Feature
Issue No. 1 - July/August 2001
Why Industry Clusters are Working
by Professor Richard Blandy
Why are companies not scattered randomly across the planet’s land surface? Why are cars made in Detroit, films in Los Angeles, leather goods in Milan, aircraft in Seattle, and financial services provided in the City of London?
The reason, of course, is that some places offer more advantages to some sorts of firms than other places do, and those sorts of firms then cluster at the better locations. Those advantages are referred to as external economies (because they are economies that do not arise as the result of actions by a firm itself, but arise from the firm’s location).
The most remarkable thing about external economies, though, is that they largely arise as a result of the clustering itself, not because of any particular intrinsic feature of a place. Cars are made in Detroit because once cars started to be made there, specialist providers of goods and services for carmakers started up in Detroit, making it an even better location for making cars than the carmakers thought it would be. Other places found it more and more difficult to compete with Detroit as a place to make cars. In the end, if a company wants to be in the American car cluster, the one really good place to be is Detroit.
Shops of similar types (not only competing, but complementary and interdependent) cluster together in particular locations (restaurants in Rundle Street East, or cinemas in a multiplex, for example) because together they are a more powerful magnet for customers and suppliers than they would be if they were scattered randomly about. This interaction between cluster and availability of specialist resources is self—reinforcing in a virtuous circle of increasing competitiveness and success.
A location with a successful industry cluster is a magnet for start—up companies and compatible firms from other places. Clusters are like economic vacuum cleaners, sucking economic activity into the places where they are located and away from ...
