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Clusters, Localisation and Agglomeration
What is an industrial cluster?

• Geographical concentration of economic activities (can be at a variety of scales)

• These concentrations are seen as by-products of cost savings linked to spatial
proximity

• In English: When economic activities in a particular place are connected together,
each firm in the locale experiences benefits from the cluster as whole

• This is due, primarily, to the creation of external economies of scale - in other words,
individual firms reap the benefits of ‘stuff’ not on their balance sheets as costs

What are external economies of scale then?

• The presence of ‘positive externalities’ enables cluster development and growth

• These are things that are external to a firm but internal to a cluster

• They help individual firms within a locality lower costs

• For example:

• Having access to a pool of labour with particular skills that would drive down
search and recruitment costs

• Limits the costs of ‘traded interdependencies’ (i
...
being close to another firms
keeps transaction and transport costs down)
...
Marshalian agglomerations & industrial districts

(a) Based upon Alfred Marshall’s research in the early 20th century

(b) Focus upon the coordination of many small, specialised firms in one locality

(c) The notion of ‘industrial atmosphere’

(d) Conceived of firms as ‘atomised’ competitors

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...


(b) The notion of ‘cooperative competition’

(c) Importance of trust between actors

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...
Italianate Districts 

• Heralded a re-emergence of work on industrial clusters and their relevance to regional
economic success 

• Pioneering work by Arnaldo Bagnasco  

• Identified a distinct form of industrial organisation in Italy that was proving successful
in weathering the globalization & offshoring boom emerging in the late 1970s

• Differed markedly from the neo-classical ideas of Alfred Marshall, but also borrowed
some ideas from him

Tre Italie: The Third Italy Model

• Arnaldo Bagnasco (1977)

• Italy has traditionally been a highly divided country with a wealthy, industrial North and
a rural, poor South

• The ‘Third Italy’ was identified by Bagnasco as a mode of organisation that bucked the
division and was worthy of significant study

• This was a group of several regions of Italy which adopted a very different set of
policies to the Fordist, industrial North, but also to the agricultural South

Some Historical Background

•  The Two Italies

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...
An agricultural, mercantilist and semi-Feudal South (e
...
Palermo and Sicily)

• 1950s: Centre and North East began rapid industrialisation

• 1961-71: industrial employment >26% (12% in Italy as a whole)

• 1971-81: >20% (4% in Italy as a whole)

• 1981: 37% of industrial employment in ‘3rd Italy’

• So ‘3rd Italy’ was holding up industry where the rest of the country was suffering

Key Districts in ‘The Third Italy’

• Clearly defined clusters in the town itself as well as in surrounding villages

• The firms themselves are very small, rarely having over a hundred employees

Fabbrica Diffusa: Diffused Production Network

• Identified a distinct and durable form of industrial clustering – Fabricca Diffusa

• Production spread across many different factories with many different owners

• Instead of one factory with many different departments/sections, the region/
locality becomes the factory, each specialising in a different area of production

• Noticed that as industrial employment grew since WWII, firm size fell at similar rate

• This led to a diversified industrial base of labour intensive sectors in this region needs a small labour force that are highly skilled, with high employment

Reasons for this Growth in the 3rd Italy

• Decline in output elsewhere - clothing/artisanal manufacturers changed tactic to lower
quality, mass-production

• Skill inheritance – intergenerational, leads to situation where only one firm could make
a particular product/do a particular skill (e
...
specialist stitching)

• High quality production - artisanal/high end, as opposed to mass production


Santa Croce sull’Arno, Tuscany

• Speciality in cured bovine leather for high quality goods

• Accounts for 25% of the Italian leather industry by employment

• 300 firms with 4,500 workers; 200 subcontractors employing 1,700 workers in
10km2

•  Didn’t exist 40 years ago, the 1970s-1980s fashion boom created demand

• SME (small and medium-sized enterprises) grew due to:

• Tradition of ‘smallness’ in the region

• Small banks could only offer small loans

• Regulatory incentives for SMEs

• Product Specific Issues (shoes, handbags, suitcases, etc
...
” (Amin, 2002)

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...
Externalities which, “take the form of conventions, informal rules, and habits that
coordinate economic actors under conditions of uncertainty”

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...
Knowledge is tacit [embodied, soft, know-how driven]

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...
e
...
g
...
The firms in a cluster must be linked in some way (e
...
by supply of inputs and
services)

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...
geographical concentrations of interconnected companies…that
compete but also cooperate” (Porter, 1998)

Porter’s Diamond Model

Context for firm
strategy and
rivalry
Factor (input)
conditions

Demand
conditions

Related and
supporting
industries

•

Based on the idea that clusters enhance competitiveness and productivity by fostering
the interaction between 4 factors:

• Demand conditions

• Tendency for successful clusters to provide firms that sell to a global market

• Such exports provide the link between a cluster and the outside

• Related and supporting industries

• Firms that supply inputs or located in the same area

• Close links enable complex and effective communication to occur

• Factor (input) conditions

• The main factors of production (land, capital, labour & knowledge)

• Links between clusters and knowledge incubators such as universities

• Context for firm context and rivalry

• Number and range of firms vital for the resilience and reproduction of a
cluster


Criticisms (from geographers)

• His writing is ‘self-confident’, ‘authoritative’ and ‘proselytising’ (converting someone
from one faith/belief to another)

• His theories are ‘overly generic’

• His definitions are often vague

• His definitions can be contradictory - suggests within a paragraph that ‘clusters are a
new way of thinking’ and ‘date back centuries’

Porter’s comeback/Response?

• Delgado, Porter and Stern (2016) Defining clusters of related industries

• Attempt to define clusters using a co-agglomeration index

• Paper makes no reference to earlier criticisms – business as usual

Two useful case studies

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• Consists of a large number of agglomerated small companies

• Fosters collegiality, knowledge transfer, co-development of products and so on

• “the full economies of division of labour can be obtained by the concentration of
large numbers of small businesses of a similar kind” (Marshall, 1920)

Silicon Valley Success Story

• Still retains a leading edge due to:

• A strong network of SMEs

• Based upon a distinct culture of business – open, entrepreneurial and pioneering

• Community of experts with strong interpersonal ties

• Constant flux of personnel between firms

• Loyalty to innovation and the region – not the firm

• Presence of key institutions (e
...
Stanford)

• Strong network of Support functions (lawyers, consultants, marketing, etc
...
Motor Sport Valley, UK  

• Focused upon the role of innovation and the circulation of knowledge in hi-tech
clusters

• MSV is viewed as a world-leading concentration of world-leading firms - in the fairly
niche sector of motor cars

• A cluster consisting of scores of SMEs, major global firms, employing upwards of
30,000 people

• Estimated that >75% of the world’s single seater racing cars designed and
assembled in this region

Knowledge, Community, Innovation

• Research very much focuses on the highly skilled individuals (designers, engineers
and managers) involved in the cluster and the particular knowledges they embody and
possess

• Like in Silicon Valley, the ‘talent’ work in diverse organisations but are united by a
shared set of norms, values and understanding that contribute to the success of the
sector/cluster as a whole

• The circulation of knowledge Henry & Pinch see as being key:

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Formation of ‘spin-offs’ and startups from established firms

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