguistically challenged. Globalization too
that, with recent support from various foundations and the ARC,
often means immigrants, imports, exchange students, and exotic
is becoming a reality. Much of the nation’s entrepreneurial educa-
foods in grocery chains, not economic opportunities that lie out-
tion has been designed with two assumptions: (1) that entrepre-
side U.S. borders.
neurship is an alternative career track and curriculum for those
seeking employment, and (2) that entrepreneurial skills are generic Clusters need global pipelines to knowledge and innovation as
and one can major or graduate in “entrepreneurship.” In reality, much as they need local buzz,43 and they need access to global
most entrepreneurs learn their skills on the job, and different types markets for goods and labor as much as to local markets.
of business require different sets of skills. Starting a technology- Intellectual property contributions of immigrant non-citizens, for
based company with products and a clearly defined market is dif- example, reached almost 25 percent in 2006, up from only 7 per-
ferent from starting a film company that is project-oriented and cent in 1998.44
dependent on networks and personal reputation.
Exposure to different operating environments and different cul-
Linking entrepreneurial education to clusters suggests the follow- tures is a powerful stimulant for innovation. After a dozen owners
ing three possible cluster-specific approaches: of North Carolina hosiery companies traveled with public sector
officials from the nearby state and community college to compara-
• Recognize enterprise distinctiveness and include skills that are
ble hosiery and knitwear clusters in Italy, the experience led to the
specific to the particular cluster
revamping of services and organization of the community college-
• Integrate entrepreneurial competencies into existing workforce technology center, refocusing on marketing networks, dyeing,
curricula by, for example, posing problems that require an design, and cluster-quality standards. Even the increased outsourc-
understanding of the cluster and by framing discussions in ing of R&D has a silver lining for those willing and able to think
business cluster contexts and act globally — access to talent and innovation from other
places.
• Establish real or fictitious cluster enterprises operated by stu-
dent teams as a context for learning technical and business Successful clusters establish linkages to suppliers and customers.
skills. They closely monitor trends in other parts of the world to gain
different perspectives. They extend their networks to distant com-
Some of the cluster hubs have been successful in producing entre-
petitors, vendors, and institutions through international profes-
preneurs. Graduates of the relatively new Center for Enology and

24
 Cluster-Based Strategies for Growing State Economies

sional associations, trade shows, and research partnerships. Clusters Initiative: Support and Assist Export and
that are cut off from external sources of knowledge eventually risk Export Networks
losing their competitive position, creating the kind of intellectual
lock-in that kept Detroit producing large cars and the Northeast A study of the role of exports among firms in seven industry clus-
producing frame computers for too long.45 ters in Appalachia found that more than half rated it as very
important to their business, yet they listed many barriers that
Dynamic clusters export. Economic growth in underdeveloped inhibited exporting, including costs, information, working capital,
nations is creating new markets for U.S. products and, increasing- trade barriers, foreign regulations, and just getting paid. Many of
ly, cultural goods and services. For example, there is a growing the approaches to simplifying exporting for small and mid-sized
market among youth outside the United States for American cul- firms have been developed by network initiatives, and some of the
ture expressed in music, movies, clothing, and accessories. The most successful networks were groups of similar companies target-
international market for the entertainment and media industries ing export markets. When the North Carolina Department of
where information technology and entertainment clusters are Commerce awarded grants to clusters in the late 1990s to develop
quickly converging, that is, on-line rentals and digital streaming, strategic plans, the hosiery cluster’s plan included two export net-
licensed digital downloads, on-line video games, electronic books works, which eventually formed following a benchmarking trip to
and news, and on-line casino gaming, is experiencing rapid growth northern Italy. A rapidly expanding middle class with new pur-
— 6.6 percent per year — and is expected to reach $1.8 trillion chasing power in China, India, and other developing nations and a
in 2010. taste for American culture creates new markets for U.S. niche
goods, whether they are designer jeans, designer genes, or disco
Initiative: Support International music. Reinforcing the argument for support for exporting, sur-
veys reported in the 2003 Cluster Initiative Greenbook found
Participation in Events and
exports to be the most common form of commercial cooperation.
Study Tours Public export support has proven to be effective when targeted to
Participation in international conferences, trade shows, and study consortia of small companies that are interested in similar global
tours is a vital source of innovation and inspiration for U.S. clus- markets.
ters. Despite the accumulated evidence of the added value of expo-
sure to new people and places, programs that support travel for the Initiative: Establish Cluster-Based
express purposes of marketing, observing, learning, and network-
International Learning
ing are few and far between. Maintaining connections with coun-
terpart clusters in other parts of the world, including networks, Exchanges for Students
and exchanges of faculty or employees can prevent clusters from U.S. students and workers are poorly prepared for the global econ-
being too locked in to their internal strengths. It also can generate omy. School semesters spent abroad and international exchanges
innovations and lead to new market opportunities. A state travel for students are rare. Most employees have little opportunity to
fund, with a required match and restricted to groups of three or learn from those working in different cultures and work environ-
more firms in clusters, that supports participation in trade shows, ments. The Trans-Atlantic Technology and Training Alliance, an
professional events, or study tours would help overcome cluster international alliance of community colleges, facilitates cluster-
isolation. based exchanges of faculty and students, such as the EUC-Syd in
Sønderborg and Bellingham Technical College in Washington for
culinary arts; Siemens Professional School in Berlin and Kentucky
Community and College System for automotive industries; and
Montana in Ireland Howard Community College in Maryland and Niels Brock
The Montana World Trade Center organized a visit to Ireland College in Copenhagen for information technologies. Because the
in 2003 for a group of artists and businesses from Montana’s majority of community college students and many higher educa-
creative enterprise cluster that included an exhibit of the state’s tion students are already in the work force, a cluster association
art at the Bank of Ireland. In addition to generating ideas, could become the focal point for exchanges or students in their
learning what sells in European markets, and building relation- work force. Short-term exchanges of students for credit, or of
ships, the trip resulted in $500,000 in initial sales across the employees with branch plants, suppliers, or customers overseas
Atlantic — including hot tubs and fishing gear as well as art. could spur the transfer of ideas and increase the value to each.

25
 Cluster-Based Strategies for Growing State Economies

The Media Arts Alliance

The Media Arts Alliance (MAA) is an international network of
community and technical colleges working to improve educa-
tion, training, and economic opportunities in regional digital
media and entertainment clusters. Member colleges in places
such as Seattle, Houston, the Silicon Valley, Maryland, Berlin,
and Durbin (South Africa) may specialize in music and event
production, film production, and digital arts but with consider-
able convergence. In one project, students from different cul-
tures shared music tracks and altered the mixes to reflect their
local talent and culture. The final mix was ultimately returned
to the original creator after its “round the world” trip. The goal
is to expand awareness of global music trends and improve pro-
fessional collaborative skills. MAA also is exploring internation-
al quality standards for entertainment production programs.46

26
 Cluster-Based Strategies for Growing State Economies

Chapter 5—Value Found and • A study conducted at the USDA Economic Research Service
found that average earnings in rural counties with high shares
Lessons Learned of particular industry classifications, defined as clusters, were
Clusters are, a priori, effective settlement patterns for companies. higher than rural counties without “clusters.”48
The proof is their persistent prevalence. Companies would not
choose to locate so close to their competitors without realizing • A more recent study across Canada found that between 1998
advantages. Public agencies need to know the measurable results of and 2005, both employment and average income in clustered
cluster-based interventions in terms of such things as jobs, wealth, industries in “city-regions” grew more than twice as fast as in
and equal opportunity, and whether they are allocating public non-clustered industries.49
money as efficiently and equitably as they might. State leaders • The International Institute for Labour Studies assessed the
should ask this question: Have public interventions been able to impact of Valencia, Spain’s, efforts to imitate the cluster tech-
improve upon natural clustering tendencies by adding additional nology centers in Emila Romagna’s industrial districts and
advantages or by accelerating their growth? found limited successes: expanded services to small firms and
Evaluating the outcomes of an initiative is easier than measuring increased demand for services. Among the lessons learned were
the impacts on the larger entity that the initiative is intended to that the centers required continuing public subsidies to remain
affect. Both require enough time for an intervention to have the in an industry leadership position, they should be located
intended effects, and both are subject to uncontrollable external within the cluster, and they worked best in collaboration with
forces that can alter any expectations. Therefore, assessments are other similar institutes.50
approximations of impacts at best. • A variety of evaluations of networks and cluster organizations
Given those caveats, what has been learned from past cluster initia- across the United States, the United Kingdom, and Australia
tives? Most of the evidence of outcomes is anecdotal, for three rea- all found that firms networked primarily to increase employee
sons: (1) there are multiple variables that must be controlled to professional learning and knowledge.51 An assessment of five
isolate the effects of specific interventions; (2) outcomes are long cluster strategies supported by the Northwest Area
term, and most cluster initiatives are relatively recent and short Foundation, for example, surveyed companies and found that
term; and (3) outcomes require baseline data that may not exist. in each case, learning was the number one reason the compa-
nies cooperated and was the number one value gained, which
affirms the importance of tacit knowledge.52
A. Case Studies Continue to Suggest
Advantages of Clusters B. Final Thoughts
Much of the evidence of the impacts of clusters or cluster initia-
Cluster-based strategies have proven effective in improving clusters’
tives comes from case studies of clusters or network strategies. The
ability to compete and, in many instances, have influenced region-
most extensive survey was performed on behalf of the
al and local growth patterns.53 In the new global economy, clusters
Competitiveness Institute and published in 2003.47 In that survey,
continue to confer advantages to their member firms and institu-
about 85 percent of respondents agreed that their respective cluster
tions, and promoting them is still good public policy. To maximize
initiatives improved the competitiveness of their cluster, and 89
their impact on regional prosperity, however, practitioners and pol-
percent said that their respective cluster initiatives helped the clus-
icymakers need to continually assess how the dynamics of clusters
ters grow. Four in five responded that their cluster initiative met its
are changing and tailor policies to support today’s opportunities,
goals, and 77 percent said “it lived up to its expectations,” but 14
not yesterday’s challenges.
percent replied “it’s been mostly talk, not much action.”

A larger set of assessments, both international and in the United

States, exists for network initiatives that began before most cluster
programs, but in many instances, these could be considered cluster
initiatives, and there is other research that measured whether
regions with clustered sets of industries outperform those with less
clustered industries.

27
 Cluster-Based Strategies for Growing State Economies

Glossary of Terms represents a higher concentration, and a quotient of less than 1.0
represents a smaller concentration.
Cluster: A geographically limited critical mass (i.e., sufficient to
attract specialized services, resources, and suppliers) of companies Network (formal): A contractual alliance or membership organi-
that have some type of relationship to one another — generally a zation in which some number of firms agree to share resources,
complementarity or similarity in product, process, or resource. costs, or information. Some form of cooperation and some level of
trust are required. Networks are often, but not necessarily, embed-
Clustering: The act of companies with similar interests or needs
ded in clusters.
in a geographic region establishing new or closer relationships and
linkages. Networking (informal): Informal interactions and relationships
among firms and support organizations that are not contractual or
Cluster Initiative: An activity that addresses the specialized needs
membership based. They imply something more than simple prox-
of a set of companies or the entire cluster designed to enhance the
imity to like or related firms and deliver more than external
competitiveness of the cluster.
economies.
Cluster Association: A membership-based organization that col-
Network Broker: A person or organization that facilitates joint
lectively represents the needs and interests of members, provides
initiatives among groups of companies.
services, and/or serves as a vehicle for members to associate and
network. Region: A geographically bounded territory that has a common
hub, labor market, or source of economic growth.
Cluster Breadth: The range of industries related by common
products, technologies, distribution channels, and/or end users. Regional Innovation System: Elements (businesses, agencies,
associations, etc.) and the relationships between the elements that
Cluster Depth: The range of vertically integrated industries such
interact with production, diffusion, and use of new and economi-
as components, parts, materials, equipment manufacturers, and
cally useful knowledge that is encompassed within specified geo-
support services.
graphic boundaries.
Creative Economy: Companies that take their principal competi-
Sectoral Programs: Workforce development programs, usually run
tive advantage from a distinctive appearance, form, content, or
by nonprofits, that address the needs of workers and employers in
sound that they embed or embody in their products or services
specific groups of industry sectors.
and employees that work in some aspect of culture, arts, or design.
Social Capital: Stocks of social trust, norms, and networks that
Externalities or Economies of Scale: Reductions in costs that
people can draw upon to solve common problems. Networks of
result from increases in the scale of demand for valued services or
civic engagement, such as business and neighborhood associations
resources. These economies are often discussed as “localization
and cooperatives, are an essential form of social capital, and the
economies,” which are the benefits that accrue to firms as a result
denser these networks, the more likely it is that members of a clus-
of the clustering of similar firms, and “urbanization economies,”
ter will cooperate for mutual benefit.
which are benefits that are associated with population density.
Soft Network: A group of companies that has some core compe-
Innovation: The transformation of knowledge into new products,
tency, resource, or need in common that choose to form a local or
processes, and services; the act of using something new. The inno-
regional association that enables them to share costs of services and
vation process consists of the steps through which something that
information, interact, and/or influence policy.
is used moves from conceptualization to utilization.
Supply or Value Chains: All of the companies in the production
Knowledge Clusters: Specialized networks of innovative interre-
stream that make the individual systems, parts, and services that
lated firms that derive competitive advantages through accumulat-
eventually are incorporated into a final product purchased by an
ed, embedded, and imported knowledge among local actors about
end customer or user.
highly specific technologies, processes, and/or markets.
Temporal Clusters: Spatial clusters that are based on seasonal
Location Quotient: The ratio of the relative concentration of
activities.
establishments or employees in a cluster to total establishments or
employees in the economy divided by the same relative concentra- Temporary Cluster: International gatherings characterized by
tion in the larger economy (state or nation). A location quotient of knowledge exchange similar to those found in a permanent cluster,
1.0 represents average concentration, a quotient of greater than 1.0 although short-lived and intensified.
28
 Cluster-Based Strategies for Growing State Economies

Selected Policy-Relevant Resources

The Associational Economy: Firms, Regions, and Innovation. Phil Cooke and Kevin Morgan, Oxford University Press, 1998.

Clusters of Innovation: Regional Foundations of U.S. Competitiveness, Council on Competitiveness, Monitor, Michael Porter, ontheFrontier,
2001

Cluster Building: A Tool Kit, http://www.clusternavigators

Ifor Ffowcs Williams

Cluster Genesis: Technology-Based Industrial Development, edited by Pontus Braunerlijelm and Maryann Feldman, Oxford University Press,
2006

The Competitiveness Institute Web site http://www.competitiveness.org

Cluster Initiative Greenbook by Solvell, Lindqvist, & Ketels, 2003
Cluster Policies Whitebook by Thomas Andersson, et al, 2004

The Competitive Advantage of Nations, 1990 and On Competition, 1998, Michael E. Porter.

The Council on Competitiveness Web site http://www.compete.org. See especially their Regional Innovation, National Prosperity (2006)
and Measuring Regional Innovation (2005).

Danish Research Unit on Industrial Research Web site, http://www.druid.dk

Large collection of papers on clusters

The Ewing Marion Kauffman Foundation Web site http://www.Kauffman.org

Innovation Systems Research Series, David Wolfe, J. Adam Holbrook, and Matthew Lucas (Eds.), Montreal: McGill-Queens University Press
Innovation, Institutions, and Territory, 2000
Clusters Old and New, 2002
Knowledge, Clusters, and Regional Innovation, 2002
Clusters in a Cold Climate, 2003

Global Networks and Local Linkages: The Paradox of Cluster Development in an Open Economy, 2005.

Just Clusters: Economic development strategies that reach more people and places
Regional Technology Strategies, 2003. http://www.rtsinc.org.

Making Sense of Clusters: Regional Competitiveness and Economic Development, Joe Cortright, Brookings Institution, 2006

NGA Center for Best Practices Web site http://www.nga.org

Organization for Economic Cooperation and Development, 2003, Web site http://www.oecd.org
Boosting Innovation: The Cluster Approach, 1999.
Innovation Clusters: Drivers of national Innovation Systems, Conference Proceedings, 2001

29
 Cluster-Based Strategies for Growing State Economies

Endnotes 16
Wardrip-Fruin and Mortford (Eds) 2003. The New Media
Reader. Cambridge: MIT Press, cited in David A. Wolfe and
1
SRI International, Cornerstone; Enterprise Florida: Growing the
Matthew Lucas (Eds.) Clusters in a Cold Climate. Montreal:
Future; and Enterprise Florida: Organizing Economic Development
McGill-Queens University Press.
Menlo Park: CA: SRI International, 1989–90.
17
Ann Markusen, “A Consumption Base Theory of Development:
2
Michael E. Porter, The Competitive Advantage of Nations. New
An Application to the Rural Cultural Economy,” To be pub-
York: Free Press, 1990.
lished in Agricultural and Resources Economics Review 36 (No. 1,
3
Paraphrasing from Joe Cortright, Making Sense of Clusters: 2007).
Regional Competitiveness and Economic Development, Washington, 18
Ifor Ffowcs-Williams, Cluster Building: A Toolkit. Wellington,
DC: Brookings Institution, 2006.
NZ: Cluster Navigators, Ltd. 2001.
4
David Barboza, “In Roaring China, Sweaters are West of Socks 19
Robert W. Fairlie and Alicia M. Robb, Families, Human Capital,
City.” New York Times, December 24, 2004.
and Small Business: Evidence from the Characteristics of Business
5
Pete Engardio and Bruce Einhorm, “Outsourcing Innovation,” Owners Survey, CES 05 07, Washington, DC: Center for
Business Week March 21, 2005. Economic Studies, Bureau of the Census, June 2005.
6
Pete Engardio, R&D Offshoring: Is it Working? Business Week, 20
Center for an Urban Future, Creative New York, New York City,
May 10, 2006. www.nycfuture.org, December 2005.
7
Richard Baldwin, The Great Unbundling(s), Brussels: European 21
Eric Hansen, et al., Enterprise Florida: Growing the Future.
Union, Prime Minister’s Officer, Economic Council of Finland, Menlo Park: SRI International, September 1989.
2006. 22
Joe Cortright, Making Sense of Clusters: Regional Competitiveness
8
New Economy Strategies, LLC. 2005 National Innovation Survey. and Economic Development. Washington, DC: Brookings
Washington, DC: Council on Competitiveness, 2005. Institution, 2006.
9
Robert M. Gibbs and G. Andrew Bernat, Jr. “Rural Industry 23
Collaborative Economies, Clusters of Opportunity User Guide,
Clusters Raise Local Earnings,” Rural Development Perspectives 12 2005 California Regional Economies Project June 2005.
(No.3). 24
http://www.nga.org/portal/site/nga/menuitem.9123e83a1f678644
10
Greg Spencer and Tara Vinodrai, “Measuring creativity & inno- 0ddcbeeb501010a0/?vgnextoid=03dcc59ae624a010VgnVCM10
vation from clusters to city-regions,” ISRN Annual Meeting, 00001a01010aRCRD.
Toronto, Canada, May 4, 2006. 25
Stuart Rosenfeld, Cynthia Liston, and Jim Jacobs, “Targeting
11
Joe Cortright, Making Sense of Clusters: Regional Competitiveness Clusters, Achieving Excellence,” Community College Journal, 73
and Economic Development, Washington, DC: Brookings (Issue 6) 2003 and Stuart Rosenfeld, and Cynthia Liston,
Institution, 2006. “Cluster Hubs: Putting Learning into Context,” Community
College Journal, 77 (Issue 3) 2006.
12
Survey of Talent, “The Battle for Brainpower,” The Economist,
October 7, 2006. 26
http://www.bionetwork.org.
13
Hector O. Rocha, “Entrepreneurship and Development: The 27
Analyzed by Joe Cortright based on 2000 Census data.
Role of Clusters.” Small Business Economics, 23 (2004) 363:400. 28
Joint Venture Silicon Valley Network, Index of Silicon Valley
14
David A. Wolfe and Meric S. Gertler. “Local Antecedents and 2006, San Jose: Joint Venture Silicon Valley Network, 2006.
Trigger Events: Policy Implications of Path Dependence for 29
Davis Jenkins and Christopher Spence. The Career Pathways
Cluster Formation,” in Pontus Braunerhjelm and Maryann
How-To Guide. New York: Workforce Strategy Center, 2006.
Feldman, Cluster Genesis: The Emergence of Technology Clusters,
Oxford University Press, 2006. 30
OECD. Boosting Innovation: The Cluster Approach, Paris:
OECD, 1999.
15
In Italy industrial districts (a.k.a., clusters) are constituted by
regional laws. in some instances allowing only certain places to 31
New Economy Strategies, LLC. 2005 National Innovation
produce authentic products — especially in the food industries. Survey. Washington, DC: Council on Competitiveness, 2005.
30
 Cluster-Based Strategies for Growing State Economies

32
OCED. Innovation Clusters: Drivers of National Innovation 47
Orjan Solvell, Goren Lindqvist, and Christian Ketels. (2003)
Systems, Conference Proceedings, Paris: OECD, 2001. The Cluster Initiative Green Book. Stockholm: Bromma tryck AB.
33
Rolf Sternberg, “High Tech Regions 2.0: Sustainability and 48
Robert M. Gibbs and G. Andrew Bernat, Jr. “Rural Industry
Reinvention,” Paper presented at Stanford University, November Clusters Raise Local Earnings,” Rural Development Perspectives 12
13–14, 2006. (No.3) 1997.
34
Joe Cortright and Heike Mayer, Signs of Life: The Growth of 49
Greg Spencer and Tara Vinodrai, “Measuring creativity & inno-
Biotechnology Centers inn the U.S. Washington, DC: The vation from clusters to city-regions,” ISRN Annual Meeting,
Brookings Institution, 2002. Toronto, Canada, May 4, 2006.
35
Alliance for Regional Stewardship, Building Regional 50
Frank Pyke, Small firms, technical services and inter-firm coopera-
Competitiveness Through Economic Innovation: The Unique Role tion, Geneva: International Institute for Labour Studies, 1994.
of Regional Stewards, Draft, May 2006. 51
Fulop & Kelly, Survey of Industry: Network Initiatives in NSW,
36
Business Week, July 4, 2005. Final Report, University of Western Sydney, 1995 and Robert
Huggins, Business network policies and economic development,
37
“Taking the Public Pulse in Design,” Fast Company, June 2006.
Pontypridd, UK, 1998.
38
Michael Fogerty and Jar Chi Lee, “A Manufacturing Industry 52
Stuart Rosenfeld, “Does cooperation enhance competitiveness?
Cluster Approach to Technology Deployment,” Center for
Assessing the impacts of inter-firm collaboration” Research Policy
Regional economic Issues, Case Western University, December
25(1996) 247:263.
1991.
53
David Wolfe and Meric Gertler. (2004) “Local Antecedents and
39
David Birch, The Job Generation Process, 1979.
Trigger Events: Policy Implications for Path Dependence for
40
See especially A Governor’s Guide to Strengthening State Cluster Formation,” in Pontus Braunerhjelm and Maryann
Entrepreneurship Policy (National Governors Association Center Feldman, Cluster Genesis: The Emergence of Technology Clusters,
for Best Practices, 2004) and related papers from the Ewinig Oxford University Press, 2006.
Marion Kauffman Foundation.
41
National Commission on Entrepreneurship. Building
Entrepreneurial Networks, Washington, DC: December 2001.
42
EntrepreNews & Views, 10 (Issue 2), The Consortium for
Entrepreneurship Education, Ohio State University, Columbus,
Ohio.
43
Harald Bathelt, Anders Malmberg, and Peter Maskell. 2002.
Clusters and Knowledge: Local Buzz, Global Pipelines and the
Process of Knowledge Creation. Aalborg, Denmark: Aalborg
University, DRUID Working Paper No 02-12.
44
Vivek Wadhwa, et al, America’s New Immigrant Entrepreneurs,
Master of Engineering Management Program at Duke University
and School of Information at University of California-Berkeley,
2007.
45
David Audretsch, “R&D Spillovers and the Geography of
Innovation and Production, International,” OCED Workshop
on Innovation Clusters and Interregional Competition, Kiel,
Germany, November 2001.
46
http://www.ma-alliance.net.

31
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